Global Macro Trading Journal

I'm been thinking about my trade of being long TLT

Pros
-Most investors hate it, Barrons reported that most managers(IIRC it was 81%) are bearish on it
-If the EU implodes(Likely in my view) there should be a flight to safety in German gov bonds, they correlate and compete with USTs in large portfolios and are quite likely to take USTs up with it
-More US economic weakness(Likely in my view also, not as likely as EU implosion though) will get more people in them as people get out of stocks
-China hard landing will drag inflation rates down by cracking commodities and perhaps get people more risk averse
-German gov bonds might come under suspicion and sell off. In this case USTs will be almost the ONLY safe haven out there, if this happen they would rally a lot. Low 2%ish 30y would be in the cards

Cons
-Its quite unlikely the Japanese scenario will play out in the US, the FOMC has 'defended' the ~1% level of inflation expectations extremely aggressively. They will go up to QE99 if necessary. So going forward inflation is likely to be around 2% or higher(Barring 2008 type mega shocks) which caps the upside of the trade and leaves all the downside. Asymmetrical payoff
-US fiscal bad news could start to affect bond prices, its going to happen one day, its a matter of when

At this point I'm feeling confident that Europe will explode and this is going to create a persistent bid for the bonds. The question is should I increase the position. I would like to hear other people's thoughts on this either pro or con
 
Quote from Daal:

I'm been thinking about my trade of being long TLT

Pros
-Most investors hate it, Barrons reported that most managers(IIRC it was 81%) are bearish on it
-If the EU implodes(Likely in my view) there should be a flight to safety in German gov bonds, they correlate and compete with USTs in large portfolios and are quite likely to take USTs up with it
-More US economic weakness(Likely in my view also, not as likely as EU implosion though) will get more people in them as people get out of stocks
-China hard landing will drag inflation rates down by cracking commodities and perhaps get people more risk averse
-German gov bonds might come under suspicion and sell off. In this case USTs will be almost the ONLY safe haven out there, if this happen they would rally a lot. Low 2%ish 30y would be in the cards

Cons
-Its quite unlikely the Japanese scenario will play out in the US, the FOMC has 'defended' the ~1% level of inflation expectations extremely aggressively. They will go up to QE99 if necessary. So going forward inflation is likely to be around 2% or higher(Barring 2008 type mega shocks) which caps the upside of the trade and leaves all the downside. Asymmetrical payoff
-US fiscal bad news could start to affect bond prices, its going to happen one day, its a matter of when

At this point I'm feeling confident that Europe will explode and this is going to create a persistent bid for the bonds. The question is should I increase the position. I would like to hear other people's thoughts on this either pro or con
More...

I'd ask is there a better way to play a European blowup. Maybe some kind of stock or bond spread between EU and US securities, I'd imagine that will have a better risk/reward profile and isolate the specific theme you are betting on. I also don't see the 30 year at 2%, that exceeds where they traded in 2008/2009 at the height of the panic. The US is not in recession and probably won't go into recession even if Europe goes down the toilet, and 2% is a depression yield.

However, the bonds are trading quite strong and its definitely a minority view. Personally it looks like a coin flip to me, even if you have conviction I don't see it as something you should bet really big on, just a normal position size.
 
Quote from Ghost of Cutten:

I'd ask is there a better way to play a European blowup. Maybe some kind of stock or bond spread between EU and US securities, I'd imagine that will have a better risk/reward profile and isolate the specific theme you are betting on. I also don't see the 30 year at 2%, that exceeds where they traded in 2008/2009 at the height of the panic. The US is not in recession and probably won't go into recession even if Europe goes down the toilet, and 2% is a depression yield.

However, the bonds are trading quite strong and its definitely a minority view. Personally it looks like a coin flip to me, even if you have conviction I don't see it as something you should bet really big on, just a normal position size.
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I only see a 2% yield if bunds start to tank along with rising CDSs due bailouts leading to big deficits and people getting scared. I don't see many options to play the EU crisis. My EUR short is not working as it should, lots of noise for little or no gain. I still have it but I don't expect huge money from there

I could short Italy or Spain stocks but I'm not sure its optimal. EWI is down almost about 45% from the post crisis highs and ~65% from the pre-crisis highs. I would not allow myself to short a positive risk premia asset after being down so much(And if I do, it would be a small position), specially when the theme is hardly contrarian(Lesson learned in 2009)

If I traded millions I could buy some CDSs on the PIGS, short bonds and stuff like that. But it ain't really an option

So I'm left with buying German bonds or USTs. The german bund ETF has very little liquidity, the futures complicate the position sizing since their size is fixed. I missed the 2011 rally in them due that, I could have bought TLT last year and it would lost little compared to german bonds(They correlate well). So that's why I choose it
 
I don't quite understand what is going on with the EUR. I read that it seems that repatriation and foreign buying of bonds has been holding it
 
Quote from Daal:

I've been thinking about this. The reason I spend so much time researching and thinking about long-term returns in different assets is related to this. My research indicates to me that stocks are in a secular bear, on avg the bull runs are shorter and bear declines deeper, so the weighting of stocks in the portfolio should be smaller(In my case I'd be willing to go up to 20% maybe 25% if there are stocks with limited downside that are diversified like BRKB), this should protect against the big drawdowns like in 2008.

