Vinicultural Analysis

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by: Polemic Paine

For the past few months, I have been pretty inactive in the markets, instead parking money in dull old dividend-paying stocks, as I couldn't see much else to get excited about.

Since then we have seen various scares pop up and disappear, but like perennial weeds in the garden of information, they sprout and either die or get pulled out. The continuing debate over who put the RU in TRUMP, the noise around how Brexit will or won't happen, the odd resurrection of how China is doomed or Australian property is about to go bust. The regular resurrection of "look at global debt it's all going to blow up", the odd explosion of crypto-currency excitement based on the fact that the price has moved (normally due to someone using it to blackmail the world's computer users), or we have the perennial oil will dump/rally because xyz. But the markets have been steady. Of course, if you fractalise a chart, you can always paint a picture of sharp moves, but look at longer charts of much at all, and nothing is really that exciting. Even USDMXN is back to where it was a year ago, acting as a class example of how short-term trading on really long-term ideas nearly always ends in disappointment.

Hence I have been sitting it out, picking up dividends.

There have been the odd opportunistic punts, normally fading fast moves, but I have even closed out my long-time favorite of long USDTRY. Turkey is still a major focus for me, as it sits at the intersection of so many regional power plays, but with the Justice March now over, media attention will wane and the country reverts to the back burner.

But today I sold US stock indices.

Why? Well, here I have a choice. I can list some complex arguments, including charts, spreadsheets, numbers, political insight, positioning information and all sorts of things, but is there any point? Explaining why you have put on trades is much like explaining why you like a wine. You only do so if you want others to try it or buy it.

To communicate in the world of wine, a new language has to be learned. One of the terroirs, climates and similes to every possible taste that isn't wine-flavoured - you never hear a wine critic saying a wine tastes of grapes, it's always blackberries, honey, tannins and herbal notes. This language is then used to describe to others, who also understand the language, whether they also should or should not drink it. But if you have no intention of telling anyone else about a wine, nor any interest in wines other people like, then you have no need to learn the language. I know which wines I like and I have them on a mental list in order of preference, but I do not need to know that a wine is oaky, citrusy, rich, light, tanning, blackberries with a finish of old dish mops to know, when I drink it, whether I like it or not.

In the world of finance, the language of communication is slightly more important as, unlike wine, it really doesn't matter whether I like what I taste, but whether everyone around me likes what I have tasted too - preferably after I have tasted it, so that they go out and buy it, making what is in my cellar all the more valuable.

So, the reams written on financial markets have the purpose of explaining why people like things in the hope that others will follow the trade or pay to read the critics' views or, just as importantly, to explain errors of judgment. Where a stock is purchased but turns out to be corked. The communication then runs along the lines of why the trade idea came from a great house, grown on a terroir of MBA PhDs, lauded by the greatest trade sommeliers in the world, and so it really was a great idea but just bad luck that it was pure vinegar to the P+L palate.

The various routes to drinking a wine that you like are similar to those to initiating a trade.

1) You buy a plot of suitable land, plant vines, harvest the grapes a few years later, learn how to make wine, make wine and then drink it.

This route is the same as doing your own research. It is hugely time-consuming, and you have to be an expert at every point of the process to ensure that errors don't compound, resulting in a Balsamic, or that in the time it has taken your tastes have changed. Or you have gone bust investing in the infrastructure. This is losing trade that really should have worked because you have 10 years of records and proof of process and you checked it yourself, but the reason it was really awful was due to unforeseen difficulties.

2) You follow the critics.

You read the Sunday newspaper supplements and try the recommended wines in the food and drink sections. After a bit, you get to know which critics throw up a higher number of wines you like, and so, tend to follow their recommendations more than any other. This is the cult of the media guru, the hedge fund god, the big name. But in following them, you are always paying more than you should. The critics are already positioned, or their bosses are, and even if you sprint straight from the newsagent to the off-licence, you'll find you've been beaten to it and the shelves are stripped bare.

3) You know a man who knows a man.

I used to know a man in the wine industry who specialised in finding the small vineyards next to the big famous ones. Their wines were nearly as good but at a fraction of the price, as they weren't geared for large-scale production or distribution. In finance, the chatter of those perceived to be closer to the big decision makers is deemed more valuable than that of others. Whispers start that a great trade is coming and only the cognoscenti know. And if you listen to the right people, you may catch a whiff of it too. Twitter is the Tinder of financial gossip matchmaking.

4) You try lots of wines and settle on the ones you like.

You have instinctively grown to know what works for you, though you really can't explain why you like them to anyone else. Nor want to. You rarely hear of these wine drinkers, as they serve wine as a secondary consideration to the main event of the food or a party. They know what they like but won't ram its wonderfulness down your throat. These are the old traders who just seem to have a gut feeling for markets and rarely say more than "it's bid" (I like it) or "it's offered" (I don't like it).

5) Use a combination of 2, 3 and 4.

This is how things tend to work both in wine and financial markets. Opinions bend according to fashions, fashions are set by style leaders (gurus) and the masses follow. Gurus wax and wane, but mostly wax, until there are so many of them their value is diluted. Yet, to be part of the "in" crowd, you have to be able to talk the language. To sound more of an authority than the next, complexity is exploited. The finer the detail, the more assumed the expertise is. But often, the finer the detail, the less influence it has on outcome and the less it matters.

Apart from methods 1 and 4, one has to learn the language of financial market communications. Either to show one's own prowess, to be followed or paid, or to understand what others are saying, whether it is true or not. Every now and again, a critic can trip up, like the CNN lady who claimed this week that Stagflation is a new, made-up word. Would the equivalent of a wine critic excusing herself saying that she just thought Sauvignon was a typo of Sauterne?

I have sold US stocks. The price can go up or down. 50/50. That is all you really need to know. Why I think they will go down is only important if I want you to also sell US stocks or for you to think I'm really knowledgeable and to be listened to in future.

I really don't need you to do either. I just know that I like it.