Global Macro Trading Journal

Using really conservative numbers I get a Kelly of 15%
http://www.system-bet.com/pages/kelly/

I'm using the assumptions
60% chance of +8%
20% -2%
20% -10%

This works out to odds of 1.9-1, assuming 1% in commissions. Yes, maybe I'm betting a really big there(Although this numbers are quite conservative), but I dunno, because I'm worried about oil and over the past few weeks the FF market has liked high oil and its leading to illusions of easier money by the Fed, it remains to be seen if the speeches of the past week has popped these delusions
 
Vincent Reinhart "Fed is running open mouth operations"
By Luca Di Leo
Of DOW JONES NEWSWIRES
STONE MOUNTAIN, Georgia (Dow Jones)--The Federal Reserve's tough talk on inflation should be seen as a way to keep prices in check without having to tighten monetary policy, a former senior Fed official said Tuesday.

Vincent Reinhart said recent remarks by Fed officials expressing concern over high global commodity prices should not be interpreted as a sign the central bank is about to reverse its easy-money policies, as some investors have been doing. Instead, they should be viewed as an attempt to keep inflation expectations under control.

Reinhart pointed to a paper Fed Chairman Ben Bernanke co-wrote in 1997, before he joined the Fed Board, in which he considered with economists Mark Gertler and Mark Watson what the best policy response to an oil shock is. Since higher energy prices can hurt the economy by hitting consumer spending, the best reaction may be to do nothing -- as long as people expect inflation to stay subdued in the future. Or, as economists like to put it, as long as inflation expectations remain well-anchored.
"How do you anchor inflation expectations?" Reinhart asked the rhetorical question in an interview. "You talk tough on inflation. That's how you should view recent remarks by Fed officials."
Reinhart was a director at the Fed's monetary-affairs department from 2001 to 2007.

Thanks to low inflation, the Fed has been able to keep interest rates near zero to support a slow economic recovery and help bring down unemployment. But the central bank will have to reverse its easy-money polices if prices start to rise too much, even if the jobless rate remains high - something it hopes to avoid with its anti-inflation rhetoric.
Reinhart was speaking on the sidelines of an economic conference here. The conference was opened by Bernanke, who late Monday said that while he believes the rise in global commodity prices won't translate into a broader inflation problem for the U.S., the central bank will "monitor inflation and inflation expectations extremely closely."

In recent weeks, a vocal minority of Fed officials have warned that the central bank may need to start raising interest rates late this year to prevent a strengthening economy from causing inflation to rise too much. That's led U.S. Treasury prices, which move in the opposite direction to yield, to fall as investors brought forward their expectations of Fed tightening.

But the move is overdone, according to Reinhart.
"The Fed will not need to tighten (this year) because they'll be able to see the spike in energy prices as not passing through to expectations," he said.
 
The Fed talks tough on inflation which sends fed futures and USTs down, which makes it more likely they will go up because it means the Fed wont have to move. Looks like the market doesn't understand this kind of bluffing by the Fed
 
LOL at Steinhardt trashing Buffett (he's completely right of course). I don't see him and Becky Quick in front of a camera together ever again. In fact, I don't see him being invited on state-run TV (CNBC) anymore.

I've heard Steinhardt is a real powder keg in private. I'd love to see him off camera to really hear how he feels!

Silver hits another post-Hunt Bros. high today. Now firmly above $39.
 
Bullard wants to end QE2 at the next meeting
http://blogs.wsj.com/economics/2011/04/05/feds-bullard-to-push-for-curtailing-qe2-at-april-meeting/

"We’d be pulling back just a little bit from where we said we were going to be based on economic developments. Then we would be on pause for a little while"

This 'pause for a little while' is something that I expect which is a reason why it will be hard for the hawks to win this year. Its hard to see extended period being off before August(this will be the little while period), which locks in 2011 for no hikes IF the fed's forecast is correct. As I understand the 'extended period' is not a time table but the likely path of rates if their forecast happens
 
John Hussman has criticized the traditional phillips curve argument that the UR will hold down prices
http://www.hussmanfunds.com/wmc/wmc110404.htm

He says
"The most prominent version of this is the "expectations augmented" Phillips Curve, which looks at the graph above as a whole set of "nested" Phillips Curves (like indifference curves in consumer theory), where each curve is set at a different level based on the level of expected inflation. In this view, unexpected inflation moves you along a given Phillips Curve, while expected inflation shifts you to a different curve. While this version of the theory is popular among economists because it gives them a modeling "environment" in which to teach the importance of expectations and so forth, the fact remains even the expectations-augmented version has only a weak relationship to actual economic data."


