Elite Trader School

[Magic]

Generally, I manage leverage as a function of beta (get leverage up to where portfolio beta = ~1), which puts me between 4-6x levered. I no longer have fancy risk management software, so I will dynamically adjust based upon vols. My strategy is long/short which makes managing leverage a little easier. If you are long only or use other asset classes then there may additional factors to consider.

Do you stress test?

Yes, I will fit a worst case scenario to my trades. Usually options cap my max risk somewhere and the position size limiter comes from somewhere else before my capital at risk stops me. Sometimes a scenario is lucrative enough where I will trade uncapped risk, like ratio spreads in options. Then it’s my best guess of how far something can go during my trade horizon, but I try to overestimate so I don’t have to size down a trade from a PnL signal.

Is your market beta ceiling for leverage used as a proxy for stress test risk over a particular time jump? I.e. you wouldn’t want to find yourself losing much more than the general market does? Or you just prefer a less sporadic equity curve? Just curious what stops you at beta = 1 because a higher sharpe could sustain more leverage and still be winning if you aren’t hitting stress test or capital constraints.

Optimizing for geometric return given a set of projections always spits out really high position sizing figures for good trades so I am always left asking myself how much to back that down by. I go at it from a few different angles like I mentioned but still not 100% developed in my process for that. Thanks for the feedback.

 

[kmiklas]

Finished the intro and first article from the first (IMF) link. Excellent! Would you recommend subscribing to any specific IMF publication?

The articles in this collection, all from the International Monetary Fund’s quarterly magazine Finance & Development and updated in 2017, illustrate the rich diversity of questions that economics can illuminate

Also:
1. What kind of capitalism do we have in Biden's America?
2. Is there any form of capitalism in China?

The many shades of capitalism Economists classify capitalism into diferent groups using various criteria. Capitalism, for example, can be simply sliced into two types, based on how production is organized. In liberal market economies, the competitive market is prevalent and the bulk of the production process takes place in a decentralized manner akin to the free-market capitalism seen in the United States and the United Kingdom. Coordinated market economies, on the other hand, exchange private information through non–market institutions such as unions and business associations—as in Germany and Japan (Hall and Soskice 2001). More recently, economists have identifed four types of capitalism distinguished according to the role of entrepreneurship (the process of starting businesses) in driving innovation and the institutional setting in which new ideas are put into place to spur economic growth (Baumol, Litan, and Schramm 2007). In state-guided capitalism, the government decides which sectors will grow. Initially motivated by a desire to foster growth, this type of capitalism has several pitfalls: excessive investment, picking the wrong winners, susceptibility to corruption, and difculty withdrawing support when it is no longer appropriate. Oligarchic capitalism is oriented toward protecting and enriching a very narrow fraction of the population. Economic growth is not a central objective, and countries with this variety have a great deal of inequality and corruption. Big-frm capitalism takes advantage of economies of scale. Tis type is important for mass production of products. Entrepreneurial capitalism produces breakthroughs like the automobile, telephone, and computer. Tese innovations are usually the product of individuals and new frms. However, it takes big frms to mass-produce and market new products, so a mix of big-frm and entrepreneurial capitalism seems best. Tis is the kind that characterizes the United States more than any other country.

...from the second article:

Prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labor.

Given that we now have a shortage of labor--supply surplus--what does this portend for the upcoming year?

Thanks again, @longandshort

 

[IamTheCasino]

2. Is there any form of capitalism in China?

They have a mixed econ, just like the US. Although state has the leverage over there - so slightly different, but not much.

 

[SunTrader]

They have a mixed econ, just like the US. Although state has the leverage over there - so slightly different, but not much.

I'd said more like corporatism in either case, although like you say they have more leverage - a little more.

 

[longandshort]

Finished the intro and first article from the first (IMF) link. Excellent! Would you recommend subscribing to any specific IMF publication?

Glad you got through it! I highly recommend subscribing to updates on their world economic outlook (WEO). They publish it twice a year -- and it is considered the "standard" outlook in the market. Their blog is good for special topics, and their country primers are excellent for getting caught up on what’s going on in a country.

Also:
1. What kind of capitalism do we have in Biden's America?
2. Is there any form of capitalism in China?

As others have stated, we are a mixed economy. China is also a mixed economy. The difference is political — we utilize democracy while China is authoritarian.

Given that we now have a shortage of labor--supply surplus--what does this portend for the upcoming year?

Tight labor should result in higher wages, which would incur inflation (sustained rise in prices faster than volumes).

The Fed has stated that they expect an overshoot of their 2% target, and instead want to “average 2%” over the decade. Lots of traders think this is the Fed admitting a policy error in raising rates too quickly a few years ago.

However, it doesn’t look like inflation is actually making the headway it needs to in order to sustain for beyond the “reopening” this year. If you look at breakevens along all tenors, the market does not believe inflation will average higher than 2.7% for the next ten years. Is that what we’d consider high inflation?

Why the market doesn’t believe in higher inflation is because the supply/demand imbalance is not long term. Companies are investing in efficiency which will actually reduce the price of labor for many. In addition, deflationary factors like slowing population growth and high debt loads are causing firms to pay back shareholders instead of investing in capacity. There are pockets where growth does actually exist (tech, semi conductors, etc.) but for most of the economy that’s not the case.

My question to you:
If you were running policy in an economy facing (a) declining population, (b) flatline productivity growth, and (c) with large amounts of private sector debt, what policies would you support to spur growth? Assume, like in real life, interest rates and inflation are averaging below 2%.

 

[SunTrader]

... Assume, like in real life, interest rates and inflation are averaging below 2%.

If only rates were - like you say in real life. Not what AAPL and AMZN borrow at. The rest of us and the rest of who pay retail.

Agree with most of the rest of the post after WEO ... that is. But you knew that.

 

[longandshort]

If only rates were - like you say in real life. Not what AAPL and AMZN borrow at. The rest of us and the rest of who pay retail.

Agree with most of the rest of the post after WEO ... that is. But you knew that.

Informed opinion, even if you disagree with it, is helpful as a point of comparison. That WEO (and WB/OECD) do this for free is of incredible value.

Also-- corporate high yield spreads have been compressing:

 

[SunTrader]

Informed opinion, even if you disagree with it, is helpful as a point of comparison. That WEO (and WB/OECD) do this for free is of incredible value.

.....

Also-- corporate high yield spreads have been compressing:

Yes that reminds me. Meant to ask you, what do you make of high yield aka junk at all time record low rates?

 

[IamTheCasino]

I'd said more like corporatism in either case, although like you say they have more leverage - a little more.

I was going to say crony capitalism originally but it all works.

 

[longandshort]

I was going to say crony capitalism originally but it all works.

Modern day mercantilism.