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15 October 2013

LME Dinner 2013 - Reading the Runes



Well, there’s another LME Dinner out of the way. The (quasi-)competitive ‘it’s my 30th’, ‘my 35th’, ‘my 29th’and so on amongst my generation is beginning to wear a bit thin. Let’s just agree we've all done it a very large number of times and leave it at that. I thought the atmosphere this year was actually quite positive, although one sector seems to be having a tougher time. I’ll come to that, but the consensus view I seemed to be picking up was that the future looks brighter than the present.

Positives

A couple of analysts revisited some of those wonderful, pre-crash phrases, telling us, variously, that the super-cycle was not over in industrial commodities and (a particular favourite of mine) that it’s not really a super-cycle, it’s a new paradigm. That’s a phrase I thought had been consigned to the dustbin of history, but here it is, rearing its head again. Now, there are some reasons to be optimistic, mostly reflecting the undeniable fact that growth in the major economies is – slowly, slowly – beginning again. It’s fair to say that the Euro no longer looks quite as much as though it is on the verge of extinction. I had a long conversation with a friend who is a pure technical analyst and he is frankly quite bullish for the moment; the logic he was using is that market players have been happy to build up LME shorts in the absence of significant upside pressure and that those shorts represent the potential for a sharp rally. His time-frame is early next year. This is classic chart analysis – the market will go to find the point of maximum pain, and at the moment, that looks to be up not down.

But Under the Surface....

So, three stars seem to be aligning – demand, coming out of returning growth, improving macro stability (the Euro) and technical signs. Does that create a constellation to light us all to better times? Well, it’s not too difficult to counter most of the arguments. Growth is returning, but it can very easily be choked again. The US has frankly made no genuine progress on resolving the issues between President and Legislature over the debt in the economy. Latest thinking seems to be that they are yet again cobbling together a compromise which will result in the whole issue being rolled forward and coming back to haunt us yet again. Now the problem with that, and as an aside, a reflection on the intellectual dishonesty of politicians, is that each time the problem is botched it means that the size of it gets bigger. It reminds me of the old restructuring of option-based hedge trades – “Of course we can get you out of this hole and move the strike price down (or up), but you will have to accept a much bigger position.” Intellectual dishonesty of the politicians because they don’t really care about finding a real solution – as long as the problem can be rolled forward beyond the next time they have to face their electorate, they are happy. And that US problem threatens the stability of the entire world; so there’s a question mark over the true sustainability of the growth. Macro stability? Well, in a similar vein, the problems of the Euro are not so much being solved as being avoided. Avoiding problems is obviously a valid strategy, but requires a consistent nimbleness that I’m afraid I don’t see in the Eurocrats, so that one’s got a question mark over it, as well. The last of our three stars, the technical analysis one, is, strangely enough, the one in which I currently have most faith. I think the market has been prepared to run short and that those shorts are still in place. So I would agree that there is at least a strong possibility of a rally to take out those shorts; if the other two issues don’t genuinely improve, though, I can see a spike in the prices rather than a genuine upward trend.

Tough for Hedge Funds

At the beginning of this I said that there was one sector which seems less sanguine. I was chatting to a friend who runs a mid-sized hedge fund, and he commented that the past year had been tough; there had been no easily discernible trends to catch during the year and even with the low hurdle set by current interest rates, it had been difficult to get too involved. Now obviously different fund managers have different strategies, but I guess the relative calm of the last year has probably made life a little tougher. It also means mistakes would probably have been less costly, but investors don’t choose hedge funds to secure a steady low growth; to satisfy their clients, the hedge funds need the big plays, to give them a chance to demonstrate their worth, and those big plays have largely been absent in 2013.

Solid Rock, or Shifting Sands?

On the surface, then, the market seems to be setting a base; whether it’s rock or sand, though, is a much more nuanced question. 

Why, oh Why?

Oh, and one last point. Am I the only one who questions why we have to have speeches at the beginning of the dinner, rather than the end, as it always was? This way, you've barely been able to introduce yourself to your neighbours when suddenly a speech starts. I don’t think this is a change for the better, particularly since there seems no obvious reason for it.

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