Problem is, it seems that his 'weak relationship' is actually strong
http://www.econbrowser.com/archives/2009/10/unemployment_an.html

I want to know which data he is looking at. As the econbrowser chart shows you can see inflation coming down everytime the UR spikes

Their model forecasted
"But the forecast of the model for the average inflation rate between 2009:Q4 and 2011:Q4 is -0.5%."

This didn't happen, the speculation is because of iexpectations are more anchored now than it was during most of their sample(which includes the 70's). And that pushed inflation up a bit. It will probably happen again this year
 
Lockhart even though he is a Fed president and is out of the fomc is not joining hawkish camp, says its not time to tighten policy and won't speculate on end year hikes
 
Increased my position on BRKB(4% of NW), I'm making a bet that Tilson is correct that the intrinsic value of the company is quite higher than the market thinks(He believes is might be as much as 48%, there is a presentation out there on the web). Sokolgate has gave a discount on the shares, I see little or no reason that would impact earnings. Buffett will probably clear this up on the shareholder meeting and Bufett will be back to conning people as Steinhardt says
 
Quote from Daal:

Using really conservative numbers I get a Kelly of 15%
http://www.system-bet.com/pages/kelly/

I'm using the assumptions
60% chance of +8%
20% -2%
20% -10%

This works out to odds of 1.9-1, assuming 1% in commissions. Yes, maybe I'm betting a really big there(Although this numbers are quite conservative), but I dunno, because I'm worried about oil and over the past few weeks the FF market has liked high oil and its leading to illusions of easier money by the Fed, it remains to be seen if the speeches of the past week has popped these delusions
More...

It could be useful to do some monte carlo simulations about the potential drawdowns you can face with that kind of position-sizing and trade stats.

Kelly assumes you are fine with say a 90% drawdown because in the very long run it will maximise your profit. In reality, you would probably quit trading, go on tilt and blow up, or become gun-shy before hitting a 90% drawdown.

So, it's probably more wise to size your Kelly to what your maximum realistic drawdown tolerance is. Most people have a lower drawdown tolerance lower than they think. So if you think you can handle a 50% drawdown, probably you can handle 25% before your trading decisions suffer. If 25% is your realistic drawdown tolerance, then that means 1/4 of Kelly size is the most you should bet. That would indicate about 3.75% on this trade, which is IMO a much more realistic position size - still pretty big, given that it's not a real home-run kind of trade like Soros' pound bet or Paulson's housing bet.

Most veteran traders recommend betting 0.5-1% on the 'typical' trade that doesn't have a hugely skewed favourable expectation, 2-3% on high conviction trades, and say that anything above about 5% is crazy risk. So 10% would probably be the absolute max, on very rare opportunities with career-changing risk/reward & win rate stats.
 
Quote from Ghost of Cutten:

It could be useful to do some monte carlo simulations about the potential drawdowns you can face with that kind of position-sizing and trade stats.

Kelly assumes you are fine with say a 90% drawdown because in the very long run it will maximise your profit. In reality, you would probably quit trading, go on tilt and blow up, or become gun-shy before hitting a 90% drawdown.

So, it's probably more wise to size your Kelly to what your maximum realistic drawdown tolerance is. Most people have a lower drawdown tolerance lower than they think. So if you think you can handle a 50% drawdown, probably you can handle 25% before your trading decisions suffer. If 25% is your realistic drawdown tolerance, then that means 1/4 of Kelly size is the most you should bet. That would indicate about 3.75% on this trade, which is IMO a much more realistic position size - still pretty big, given that it's not a real home-run kind of trade like Soros' pound bet or Paulson's housing bet.

Most veteran traders recommend betting 0.5-1% on the 'typical' trade that doesn't have a hugely skewed favourable expectation, 2-3% on high conviction trades, and say that anything above about 5% is crazy risk. So 10% would probably be the absolute max, on very rare opportunities with career-changing risk/reward & win rate stats.
More...

Thanks for the feedback. I definitely wouldn't trade a system with this kind of position sizing since as you point out the drawdowns would reach levels its hard for any sane human to handle, I'm making an exception because I have a high confidence on this trade. Most of the time I'm making small bets, like the Berkshire shares, I only have 4% there. I also bought IRDM today, about 1%. The EUR trade was about 15%(the actual risk was lower since I cut back as it went against me)

But on this trade, I don't know, I'm already quite protected against being wrong given that the contract is almost 100% at a 25bps hike. 2 hikes seem quite low prob(Specially given that it looks like the ECB will hike then wait, the Fed would prob do the same)
 
You must log in or register to reply here.
Back
Top