Global Macro Trading Journal

Quote from Martinghoul:

If my recollection is correct, this is precisely the phenomenon that gave us Taleb the Philosopher. Prior to this, he used to be Taleb the Options Trader.
More...

No, Taleb's idea was to own deep OTM premium all the time (and short ATM premium against it to pay for the bleed), then market it as a long-tails hedge to investors. That is quite different to owning deep OTM premium in one direction when a bubble has entered a massively overvalued phase, as one trading strategy amongst several.

Example: Taleb invests in US Treasuries and spends the income on OTM premium each year. Vol collapses from 2003 to 2007 and his returns suck compared to most hedge funds playing the credit bubble. Taleb becomes a philosopher.

Meanwhile, fund X and trader Y follow their normal strategies and make 15-30% per annum (or whatever) from regular trading in 2003-2006, whilst bleeding 1% a year on their housing blowup bets. Once the housing market clearly turns down in 2007, the position pays off big. This assumes no timing ability at all for the housing bears. In reality, once housing turns down in 2006, they have plenty of time to add to positions to score even bigger in 2007-2008.
 
Quote from Ghost of Cutten:
No it can't turn into a costly waiting game, because you control how much you pay while you wait. If you limit the risk to what you can comfortably wait/burn, then there is no issue. And since all bubbles in history have eventually popped spectacularly, you will get paid.

Example, let's say you were early on the housing bubble and started paying 1% per annum (when Treasuries were paying 4-5% per annum) to own CDS exposure from 2003. So, your fund performance is 1% per annum worse in 2003, 2004, 2005, 2006. Then you make 100% in 2007-2008.

So, with no timing ability whatsoever, and being 4-5 years too early, and not adding to your positions at all in 2007-2008 when it became obvious the timing was right, you had a 100% gain at a risk of 4-5%. Everyone who says you need timing to profit from bubbles is utterly wrong.

The only way you can lose shorting a bubble is if you risk more than your staying power/conviction and capitulate before it pops, or if you are wrong that it's a bubble. You cannot lose by maintaining modest asymmetric positions each year until the crash occurs, even if your timing is horrible.

Finally, the timing issue is not hard anyway. You can either wait until the fundamentals start turning down, or wait until the key price drops below the 200 day moving average, or both, and only then put on your bets. This takes about 1 minute of analysis per month.
More...
This, in my view, and based on my personal experience, completely incorrect.

EDIT: Apologies for the above. I didn't read what you have written with sufficient attention, GoC. I actually don't disagree, as it's a more nuanced point you make. I will respond more meaningfully to this and your other post a bit later.
 
Quote from Daal:

I agree with this. The reason most people got killed shorting Japanese bonds was because their thesis was flat out wrong, inflation there is frequently negative or barely positive. Economic growth weak, the fiscal situation has worsened but a lot of those people were shorting in the 90's and early 2000's when fiscally they weren't as bad, they deserved to lose money because they misunderstood the situation not because the trade mechanics was flawed
More...

Yep I agree. I actually bet against JGBs and Euroyen in 2003-2004 and made good money (for a while), expecting a recovery and the re-emergence of inflation, but then it became apparent that there was still no inflation and the BoJ was going to sit at 0% for years more, the markets recovered strongly and I exited after giving back about half my profits.

People shorted JGBs in the late 90s and early 2000s because they were 'expensive' i.e. low yields. But the fundamentals were deflation and a sucky economy i.e. the fundamentals indicated prices should be 'expensive'. Just like tech was expensive in 1995, 1996, 1997, but the fundamentals were great. Similar story in 2003-2004 with housing - expensive prices but great fundamental growth.

The time to bet against a bubble is when the fundamentals deteriorate but the valuations are still pricing in amazing growth (or bet against a crash when fundamentals start recovering and values are still pricing in disaster).

If you are wrong on the underlying thesis, you will lose. But I'm not sure how that is different from almost any other trade or investment.
 
Quote from Ghost of Cutten:Example, let's say you were early on the housing bubble and started paying 1% per annum (when Treasuries were paying 4-5% per annum) to own CDS exposure from
More...
How many $10m CDS contracts have you bought in your lifetime?

I doubt utterly cheap CDS are a good example, representing the typical cost of speculating against the average financial asset bubble. The truth is that using mispriced CDS - thanks to idiotic counterparties at AIG or Japanese investment banks - to cheaply speculate on large directional moves is something that isn't reliably available when you spot the next bubble, especially not to the traders of the retail ilk.

The most obvious way to speculate against a bubble is long-dated OTM options. And option prices typically increase, sometimes sharply, during exponential moves, e.g. CL put options during the 2008 blow-off rally or Nasdaq put options during the 1997-2000 period , which witnessed very high realized volatility.

So yes, for the typical trader being early can be very costly and timing matters, especially when trading bubbles.

And I agree with your timing suggestions (coincident fundamental deterioration or some sort of MA timing or both) but Bass wasn't mentioning any of that in his interviews. He said it's 'unsustainable' and 'it's a no brainer'. He didn't address timing at all.
 
Quote from Ghost of Cutten:

Could be an interesting short play there?
More...

Yes, I had a small long yesterday(returned well stock surged like hell). I still expect further gains today and MAYBE on tuesday. WHX bounced like a monster for 3 days on retail idiots buying, then resumed its decline. I will put the short once the idiot buying stops
 
WHX had the same story as BPT a few months back. Eventually it went back to its NPV even though it had all kinds of squeezes and panics. BPT might do that too

BPT is decent trade on pre-market too, retail idiots hit all kinds of far away limit orders. I unloaded my position today at $93.00 even though the stock closed at $89.51. Maybe it will open at $93 but I bet its not likely at all

I will try to buy back a small position for a possible further run today
 
You must log in or register to reply here.
Back
Top