A capacity crowd watched with me in the new Stade de Alpes (budgeted €30m, cost €73m) in Grenoble as the home team earned promotion to the French first division with a draw against Châteauroux.

Funny thing incentive. Grenoble required a point – that is, a draw – to earn the right to play next season with the likes of giants Lyon, Bourdeaux, Nancy and Marseilles. The opposition Châteauroux squad also needed a point– only in their case it was to stave off relegation to Ligue 3.

Unsurprisingly, what was served up was dire. Most of the action came very late when Châteauroux defended heavily and Grenoble as a result felt safe enough to launch several forays forward. But in the entire game there were two genuine saves and one pressured goalie clearance.

But that was not the point. The bigger picture was the party for the historical advance to the big time; and for that the boisterous crowd led by the Grenoble’s flare-wielding “Red Kaos 94” nutter-fans (friendly chant for every opposing goal kick “ooooooohhhFILSD’ENCULE!!!!”) led the way.

Parallels to the world of finance are tempting. The leveraged debt financing of the stadium was justified by the promise of promotion, an ethereal piece of reasoning if ever there was one (c/f subprime is not a poor credit risk in this economy). The team owners – Japan’s Index Corporation – got exclusive use of the stadium via other people’s money without having to pay a cent themselves. And when construction costs more than doubled the public was again and again tapped for the difference. Punters and players rejoice.

But with Ligue 1 status earned it is going, sort of, to plan. The fact that Lyon sent a second eleven here for a cup-tie during the winter and won 4 nil has not been taken as a portent of the forces lying in wait. And with the taxpayer keeping goal (here too) why should it?

“…professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.”

JM Keynes, The General Theory of Employment, Interest and Money (Chapter 12)

The persistent use of bastardised versions of Keynes’ “prettiest girl” metaphor to promote speculative trading is matched, perhaps, only by the cult of momentumism in stock markets themselves (if the google result of “Keynes prettiest girl” is reliable evidence). Yet Keynes was not – far from it - recommending a method with the analogy: he was making analysis.

The full chapter can be found here; abounds with often-quoted JM Keynes specials but, crucially, sets them all in context; and ought to be required reading for anyone active in markets. If only as a hat tip to truth in advertising standards.

Unfortunately, judging by some recent offline correspondence, the link between the promotion of momentum methods and Keynes’ quote is strong. Yet the man himself, after a decade of large ups and large downs with his own prettiest girl methods (based on short term forecasts in the values, relative to money, of currencies and commodities) was wiped out in 1929.

It would be wrong to say he stopped speculating entirely. But the fortune he rebuilt was as a contrarian – notably using negative selling momentum during the severe pessimistic trough of 1932 as a signal to buy and build a concentrated portfolio of companies he judged fundamentally attractive in balance sheet terms. When his will was probated in 1946 over 90% of it was in equity form, shares he had held over the long term (compared to in-and-out momentum devotees).

Much of this is visible in his record as bursar of King’s College, Cambridge. A volatile performance (thanks to the concentrated holdings) but over its existence a great one. And not one that was the result of momentum trading.

NB: Much of the info herein from Robert Skidelsky's fantastic 3 volume biography of John Maynard Keynes.

Some recent headline topics, anagrammed:






Bonus for which no suitable image found:

"Monoline insurance" - nine lice mourn a son.

This Bloomberg exclusive made lots of noise when it was published in March. One of the key points is that the rating agencies do not want to downgrade for fear of crushing banks:

"A bank would have to increase its capital against $100 million of bonds to $16 million from $1.6 million if a bond was downgraded to below investment grade from AAA, under global accounting rules"

There is some self-interest at play: banks are clients. And there is the pressure of politics too - regulators agree with banks (but probably not for all the same reasons) that market mechanisms have "overshot" (see the Bank of England's Financial Stability Report for example) and needlessly threaten the financial system.

