You can always do a little bit of put selling so you can at least get paid while you wait for lower prices. Keyword is a little bit
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Global Macro Trading Journal
- Thread starter Daal
- Start date
The problem with this sort of move is that its an stealth 'short' position. The losses come in the form of missed gains. 'getting stretched' is an overbought/ovesold type measure, it will work great in range bound markets but give back (most if not all) of the 'profits' in trending markets (like now when a new macro regime shift takes place)I'm a pretty big bull for this year, but I just won't chase these prices. Yes, everyone and their mother is looking for a correction, but having sold out longs from last year earlier this year I just cannot bring myself to buy here. Even Eurozone and EM's are getting stretched. If I was long already I would hold and add on dips, but for people in cash I feel it warrants staying out for a little.
'shorts' have unlimited loss potentials (even if they are just missed gains, they still hurt long-term performance, at least on a relative basis)
Most people (certaintly, most on ET) are 'short' assets and valuations (because we want to retire in the Bahamas one day, stop working, etc). For people that diversify globally, its so easy to almost ALWAYS own a certain % of their wealth in stocks. If they don't like a market, they can always find another one that is more attractive/cheaper. What doesn't make sense to open that short position and just let it ride, especially if using overbought/oversold ideas. If markets can remain irrational longer than people can remain solvent, markets can also remain resonably overbought longer than people expect (in fact, it can last for years)
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I speak from experience, I opened a 'short' position (short in the sense I was in bonds/cash and avoided the US equities asset class) in US equities in 2008/2009 and didnt close until much later. For years I thought valuations were too high, there was going to be another recession, this or that indicator was flashing alert signals, and on and on.
I ended up missing a triple in price plus dividends (so probably a 4x gain on invested capital). This will hurt my long-term wealth massively forever and there is nothing I can do about it. That is, except learn from it and never do it again.
I control for risk through other methods now, going into cash because I think markets are too high is just too flawled of a method
I ended up missing a triple in price plus dividends (so probably a 4x gain on invested capital). This will hurt my long-term wealth massively forever and there is nothing I can do about it. That is, except learn from it and never do it again.
I control for risk through other methods now, going into cash because I think markets are too high is just too flawled of a method
This is where having a 'robust' plan can help. There is a fair amount of 'perma skeptics' hedge fund managers who love to say that the market is too high and that bad things are going to happen, yet at the end of the day they still got 20-40% of their fund in equities. Specific stocks that they like, certain country stock markets they think its too cheap, etc.
And if some of these positions appreciate a lot and they sell, usually they will go and buy something else. Even though they are scared shitless of buying SPY, they can own all kinds of other things that will correlate to it and will return more than cash (like EM equities or some mispriced US companies, etc)
Now, I don't know if these guys are so smart that they came up with a 'robust' plan themselves or if there is natural selection going in (the guys that have a tendency to go to all cash usually will lag the benchmarks and be fired by clients) but the point is that a 10-30% allocation to equities that is more or less 'permanent' makes a HUGE amount of sense.
It adds a lot of diversification, rebalancing, all-weather benefits (plus its a hedge against you being wrong, which often will be needed), it should be almost never be swapped for cash (unless you just KNOW we are headed to 2008 all over again, in which case you should be SHORT outright)
So that's my rule, I will get rid of my mother before I get rid of my last 10-30% allocation to equities to get in cash. As of right now I'm quite far above this 'downward limit', I still think being overweight equities for the next few years make a lot of sense and I won't try to time things based on overbought readings. Once you sell something its very hard to buy back
And if some of these positions appreciate a lot and they sell, usually they will go and buy something else. Even though they are scared shitless of buying SPY, they can own all kinds of other things that will correlate to it and will return more than cash (like EM equities or some mispriced US companies, etc)
Now, I don't know if these guys are so smart that they came up with a 'robust' plan themselves or if there is natural selection going in (the guys that have a tendency to go to all cash usually will lag the benchmarks and be fired by clients) but the point is that a 10-30% allocation to equities that is more or less 'permanent' makes a HUGE amount of sense.