Also since, hopefully, my macro bias will pickup the stock bear market, I will likely to have some shorts in stocks and perhaps longs in bonds or stuff like fed futures(Bonds as % of total increase since the macro exposure will add up to passive). This should protect the downside

The commodity ETF exposure will create some problems as well. I could decrease the weight in the total portfolio, I wouldn't be to happy doing it(as one is not supposed to do that in a secular bull) but if there are not enough hedges in the macro account this becomes an option

Probably a bad option, so far my attempts to stay out of commodities have given mixed results, I dodged 2008 but also missed 2009 and late 2010 rallies

In the end, some downside volatility seem inevitable.

A level of prediction and making educated guessing becomes inevitable as well. With stocks(secular bear) its probably fine to decrease exposures if you are afraid but with commodities its tricky, guys who were afraid of recessions in the 70's missed large run ups, the total drawdown in the CRB IIRC was 20%, could easily been offset by a bond portfolio and prudent macro shorts
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Well, the whole point of a passive index portfolio is not to guess market direction. Predicting specific macro outcomes is against the underlying concept of passive portfolios. But that is exactly what we do, so there's an inherent tension.

A way to blend macro prediction with portfolio investing would be to have say 3 types of portfolio - one for a 'good' environment, one for a 'bad' environment, and one neutral. You'd stay neutral unless you had strong conviction than the outlook was good or bad. So in 2007 or 2008 you could have on the conservative portfolio, and you should have been ok (anything with 50-60% bonds in 2008 would have been alright). In 2009-2010 you would have been neutral or conservative, since you missed the rally, but both those portfolios would have done ok and definitely better than staying in cash the last few years.

Regarding commodities, I don't accept them as part of a passive portfolio. Gold is a far superior portfolio and disaster hedge. Look at the 1970s, the 2000s, and 2008 - gold went up more reliably in line with inflation, and got hit less hard in the crashes. 1975 was the outlier but stocks did really well that year. Something like 10-25% gold would be much better than 10-25% in the CRB.

IMO you want something like this as a neutral portfolio:

20% gold
20% domestic stocks
20% foreign stocks (total 40% in stocks)
20% long bonds
20% cash

In 2007-09 you would have lost about 20% on the stocks, 5% on the gold, but made some money on the bonds and a little on the cash. Net loss about 20% peak to trough, that is good for a crash as bad as 2008. This portfolio would have done pretty well in 1929-32, and 1973-74 (or the whole 70s) also.

To go more conservative, reduce the stocks to 30% (15% each), up the gold/cash/long bonds. To get more aggressive, drop bonds/cash/gold and up stocks to 50 or 60%.

Looking at today's environment, I think 40% stocks is fine. Long-run returns should be:

gold - inflation i.e. about 2%
stocks - about 8-10%
long bonds - current yield i.e. 3.15%
cash - a bit above inflation e.g. 2.5%

40% stock weighting gives total expected portfolio return of 4.9%. 55% gives 6.1%. IMO it's really unwise to drop stocks below 40% for extended periods, 5% is already an iffy return (although that's roughly what a Japanese conservative portfolio would have made in the last 20 years - FAR better than any 'normal' stock-biased portfolio did). With 40% in stocks even if you get a secular bear, your gold and/or long bonds should make some nice returns.

In 2000 or 2007 I would agree with you, drop stocks to 30% for example. But not today, after 3 years of earnings growth, PEs that are, even on a bear case, not overly stretched, and bonds/cash yielding diddly squat. Even 50% long stocks you are only going to drop 25% during a very nasty bear, and that will be offset by bonds and/or gold (depending if it's an inflationary or deflationary recession).

I would add that gold and US stocks are a great diversifier for non-US investors, because in a global crunch the dollar will usually rally, and when the dollar goes into the toilet (2002-2007 for example), gold will usually do very nicely.
 
Quote from Daal:

I don't quite understand what is going on with the EUR. I read that it seems that repatriation and foreign buying of bonds has been holding it
More...

What about a hawkish ECB versus dovish Fed?

Anyway, it does show remarkable resilience. If and when Europe starts to turn around, the Euro might catch people out with a large rally.
 
Quote from Ghost of Cutten:

Well, the whole point of a passive index portfolio is not to guess market direction. Predicting specific macro outcomes is against the underlying concept of passive portfolios. But that is exactly what we do, so there's an inherent tension.

A way to blend macro prediction with portfolio investing would be to have say 3 types of portfolio - one for a 'good' environment, one for a 'bad' environment, and one neutral. You'd stay neutral unless you had strong conviction than the outlook was good or bad. So in 2007 or 2008 you could have on the conservative portfolio, and you should have been ok (anything with 50-60% bonds in 2008 would have been alright). In 2009-2010 you would have been neutral or conservative, since you missed the rally, but both those portfolios would have done ok and definitely better than staying in cash the last few years.

