Global Macro Trading Journal

Daal · May 14, 2012

Quote from Butterball:

Let's also not forget Hank Paulson thought it'd be a great idea to let Lehman fail in a disorderly manner on a Sunday evening and thought the market was 'well prepared' and the impact would be muted. 48 hours later he started wetting his pants.

There's no telling if there's a large discrepancy between what European leaders assume will be the market reaction and what may actually follow.

Lots of what they are saying its what they have to say. They can't say 'If Greece exits it will trigger the mother of all bank runs' so they say 'We can handle it' just like they said 'Greece won't default' to stop people from panicking

ralph00 · May 14, 2012

Quote from darkhorse:

So "panic" in this case = a one day gap and < 10% drop in stock price that isn't even a new six month low.

Re, human flaw connoisseurship, I humbly suggest a review of "anchoring" and "recency bias"

From recent talk by James Montier ...

Anchoring â give someone a number â any number â and s/he thinks it means something (even when it doesnât).

Notes: http://rpseawright.wordpress.com/2012/05/06/cfa-conference-james-montier/

Full talk: http://annual.cfaconference.org/2012/05/06/live-stream-session-the-flaws-of-finance/

Starting at 18 minute mark.

darkhorse · May 14, 2012

Quote from ralph00:

From recent talk by James Montier ...

Anchoring â give someone a number â any number â and s/he thinks it means something (even when it doesnât).

Notes: http://rpseawright.wordpress.com/2012/05/06/cfa-conference-james-montier/

Full talk: http://annual.cfaconference.org/2012/05/06/live-stream-session-the-flaws-of-finance/

Starting at 18 minute mark.

Love it (circa 27:00):

The Value at Risk model is kind of like buying a car with an airbag, where the airbag is guaranteed to fail when you need it. Or alternatively putting on Kevlar body armor that will stop 95% of bullets. It's really not any good. It's cutting off that part of the distribution that we need to worry about -- the tails.

MichaelJ · May 14, 2012

Hi all - simple question. Everyone keeps talking about Greece defaulting and exiting the Eurozone.

I'm curious about the "AND". Greece might get booted from the Eurozone in the sense of being part of a community with certain rights and obligations. However, they could continue to use the Euro as their main currency (not saying they would do so, only that they could). Or introduce a Drachma that is pegged to the Euro.

What are the politics of a Greek currency post default. Do people think they will:
a) introduce a floating Drachma
b) introduce a pegged Drachma (and pegged to what)
c) continue to use the Euro for main accounts and trade within the country

Ghost of Cutten · May 14, 2012

Quote from Daal:

As much as I wrote about the possibilities of a Greek exit, I don't necessarily believe its the most likely scenario for this year. Simply because I don't trust the politicians when they say 'accept terms or you are out of EUR zone'. Its going to create a lot of panic and contagion to kick them out like that, I'm not sure the politicians would have the balls to do that(Effectively triggering another Lehman times X)

A rather distinct possibility are public sector writedowns of Greek debt(By the ECB and EFSF), bringing their debt to GDP ratio down and decreasing the need for austerity. Its going to look really bad to the voters, those are effectively fiscal transfers to the Greek people(ECB will need a bailout as well). But the alternative is send the European VIX to 80+(proxy for panic) and create bank runs in other places, I just don't think the politicians would go there fully knowing what is going to cause, even if they say that they will

What makes this specially attractive to the core countries is the fact that if they don't give these fiscal transfers, then they will lose everything(Greece does 100% defaults and leaves EUR). So its a choice between losing 50%+ and diminishing panic and losing 100% and triggering a banking panic of large proportions

It looks likely that they would pick the first option. Either way its not looking good for risk assets because in that scenario some panic will be needed in order to get them to act(Ala TARP)

Yeah if they backstop it then they can do it by printing money, but this will tank the Euro and represent a defeat for the Germans. The Germans may however prefer one-off QE rather than having to pay the bulk of a taxed transfer payment to Greece (and then Portugal, Spain etc). As you say, it's a Soros reflexive situation and the thickos at the 'Bundesbank' must figure this out eventually, if they haven't already. Much cheaper to rescue Greece than to let it fall and trigger a Minsky moment, then have to rescue the entire periphery.

