Global Macro Trading Journal

Quote from Ghost of Cutten:

Nonsense - there are ways for the approach to fail even if valuation and fading extreme sentiment trends matter a huge amount. E.g.

1. the trader could be mistaken in their assumptions about valuation. E.g. thinking things are expensive when they are not (like shorting stocks in the 50s when the dividend yield fell below bond yields; or staying hedged in early 2009), or cheap when they are not (e.g. buying after 1930 due to a 50% fall in prices).

2. The trader could be mistaken about what an 'extreme sentiment trend' is. For example, not fading the overwhelming fear and panic in late 2008 or early 2009.

3. The trader could avoid the mistakes above, but fail due to poor implementation, or adopting other flawed strategies which swamp the good side of their methodology.

4. The market may price valuation correctly, and extreme sentiment trends may just be efficient odds-bets on secular/structural changes in the markets (I don't believe this, but it is a theoretical possibility).

Hussman has *already made* mistakes 1, 2, and 3, so it is an absurd statement to say that his approach 'has to work'. You are just shooting from the hip and passing it off as serious analysis.
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The thing is, his approach has ALREADY worked, he is beating the S&P since inception. I don't see anyone ripping on buffett because of 4 year returns
 
Quote from Ghost of Cutten:

Ok I am not trying to pick on you here, but I think your way of approaching this trade is flawed. Here's why:

Firstly, perceived 'mispricing' alone is not a reason to do a trade. It is a necessary but not sufficient condition. The reason is that mispricing can get worse, or stay mispriced a long time, or (worst case) you can be incorrect and the 'mispricing' might be right. You need many other things too: very attractive trade odds; a high level of conviction; a way of knowing if and when you are wrong and must bail on the trade; and either a catalyst (reason to think the market will move in your favour within a given timeframe) or at the very least, no likely negative catalyst (reason for the market to squeeze you before it moves the way you expect). It is also good, but not essential, if your trade view is not widely perceived or accepted by the market.

Reading your other posts on this trade, it looks problematic:

"Frankly I'm just a little scared here." - i.e. you have little conviction or staying power, you are a weak hand. You will get either squeezed out if the market tests your position, or wiped out if you are unsqueezable due to stubborness, but turn out to be actually wrong this time. It is good trading technique to assume ALL positions you adopt will be seriously tested/squeezed at some point, even if you are 100% correct about the eventual result.

"This is one of the trades that you can lose a lot if wrong" - not a good sign. Picking pennies up in front of steamrollers only works if i) you trade small size ii) you make a LOT of these trades, so you have high odds of collecting more in 'insurance premiums' than you lose in big payouts iii) your odds assessment is super accurate and super conservative. A moderate odds calculation error in a 5:1 risk/reward trade is not a big problem - maybe you make 3:1 instead. A moderate odds calculation error in a 1:10 risk/reward can turn a small net winning strategy into a huge loss-making strategy. There is simply no way to calculate trade odds that accurately on situations like this.

"Only scenario where this trade can go bad is if the economy really takes off, beats all private and Fed forecasts, employment heats up and inflation surges." - no. It can also go bad if the market, or the Fed, THINKS this will happen and thus rates change. E.g. if the market fears inflation enough, not only will you take a lot of heat and maybe get squeezed out (and definitely have terrible trade timing), the Fed may even start hiking to allay these fears.

The other problem with this trade is you neither have a true sentiment extreme to bet against, nor favourable market momentum to coat-tail. You are fading a trend in a fairly early or middle phase. That can sometimes work if the trend fails to develop, but it can also, as you point out, result in getting steamrollered.

Overall this looks like a marginal trade, rather than a slam dunk. More importantly, your trade preparation is missing many critical factors that should be considered before placing any capital at risk.

Trading on opinion is not a robust approach. You need to develop a trade strategy, and it must cover ALL feasible contingencies, not just the ones where your trade thesis works without being seriously tested, not just one where your assumptions all turn out to have been correct. Trading according to a soundly tested, robust, and comprehensive strategy or set of strategies, with proper planning for all contingencies, is a requirement.
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Quote from Ghost of Cutten:


The other problem with this trade is you neither have a true sentiment extreme to bet against, nor favourable market momentum to coat-tail. You are fading a trend in a fairly early or middle phase. That can sometimes work if the trend fails to develop, but it can also, as you point out, result in getting steamrollered.
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I'm actually fading an anomaly, even since the Fed has provided guidance the front end has followed it, except in this particular period where a lot of people are unwinding fixed income positions. The catalyst that you seem to have missed is the Fed meeting next week, that is very likely to wake people up and get them to feel safe about the front end again. What if they don't you say? Then I will decrease size and hold to expiration, free money only stays out there for so long until reality takes over.

Now you might say, what if the market turns this mispricing into a gigantic mispricing, I keep coming back to the Fed but it is not easy to have something to stay mispriced when the price fixer says it is mispriced and they will fix the price. It is very unlikely, secondly, of course I have sized my position thinking in worst case scenarios. Its not like I started trading yesterday, if all these unlikely things happen than I will book a loss. What is the big deal?

You talk about a high level of conviction, I have confidence in the trade but I'm also aware that it is dangerous to be confident in a situation like this because if you don't pay attention to the signs you can get run over if there is a change in thinking by the Fed. But 95%+ of the time everything is likely to go as planned. 5% of the time I will get out at a loss (which is likely to be of the same size as my likely gain)

The contracts are at 99.38 right now, so R/R is a bit worse. When I posted it was at 99.25, I was thinking 30-40bps downside due unwinding and more lunacy and 65bps of upside (no hikes)
 
Fed said tighter financial conditions were the reason for no taper. Only reason for that were taper expectations and the great unwind of fixed income positions. Fed wants to stop rates from going to stupid levels and killing recovery, funny, once they signaled taper rates were up so much there was no need for taper

They didn't expand forward guidance but with no taper there was no need for that. Rates down across the board. I think I will sell another 1/4 today and hold 2/4 for the drift up in stocks and bonds that tends to happen over the coming days on Fed surprises
 
The Fed funds forecasts from this meeting are hard to compare to the ones from last meeting (with forecast materials). Only 17 people attended this meeting compared to 19 (in the last one), I guess some non FOMC voters (but voters in the forecast materials) had more important things to do. Only real news piece of info is

"Participants expected the funds rate to rise to 1.81% by end-2016, well below participants’ 3.25-4.25% range for the longer-run rate."
 
I expect this slap in the face by the Fed on bond investors to get markets to align the front end to something closer to the Fed's forecast. Its tempting for me to sell here but I'm keeping 2/4 to see what happens in the next few days
 
Biggest piece of info today is the confirmation that the Fed will rescue rates as a long as the economy can't stand on its own
 
Sold another 1/4 into this weakness. Will hold final 1/4 for long-term. If the front end dips again I will very likely buy, maybe even bigger next time
 
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