It adds a lot of diversification, rebalancing, all-weather benefits (plus its a hedge against you being wrong, which often will be needed), it should be almost never be swapped for cash (unless you just KNOW we are headed to 2008 all over again, in which case you should be SHORT outright)
So that's my rule, I will get rid of my mother before I get rid of my last 10-30% allocation to equities to get in cash. As of right now I'm quite far above this 'downward limit', I still think being overweight equities for the next few years make a lot of sense and I won't try to time things based on overbought readings. Once you sell something its very hard to buy back
The question is, if someone does get rid of that last bucket of 10-30% equities, is there a way around the problem? How could I have fixed the problem that I had of missing the 2009 bull market? I can think of a few solutions that I could have implemented during those years
-If I had knew the importance (in terms of diversification/rebalancing/all weather benefits) of that first bucket, that would have helped
-I should have realized that cash beats assets so infrequently that if I'm concerned that its going to happen, I'm probably wrong. So owning a certain amount of stocks (that 20% bucket), I'm hedging my own stupidity
-I could have started to short puts (conservatively) in certain stocks that I liked but that I just couldn't get myself to buy. If they collapsed, I would be long automatically and if they don't, at least I capture a little bit of premia
-I could have started to buy small outright positions in stocks I liked (the cheapest ones). And bought more if they went lower
-I could have found certain global stock markets that were resonably cheap and that I liked fundamentals (Singapore might be interesting now)
-I should also have realized that consequences (that are huge) to compounded returns if you miss out a bull market early in your career. If you have a bear market early on, thats usually great (since you can buy cheaper) but if you miss out a bull, the consequences are so devastating. Not only in terms of returns but in terms of learning. Its hard to learn if all you do is just to watch, when you get involved you learn so much. I learned more since I got back to macro (late 2015) than any book I ever read. Learning can also compound overtime (both in your head and in your returns)
-Other ways I can't think of right now
Following these ideas one can prevent himself from being a perma bear and making HUGE mistakes
-If I had knew the importance (in terms of diversification/rebalancing/all weather benefits) of that first bucket, that would have helped
-I should have realized that cash beats assets so infrequently that if I'm concerned that its going to happen, I'm probably wrong. So owning a certain amount of stocks (that 20% bucket), I'm hedging my own stupidity
-I could have started to short puts (conservatively) in certain stocks that I liked but that I just couldn't get myself to buy. If they collapsed, I would be long automatically and if they don't, at least I capture a little bit of premia
-I could have started to buy small outright positions in stocks I liked (the cheapest ones). And bought more if they went lower
-I could have found certain global stock markets that were resonably cheap and that I liked fundamentals (Singapore might be interesting now)
-I should also have realized that consequences (that are huge) to compounded returns if you miss out a bull market early in your career. If you have a bear market early on, thats usually great (since you can buy cheaper) but if you miss out a bull, the consequences are so devastating. Not only in terms of returns but in terms of learning. Its hard to learn if all you do is just to watch, when you get involved you learn so much. I learned more since I got back to macro (late 2015) than any book I ever read. Learning can also compound overtime (both in your head and in your returns)
-Other ways I can't think of right now
Following these ideas one can prevent himself from being a perma bear and making HUGE mistakes
I think it comes down to risk tolerance and view on multi asset correlation(risk on/off). If you have a view whereby say the US is selling off but Japan is going up, then it makes sense to always be long somewhere.
If you have the view that risk assets all go up/down at the same time with differing degrees of drawdown, then no perhaps being long EMs vs SPY isn't a great idea.
You could throw in negative correlated assets(risk off) in there to reduce the drawdown, but then that's a bet on historical correlations. I believe for the last 50 pages or so you have talked about this.
The issue of short vs cash from a long bias is an interesting one and personally I have looked at it as if I sold out my longs, I must invariably be short. So why go to cash? For me it clears my mind, having a hedge on even if it's a delta 1 hedge is another position I have to manage. Cash is simple, I just wait.
From my experience, too many hedges on simply complicates the whole procedure, especially if not delta 1.
If you have the view that risk assets all go up/down at the same time with differing degrees of drawdown, then no perhaps being long EMs vs SPY isn't a great idea.
You could throw in negative correlated assets(risk off) in there to reduce the drawdown, but then that's a bet on historical correlations. I believe for the last 50 pages or so you have talked about this.
The issue of short vs cash from a long bias is an interesting one and personally I have looked at it as if I sold out my longs, I must invariably be short. So why go to cash? For me it clears my mind, having a hedge on even if it's a delta 1 hedge is another position I have to manage. Cash is simple, I just wait.