Regarding commodities, I don't accept them as part of a passive portfolio. Gold is a far superior portfolio and disaster hedge. Look at the 1970s, the 2000s, and 2008 - gold went up more reliably in line with inflation, and got hit less hard in the crashes. 1975 was the outlier but stocks did really well that year. Something like 10-25% gold would be much better than 10-25% in the CRB.

IMO you want something like this as a neutral portfolio:

20% gold
20% domestic stocks
20% foreign stocks (total 40% in stocks)
20% long bonds
20% cash

In 2007-09 you would have lost about 20% on the stocks, 5% on the gold, but made some money on the bonds and a little on the cash. Net loss about 20% peak to trough, that is good for a crash as bad as 2008. This portfolio would have done pretty well in 1929-32, and 1973-74 (or the whole 70s) also.

To go more conservative, reduce the stocks to 30% (15% each), up the gold/cash/long bonds. To get more aggressive, drop bonds/cash/gold and up stocks to 50 or 60%.

Looking at today's environment, I think 40% stocks is fine. Long-run returns should be:

gold - inflation i.e. about 2%
stocks - about 8-10%
long bonds - current yield i.e. 3.15%
cash - a bit above inflation e.g. 2.5%

40% stock weighting gives total expected portfolio return of 4.9%. 55% gives 6.1%. IMO it's really unwise to drop stocks below 40% for extended periods, 5% is already an iffy return (although that's roughly what a Japanese conservative portfolio would have made in the last 20 years - FAR better than any 'normal' stock-biased portfolio did). With 40% in stocks even if you get a secular bear, your gold and/or long bonds should make some nice returns.

In 2000 or 2007 I would agree with you, drop stocks to 30% for example. But not today, after 3 years of earnings growth, PEs that are, even on a bear case, not overly stretched, and bonds/cash yielding diddly squat. Even 50% long stocks you are only going to drop 25% during a very nasty bear, and that will be offset by bonds and/or gold (depending if it's an inflationary or deflationary recession).

I would add that gold and US stocks are a great diversifier for non-US investors, because in a global crunch the dollar will usually rally, and when the dollar goes into the toilet (2002-2007 for example), gold will usually do very nicely.
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Interesting points.
With regards to Gold vs CRB. I'd say its complicated, the "CRB" includes interest income that is earned in the USTs that are used as margin against the futures position. Currently its 0%(The GCC ETF uses bills) but it won't be zero forever. The CRB index return against Gold in the 70's could be unfair due that(Imagine what kind of interest income one would have gotten, specially compounded. I don't have the numbers but I'd be surprised if they it doesn't beat physical gold), the income is also a cushion against vol
Also, its nice diversification.

With regards to long-term returns it seems that you are talking about REALLY long-term there. If that is so, I'd agree with the projections. If its more like 5-15 years I'd use different numbers
 
The Yen is up about ~30% since their bubble peak. The risk is that a similar thing could happen with the EUR. They both have central banks that are behind the curve. There are some facts that complicate this though
-2% inflation mandate, as much as the ECB is criticized they are succeeding in doing this, the BOJ never had a target and as a result could be incompetent without drawing much attention to them
-Sov debt crisis, usually its bearish to a currency, specially combined with banking worries. Leads to lots of people moving cash out
 
Quote from Debaser82:


Risks are:

1: Is it safe where you store it? Daal had a newsbite a while back about a bank being robbed and safes opened.
2: Can be confiscated, forbidden.

The risks to me are reasonable and fall in the category of: what if my bank goes broke, what if the Euro collapses, what if my country goes bust...
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Reduce the risk on your physical holding of gold. There is no reason to take any risk that can be hedged and won't give you any excess return for even 1 extra day. So, I would do it today (asap) if I were you!

1. Divide your gold holdings and store them in two different bank branches of too big to fail banks in your country (you would have to be extremely unlucky that both banks go bust together or both branches get robbed together)
2. It is better if you can have the branches in multiple cities - helps protect yourself against natural events - massive earthquakes, tornados, floods, massive riots - civil machinary breaking in one part of country etc. etc. (I agree probability of these events is pretty small but why take risk if you are not going to earn anything from it).
3. Store a little bit of gold in your home (say Euro breaks, Belgiam goes Ireland way or a a military coup happens in your country - agreed chances are close to 0 for Belgium :) ), and the govt. confiscates the gold stored in banks - you are done. Protect yourself against all these highly unlikely but extremely severe events that can happen in life.

All the above is basic 101 business continuity planning advice and they don't cost much money to implement, so no reason why thoughtful traders shouldn't implement them.

On a similar note, always have 2 different internet connections and 2 different computers, if you trade actively. One computer can crash anytime and if you are leveraged in a futures position, a lot of damage can happen. Always have telephone number of your broker in your wallet - you might be on road and Iran-Israel have war, you want to access your account asap.

Anyways, above are all the simple little precautions that I have put in place for my long term survivability and I recommend everyone to have them. They don't cost a lot of money to put in place.

Finally, if you are trading a small account today say 20k, its not a justification to postpone having a working business continuity plan in place, because within 2 yrs you might be trading 80k account and if suddenly one day some event happens, you would be in a bad position. So, protect yourself ahead of some event.
 
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