So, either Greece exits the Euro and the EU banking system has a 2008/2009 moment, or EQE comes in on huge size and the Euro collapses. Both scenarios are pretty dollar bullish, so I think the time for Euro shorts is now. If the Euro doesn't tank on the current macro news flow , then it won't go down on anything.

Daal · May 14, 2012

Quote from Ghost of Cutten:

Yeah if they backstop it then they can do it by printing money, but this will tank the Euro and represent a defeat for the Germans. The Germans may however prefer one-off QE rather than having to pay the bulk of a taxed transfer payment to Greece (and then Portugal, Spain etc). As you say, it's a Soros reflexive situation and the thickos at the 'Bundesbank' must figure this out eventually, if they haven't already. Much cheaper to rescue Greece than to let it fall and trigger a Minsky moment, then have to rescue the entire periphery.

So, either Greece exits the Euro and the EU banking system has a 2008/2009 moment, or EQE comes in on huge size and the Euro collapses. Both scenarios are pretty dollar bullish, so I think the time for Euro shorts is now. If the Euro doesn't tank on the current macro news flow , then it won't go down on anything.

Why you expect money printing in large scale?Under a default but no EUR exit, the fiscal transfers would be done automatically by haircuts on the debt held by the public EU sector. Further Greek bailouts(And it seems that they will need because they don't have the money to recap banks) might have to be done EFSF way

Daal · May 14, 2012

Quote from MichaelJ:

Hi all - simple question. Everyone keeps talking about Greece defaulting and exiting the Eurozone.

I'm curious about the "AND". Greece might get booted from the Eurozone in the sense of being part of a community with certain rights and obligations. However, they could continue to use the Euro as their main currency (not saying they would do so, only that they could). Or introduce a Drachma that is pegged to the Euro.

What are the politics of a Greek currency post default. Do people think they will:
a) introduce a floating Drachma
b) introduce a pegged Drachma (and pegged to what)
c) continue to use the Euro for main accounts and trade within the country

I don't believe the Drachma peg would hold. In order to keep it 1-1 to the EUR they will need EUR reserves(lots of it) to contain market speculation. The government is broke and can't print EURs

Ghost of Cutten · May 14, 2012

Quote from ralph00:

Why do people consider knife-catching a sophisticated investment strategy?

What is 'knife-catching', exactly? Does it mean Bill Miller buying a financial stock in 2007 just because the price went down on bad news, or does it mean doing a Buffett-style deep value investment in a strong business franchise with a fortress-like balance sheet at 1/4 of book value, because it's now a great bargain?

I think the phrase is practically meaningless. When trying to convey facts, using analogies generally confuses the meaning that one wants to convey. Analogies are for artists and elementary school teachers, not financial market participants.

And while we're at it, can we also avoid using ugly contractions like "Grexit". Is it really so hard to say or type "Greek exit", which sounds better and is a whole 3 letters longer?

The financial media really need a refresher course in writing style. It reminds me of that other ridiculous, lazy, and totally misleading phrase, "The Fed is out of bullets".

Ghost of Cutten · May 14, 2012

Quote from darkhorse:

Love it (circa 27:00):

The Value at Risk model is kind of like buying a car with an airbag, where the airbag is guaranteed to fail when you need it. Or alternatively putting on Kevlar body armor that will stop 95% of bullets. It's really not any good. It's cutting off that part of the distribution that we need to worry about -- the tails.

Just to be pedantic, no body armor will stop 95% of bullets (as any maker will tell you), no airbag works 100% of the time (in fact they can injure and kill you sometimes).

Seems like today is lazy & misleading analogy day.

Ghost of Cutten · May 14, 2012

Quote from Daal:

Why you expect money printing in large scale?Under a default but no EUR exit, the fiscal transfers would be done automatically by haircuts on the debt held by the public EU sector. Further Greek bailouts(And it seems that they will need because they don't have the money to recap banks) might have to be done EFSF way

Hmm, do you think that Greece could just default on all its debt, stay in the Eurozone, and the banks and ECB would be recapitalised by tax increases? I'm sceptical.