Co-ordinated truce or otherwise it signals the banks to bail hard before the raters are forced to act/let off the leash (which seems to be happening in dribs and drabs).

Two contrasting articles from the FT and the Independent. The latter (not mortgage backed securities debt) obliquely touches a point previously raised in this space - that banks would end up ceding function to parallel lenders. But that's an aside. The main question these deals raise is what is the benefit to the likes of Blackstone and assorted private equity of a stay from the ratings agencies?

There isn't an obvious one. Simple economics says creating a false market (by not downgrading) merely defers discretionary buying activity. Blackstone pays attention to what ABX indexes read; they know rating agencies are looking to begin downgrades imminently; and yet they have settled on a 75 cents on the dollar deal.

Curious and perhaps the deal-by-deal detail provides the answers. But the temptation to open the floor to speculative inferences is great.

Exhibit 1: On the way to Sappey en Chartreuse...up at last

Last Friday some Swedish friends and I hiked a 1000m ascent from which I have been recovering since. During the pain talk turned to the Finns – major rivals to Swedes when it comes to ice hockey.

Give them their due, said my friends, they are fearless - especially in youth. Which is why (went on the Swedes) Finnish teenagers, too young to worry, dominate the mad sport of ski jumping.

As I re-read the ABN Amro/London Business School study released last February on (in part) momentum I wondered if this madder than the rest 17 year old Finnish momentum man profile is one whose time has come.

The thought of that momentum work came up because of both the Finnish chatter and Bill Miller’s last quarterly letter cited in the previous post. Mr Miller made several thoughtful comments on value versus momentum. And overall there is in his commentary a slight, perhaps inadvertently left, impression that some kind of ‘fashion’ for momentum has damaged his Value Trust's performance over the last 2 year almost as much as the credit crisis.

But the ABN Amro/LBS study, long term as it is, seems to belie that conclusion. Perhaps the Legg Mason Value Trust just has had less overlap than usual with what momentum groupies - not so much a fashion group than a permanent market commando force - lately have favoured buying?

The seductiveness of momentum is its ability to capture whatever the perceived successful investment style of the moment is (including 'value') and transform it into an instant positive price trend. Is this somehow a marketing triumph promoting casino skill at the expense of business analysis?

Beyond a certain valuation point it must be; and from then on momentum following becomes akin to a religious act. Certainly it becomes self-fulfilling and prone to fantastic reversals (c/f "he lived to jump again but never with the dare he had before").

Yet momentum is obviously an important factor to consider for investors and speculators (based on a reasonable reading of the ABN Amro/LBS study). But how it might be reconciled – and whether such an outcome is even desirable - with the habits of devotees to the scrutiny of underlying businesses is tricky. Ultimately a flourishing business correlates completely with the price of the company's equity. But it can take awhile for the match to appear.

Most non-momentum equity investors therefore look for some sort of catalyst for price appreciation. Mine is free operating cash generation: few things - price momentum itself notwithstanding - attract interest like a growing cash pile. Still, in a concession to the hot breath of momentum on portfolios' collective necks, who does not look at relative price strength (for example) to round the analysis off?

I do wonder, though, if technical indicators of momentum say more about the popularity of strategy rather than its effectiveness. Or can that differentiation be made only if there is an allowance for time horizon? And even then? There is, I think, some nuance in these questions (compared to the usual technical versus fundamental analysis debates) which even pragmatists may want to mull.

Always grateful for views via email or the comments.

Exhibit 1: "Déclaration sur l'honneur"
(from my children's daily calandar)

Two weeks ago the Financial News (subscription required) was reporting on the active put market in financials citing Lehman, Morgan Stanley and Wachovia as concerns and/or catalysts for the increasing bets that more falls were due.

At the time Legg Mason's Bill Miller and Pimco's Mohamed El-Erian were concurrently writing different conclusions as to what stage the credit crisis is at. Mr Miller argues the peak is past; Mr El-Erian that, though that may be, the financial system is now in a weakened state and vulnerable to the significant economic downturn in prospect – which would re-ignite the credit fire embers.