From my experience, too many hedges on simply complicates the whole procedure, especially if not delta 1.
I understand this view. I would just point out that usually, the strategy that you are implementing tends to work IF it also has a solid reentry strategy. Like for instance, timing SPY based on long-term moving averages crosses. You will get out when they cross down but they get back if they cross up (I'm seriously considering implementing such strategy on my EWZ position since the country is facing a binary outcome).I think it comes down to risk tolerance and view on multi asset correlation(risk on/off). If you have a view whereby say the US is selling off but Japan is going up, then it makes sense to always be long somewhere.
If you have the view that risk assets all go up/down at the same time with differing degrees of drawdown, then no perhaps being long EMs vs SPY isn't a great idea.
You could throw in negative correlated assets(risk off) in there to reduce the drawdown, but then that's a bet on historical correlations. I believe for the last 50 pages or so you have talked about this.
The issue of short vs cash from a long bias is an interesting one and personally I have looked at it as if I sold out my longs, I must invariably be short. So why go to cash? For me it clears my mind, having a hedge on even if it's a delta 1 hedge is another position I have to manage. Cash is simple, I just wait.
From my experience, too many hedges on simply complicates the whole procedure, especially if not delta 1.
The issue with getting out when things are rising is that is very easy to just watch as things keep going forever.
Also, I'ven seen a bunch of backtests showing that the S&P500 does better when you buy at the a new all-time high vs buying at other periods, its counter intuitive but markets tend to be like that
Ended up not covering part of Fed futures short, my hunch is that the officals are all going to be 'united' in the idea that March a hike should be on the table but its also possible that Yellen (who has a speech coming) will signal a hike, at the very least she will signal that the meeting is open. So its hard for my profits to evaporate before the meeting, worse case they just hoover around here. I will reasses right before the meeting
Hopefully Yellen comes out and says a hike will happen and make things easier for me.
Also, a high hike chance might be self-fulfilling ("markets expect us to hike we better not go against that and risk problems in the future"). So a 70% chance might very well be 100% (especially because if they pass now, they wont get a real meeting till June, by real I mean the ones with a press conference). I rather wait and reasses everything before the meeting
Hopefully Yellen comes out and says a hike will happen and make things easier for me.
Also, a high hike chance might be self-fulfilling ("markets expect us to hike we better not go against that and risk problems in the future"). So a 70% chance might very well be 100% (especially because if they pass now, they wont get a real meeting till June, by real I mean the ones with a press conference). I rather wait and reasses everything before the meeting
The whole valuation bear thesis gets worse when one considers what Buffett said the other day on CNBC:
"But when you say reversion to the mean, I'm not sure what the mean is"
Right now, due a macro regime shift, no one knows how much will the S&P500 (and the average american business) will earn, the market believes the risks are to the upside.
So the E of PE is uncertain
On top of that, what is the 'right' valuation for US equities? The average looking at the past? But what average? 10 years, 20? 50? There will be a huge difference depending on which average to use. But the average of the past doesn't take into account that the economy is dynamic and business can do better or worse in different points in time. Better economic/business climates will require different 'right' valuation levels (and that will shift as the probability of changes moves around).
Furthermore, if US equities spend the next 30 years in 'expensive' move, the averages will be pushed up (so, the future will retroactively justify the past)
Right now people talk about a 16 Shiller PE as fair value but in 30 years they might talk about a 21 Shiller PE as the right price. How come the valuation lecturers don't talk about that risk? The risk that their dogma is wrong? If the 'average valuation' can move around, the 'expecting valuations to go back to average' thesis has so many ways to go wrong, it's not even funny
So no one knows what earnings is going to be, no know what is the right valuation level (other than whatever the market decides is the right valuation) and no one knows what the average valuation really is (So, 3 ways one can be wrong by using that thesis, and it gets worse when one considers that people are 'short' valuations during their working years)
This whole valuation thing is only useful in big extremes, when its clear cut what is going on. Right now, its the furtherest from clear. I do know for a fact that the SPY is priced to return something like 4% (div yield+buybacks) plus price appreciation/growth. So something like 5-6% even without assuming much optimism (other than no recession)
And if it falls apart for no reason (pure 'mean reversion'), that implied return will go to 8-10%, which will be great since I can plow some of income there plus some bonds/cash/gold can redeployed there.
