Global Macro Trading Journal
- Thread starter Daal
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I will admit, that's a risk to the Trump trade. Its been a popular theme to be in US equities since 2009. So its an obvious trade, that probably a lot of people are playing with leverage. If you combine that with Trump's volatility, its a mix that is likely to create drops a long the way. I do think that better prospects for growth will prevent any big dip. Barring a recession, the dips that do happen will offer great rewards to people to step in and take a chance. It will be hard to keep the market down
That's what I believe Soros was doing with this post-election was short. The fact that he lost 3% I dont think means much, had he been right he would also made a lot. Key is, its part of his fund strategy to put these 'macro overlays' when significant catalysts hit. These catalysts lead to significant potential moves and the trader doesn't have to risk very much if one is early in getting in the trade.
I'm trying to do something similar by ocasionally getting involved on the short side and changing the weightings of my risk parity allocation. But with shorts, its tough. Since 2009 there has been few significant drops. There was 2011 where the market dropped 19% or so, then 2016, where it dropped some 15-16%. I think in 2014 there was a 10%+ drop as well. All of these stock drops ultimetly were failed pullbacks, markets perked up and went to new all-time highs. You had to time super well (the little small losses trying to catch them can add up) and you had to be good at taking profits, otherwise quickly those profits were gone.
Bonds barely dipped until recently, there was the Taper tantum in 2013 but they were on a tear for a long-time until that. Anyone looking to short them accumulated a lot of little losses. And they had to be quick taking profits otherwise those losses weren't paid by the profits. Overall, the enviroment that US assets currently face is not of of a lot of macro dislocation, but rather an enviroment where beta (indexes), "beta plus" (illiquid assets like real estate, private equity) are doing well. So macro 'alpha' is hard, there is not much of that, at least in the US. But at some point beta chasing will end badly and we see a lot of dislocation. At this point I'm not seeing the catalyst to make that happen, I still think it will be a favorable enviroment for beta, beta plus and levered beta (although the latter might face some difficulties due Trump's volatility)
But at some point down the line I do plan to protect myself against dislocations by putting in big shorts and underweighting certain asset classes. I just don't want to be early, until a big catalyst shows up there is no reason to fear beta
Bonds barely dipped until recently, there was the Taper tantum in 2013 but they were on a tear for a long-time until that. Anyone looking to short them accumulated a lot of little losses. And they had to be quick taking profits otherwise those losses weren't paid by the profits. Overall, the enviroment that US assets currently face is not of of a lot of macro dislocation, but rather an enviroment where beta (indexes), "beta plus" (illiquid assets like real estate, private equity) are doing well. So macro 'alpha' is hard, there is not much of that, at least in the US. But at some point beta chasing will end badly and we see a lot of dislocation. At this point I'm not seeing the catalyst to make that happen, I still think it will be a favorable enviroment for beta, beta plus and levered beta (although the latter might face some difficulties due Trump's volatility)
But at some point down the line I do plan to protect myself against dislocations by putting in big shorts and underweighting certain asset classes. I just don't want to be early, until a big catalyst shows up there is no reason to fear beta
It's funny watching all these people, children of the Great Moderation, freak out about anything that creates volatility that comes from government action. They are used to the opposite, the government trying to dampen volatility and they think its the end of the world when government creates volatility. I have lived under a government that creates volatility for a long-time, its not a big deal, markets still function and things move forward. That higher vol is only a problem to the extent that it reflects true higher probabilities of tail/worse case scenarios and I dont think that's the case, at all
Trump can ALWAYS back down from threats and if he sees that certain actions are doing more harm than good, and he will because he is not a classic mercantilist (he is a Wharton graduate and a businessman) nor are his advisors ("tarrifs are a last resort" - Ross)
Same thing with diplomatic tensions and manouvers. Nor he is mentally ill ("sometimes it pays to be a little wild" - The Art of the Deal)
A president that is not allowed to send the VIX above 15 (because the children of the Great Moderation start to cry) while in office is at a disvantage over one that doesn't care, as a long the one that doesn't care will stop at VIX 30 and Trump will stop there.
So I expect some Trump dips and hicups but I doubt we will see (barring a recession) a Trump bear market. If markets ever drop 20% without a recession, then its a 2016 all over again and its a huge buy
Trump can ALWAYS back down from threats and if he sees that certain actions are doing more harm than good, and he will because he is not a classic mercantilist (he is a Wharton graduate and a businessman) nor are his advisors ("tarrifs are a last resort" - Ross)
Same thing with diplomatic tensions and manouvers. Nor he is mentally ill ("sometimes it pays to be a little wild" - The Art of the Deal)
A president that is not allowed to send the VIX above 15 (because the children of the Great Moderation start to cry) while in office is at a disvantage over one that doesn't care, as a long the one that doesn't care will stop at VIX 30 and Trump will stop there.