Then came last Thursday the Bank of England’s (BoE) biannual Financial Stability Report (FSR).

Funny thing, bias. Not many would claim the BoE is an institution that calls a spade an effing shovel. In spite of some fabulous graphics, beautiful packaging and a ton of brainwork the report boils down to a self-serving (could be coincidence of course) argument that markets have got it wrong and have overshot badly. There is a risk, say the BoE, of a self-fulfilling destructive tendency.

This is an opinion sitting on the impressive assumption that the mortgage-backed securities (MBS) market can recover sufficiently to justify the BoE's opinion that mark-to market is a dangerous, socially anarchistic notion.

Ever since credit dysentery took Bear Stearns to Jesus that view has been furiously peddled by regulators and owners of MBS. Capital raising activities - key to restoring balance sheets - have been made sometimes to look like minor hedge actions rather than the primary focus they ought to be. It is, of course, true that if credit spreads narrow (as Mr Miller, a holder of Bear Stearns, JP Morgan and Countrywide, points out) there will be positive surprises in financials. But that does look an act of faith.

Lots of intelligence in the BoE. But there is more in the marketplace. Mr Miller and the BoE may interpret ABX index levels and general reaction as panicky exaggerations – and last week markets were clearly giving the benefit of the doubt to their view. But beside panic many are merely prudent like Mr El-Erian – not a bond guy for nothing. And it is doubtful that camp has been converted to consider this BoE opinion as signal rather than noise.

A treasured double audio cassette sits on the shelf here: Great Parliamentary Speeches. An anorak's possession for so popular is it that Amazon (nor anyone else so far as I can tell) does not even have a photo image or stock [Update: wait, here are some].

In it is a devastating, mocking, anti-monetarist speech made in 1980 by Michael Foot, then the UK's Labour opposition leader, against the prevailing government economic dogma - which at the time looked to be seriously failing on the growth, employment and inflation fronts. The economy was, in hindsight, undergoing very painful and profound structural reform: Margaret Thatcher - you may have heard of her.

Mr Foot told a story from his youth of seeing a magician performing at the Palace Theatre in Plymouth where he grew up. The conjurer asks and gets a superb gold watch from a prominent city Alderman which he wraps carefully in a red handkerchief. He then produces an immense mallet and, to gasps, uses it to smash "to smithereens" the contents of the hanky. There is then a sickening pause from the magician and in Mr Foot's words:

"...on his countenance would come exactly the puzzled look of the Right Honourable Gentlemen*...and he would step forward right to the front of the stage and he'd say 'I'm very sorry - I've forgotten the rest of the trick.' "

Now, it is not charitable; nor was it a superb gold watch Alderman Greenspan handed to Mr Bernanke. But the latest text from the FOMC meeting concluded today contains sufficient somewhat at-odds statements:

"...some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate"

and conditional hope:

"The substantial easing of monetary policy...should help promote moderate growth...and to mitigate risks to economic activity."

as to recall the cadence and punchline of Mr Foot's great speech - and the gales of laughter it brought from British MPs - 28 years ago.

*The then Secretary of State for Industry, Sir Keith Joseph

Le Monde has a tidy series of articles covering what it identifies as the six themes of the current global economic crises here with accompanying graphs.

One of these ties usefully back to the earlier post + wheat comments on food prices:

Exhibit 1: Wheat volatility, volume and supply vs demand


And while I'm at it, their subprime scorecard is useful to. Though why they would want to single out the UK banks with the lower graphic is curious - don't the landesbanks deserve a share of the spotlight too? And, while it may not be subprime exactly, Spain's banks have a few issues of their own.

Add those latter two together and don't bother looking for a Teutonic bail out of EU brethren if things really go pear-shaped.

Exhibit 2: Global bank subprime impairments and UK mortgage deal volume by value