The avg valuation asshole need to shut up and stop harming people with their snake oil
"But when you say reversion to the mean, I'm not sure what the mean is"
Right now, due a macro regime shift, no one knows how much will the S&P500 (and the average american business) will earn, the market believes the risks are to the upside.
So the E of PE is uncertain
On top of that, what is the 'right' valuation for US equities? The average looking at the past? But what average? 10 years, 20? 50? There will be a huge difference depending on which average to use. But the average of the past doesn't take into account that the economy is dynamic and business can do better or worse in different points in time. Better economic/business climates will require different 'right' valuation levels (and that will shift as the probability of changes moves around).
Furthermore, if US equities spend the next 30 years in 'expensive' move, the averages will be pushed up (so, the future will retroactively justify the past)
Right now people talk about a 16 Shiller PE as fair value but in 30 years they might talk about a 21 Shiller PE as the right price. How come the valuation lecturers don't talk about that risk? The risk that their dogma is wrong? If the 'average valuation' can move around, the 'expecting valuations to go back to average' thesis has so many ways to go wrong, it's not even funny
So no one knows what earnings is going to be, no know what is the right valuation level (other than whatever the market decides is the right valuation) and no one knows what the average valuation really is (So, 3 ways one can be wrong by using that thesis, and it gets worse when one considers that people are 'short' valuations during their working years)
This whole valuation thing is only useful in big extremes, when its clear cut what is going on. Right now, its the furtherest from clear. I do know for a fact that the SPY is priced to return something like 4% (div yield+buybacks) plus price appreciation/growth. So something like 5-6% even without assuming much optimism (other than no recession)
And if it falls apart for no reason (pure 'mean reversion'), that implied return will go to 8-10%, which will be great since I can plow some of income there plus some bonds/cash/gold can redeployed there.
The avg valuation asshole need to shut up and stop harming people with their snake oil
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But I get it why people flock to valuation models, they makes us feel so powerful. It feels like we can know what will happen in the future, we know what to expect. It 'removes' some uncertainty from the uncertain stock market.
But its largely an illusion, once you factor in all uncertainties around the variables (what earnings will be, what is the 'right' valuation level and whether avgs make any sense) you can see that the whole model is so error prone you might as well throw darts around
During macro regime shifts then, it just gets even worse
The Shiller PE has been calling the market overvalued since like forever, yet, profits as a % of GDP soared. So the market was 'right' in paying up for stocks. That's the kind of thing this backward looking models will miss out
And what does the avg valuation asshole do it when that happens? They start to talk about profits mean reversion as well. And they have been talking about it since forever. But the truth is, no one knows what is the average because the average will change dramatically based on the future
Instead of this backward looking trash model, I rather use a richer and more robust model. That's why I tried to figure out whether I was 'short' or 'long' valuations. By knowing that I'm short (and the risks lie with valuations going higher), I don't need to know where they are going. I can act in a way that makes sense taking into account the different risks that I have/risk tolerances/exposures. I can then balance my risks and protect myself (while still earning a positive return)
I will let the fools try to predict valuations while I just balance my risks and earn some premia
But its largely an illusion, once you factor in all uncertainties around the variables (what earnings will be, what is the 'right' valuation level and whether avgs make any sense) you can see that the whole model is so error prone you might as well throw darts around
During macro regime shifts then, it just gets even worse
The Shiller PE has been calling the market overvalued since like forever, yet, profits as a % of GDP soared. So the market was 'right' in paying up for stocks. That's the kind of thing this backward looking models will miss out
And what does the avg valuation asshole do it when that happens? They start to talk about profits mean reversion as well. And they have been talking about it since forever. But the truth is, no one knows what is the average because the average will change dramatically based on the future
Instead of this backward looking trash model, I rather use a richer and more robust model. That's why I tried to figure out whether I was 'short' or 'long' valuations. By knowing that I'm short (and the risks lie with valuations going higher), I don't need to know where they are going. I can act in a way that makes sense taking into account the different risks that I have/risk tolerances/exposures. I can then balance my risks and protect myself (while still earning a positive return)
I will let the fools try to predict valuations while I just balance my risks and earn some premia