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Erwan MAH 00 33 1 53 05 57 Excellence in options: +++=

Money exists not by Nature but by Law Aristotle

Still here!
27 September 2013

Many of my dear friends and readers, worried about the sharply reduced frequency of this report, have asked me in recent weeks if I had stopped publishing it or, worse still, excluded them from my mailing list. Happy to renew contact with certain individuals with whom I have not had the pleasure of talking for quite some time, I explain how this journal has gone from almost daily publication between 2005 to 2009 to a weekly or biweekly since then.

The purpose of this newsletter, aside from the obvious sales motivation (Im a broker, after all ), has always been to provide readers a new insight into the macroeconomic problems of our times within the framework of an effective asset allocations process. I never had the slightest intention letting this report turn into a press review of which we see so much (too much, in my opinion) in this field, which adds nothing of value to readers given that they already have access to numerous sources of the same information.

Today, I am struggling to provide you a report that meets such a standard. The theoretical pillars of my analyses are grounded in very simple principles, which seemed very heterodox not long ago but which have now gained in popularity, including in the mainstream economic and business press. Whilst each of the examples below merit a newsletter all to themselves, consider out this extremely simplified cases below: In the equation MV=PQ, V is what counts, but it is far from being constant, despite the monetarist theories that have been dominant since the 1970s, which often diverged from the often good intuitions of Milton Friedman. This study of V resulted in a 180 change in our asset allocation policy in the spring of 2007, following the implosion of the Bear Stearns hedge funds.

Loans make deposits. Here again, the conventional wisdom tells us that banks finance their lending with client deposits (savings fund Investments). This theory, like that of the Credit Multiplier, is totally wrong, since banks create money ex nihilo and then refinance (in normal times) their balance sheet (liabilities) via the interbank market. In a monetary system where central banks have an interest rate target, they are not restricted by their level of required reserves. In this context, QE policies, which simply amount to swapping long assets (bonds) for short assets (monetary base) could not generate the much talked about hyperinflationary impact in the context of bank deleveraging! Growth by austerity, the modern counterpart of creative destruction, is a myth based on political ideology whose sole goal is to reduce the size of government. The failure of these approaches is now obvious, especially in the eurozone where the distressed countries are cut off from the oxygen of devaluation. Yes, the zone appears to recovering, but look at the enormous damage caused in the meantime! Animal spirits (fear and greed) have enormous influence on the prices of assets, be they financial or real estate and physical assets. Thanks to this philosophy, we were able detect early on the recovery of the US real estate market, with our real animal rates .

Many commentators and researchers are now publishing very good analyses on these matters, and even institutions we might have thought we would be more reticent toward (IMF, ISB, OECD) are beginning to see the light. As such, I do not want to waste your time and instead prefer to focus a bit more upstream, with new insights I hope to share with you soon.

In the meantime, nothing stops from looking after my clients needs, so here is an update on the option strategies proposed during the last Thalers Corner of 4 September. At the time, I took a contrarian and thus bullish stance, with the advice to set up October maturity call flies on Euro Stoxx options, mainly the 2850/2925/3000 at 10. Today, it is trading for 24 and, despite the already materialised market hike and the logical temptation to take profits, that is not necessary! Thanks to the magic of the Greeks, this positions delta has become slightly negative at -2%, after climbing to nearly 10%. Moreover, this position has also become long theta. As such, counter intuitively, doing nothing amounts to taking profits. This sort of advice is hardly consistent with my broker volumes, but other opportunities will arise.

I have concocted a selection of reading for you this weekend, including one must read. Warm up your printer; you will not be sorry!

The Macro Geeks Corner ( MG )


This first link, which is exceptional, is Adair Turners speech of 12 September.
CREDIT, MONEY AND LEVERAGE: WHAT WICKSELL, HAYEK AND FISHER KNEW AND MODERN MACROECONOMICS FORGOT Adair Turner Stockholm School of Economics Conference.

(A big thank you to Merijn Knibbe, who included this link in his report, The macro-economic formula of everything, which I also recommend).

Two articles that illustrate the state of animal spirits in the UK property market: UK housing market sentiment hits 3 and half year high Houses beating households, London edition

I have saved this last one for the more masochistic and yet ambitious among us: SHORT-RUN FLUCTUATIONS David Romer / University of California, Berkeley First version: August 1999. This revision: January 2013

Asset allocation biases and advised option positions


See above.

Happy reading and good weekend!


Erwan Mah Asset allocation and option strategy