So I expect some Trump dips and hicups but I doubt we will see (barring a recession) a Trump bear market. If markets ever drop 20% without a recession, then its a 2016 all over again and its a huge buy
Here is some good news, after the Fed's latest hike, IB is finally back at paying interest on cash balances. Right now its nothing, only 0.16% on balances after the first 10K (a whopping $144 on a $100K balance) but if the Fed does go to it's 'long-run' FF of 3%. IB will pay that minus 50bps, so 2.5% on balances over 10K. A nicer $2,250 on a $100K balance
That's why sometimes I bring up the fact that some portfolio losses (in this case, bond losses) might not be 'true' losses, frequently, when valuations improve (real rates) there are compensatory gains elsewhere. Especially for people that have income coming in and that will be net buyers of financial assets in the next 10-20 years. Counting valuation changes as losses can lead to situations where people are sad when they should be happy
That's why sometimes I bring up the fact that some portfolio losses (in this case, bond losses) might not be 'true' losses, frequently, when valuations improve (real rates) there are compensatory gains elsewhere. Especially for people that have income coming in and that will be net buyers of financial assets in the next 10-20 years. Counting valuation changes as losses can lead to situations where people are sad when they should be happy
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Here is a scary thought. I mentioned in the past a Asness study that I'm a fan of that talks about the Fed Model and the Stock Market. In it, he talks about how the last 20 years standard deviation of the stock market (or the bond market) tend to affect how those assets are valued in the future. Bad times (high 20y standard deviations) lead to lower valuations (and higher excess returns) for the next 20y. This happens because people carry the scars of those crisis and remain skeptical of that market for a long-time. Lots of people comment how their parents and grandparents lived through the Great Depression and developed a skepticism about stocks that they tried to pass on to their children. They were doing them a disservice as excess returns in stocks after the Depression were pretty good due that skepticism.
But what I'm trying to get at is that many (if not almost all) of the great commentators/analysts/investors in the US fell for this human tendency even though they had all read the great books, works and studies on finance. Rosenberg, Roubini, Soros, John Mauldin and many others all were bearish in 2009 (Soros invented the Reflexivity theory and couldn't even see it in real-time). They called it the 'idiot maker' rally for that reason. Gradually overtime that skepticism came down and people got more comfortable with stocks but even back in 2010 and 2011 there was a lot of talk about a 'double dip' or how the Aug 2011 stock crash was 2008 all over again, there was the EU crisis and most commentators (even the good ones) tried to convince the world to sell equities. The natural tendency for most was to take profits during the rally since 2009, they were skeptical all the way up. People that knew all the theory still fell for that trick
I think that fact raises some important considerations one has to make, you can't think you are above it all just because you have read all the books. This applies not only to bottoms but also to tops. Who is to say that most of the 'good' commentators won't be bullish at the top? I hope I'm smart enough to avoid falling for this trick
But what I'm trying to get at is that many (if not almost all) of the great commentators/analysts/investors in the US fell for this human tendency even though they had all read the great books, works and studies on finance. Rosenberg, Roubini, Soros, John Mauldin and many others all were bearish in 2009 (Soros invented the Reflexivity theory and couldn't even see it in real-time). They called it the 'idiot maker' rally for that reason. Gradually overtime that skepticism came down and people got more comfortable with stocks but even back in 2010 and 2011 there was a lot of talk about a 'double dip' or how the Aug 2011 stock crash was 2008 all over again, there was the EU crisis and most commentators (even the good ones) tried to convince the world to sell equities. The natural tendency for most was to take profits during the rally since 2009, they were skeptical all the way up. People that knew all the theory still fell for that trick
I think that fact raises some important considerations one has to make, you can't think you are above it all just because you have read all the books. This applies not only to bottoms but also to tops. Who is to say that most of the 'good' commentators won't be bullish at the top? I hope I'm smart enough to avoid falling for this trick
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'In the process of being confirmed as Mr Trump’s commerce secretary, Wilbur Ross somewhat reassuringly said that he had learned the lessons of the Smoot-Hawley Tariff Act, which raised thousands of tariffs in the 1930s. (It “didn’t work very well, and it very likely wouldn’t work now”.) '
http://www.economist.com/news/finan...will-mount-destructive-trade-war-can-still-be
What you have is are "neo free traders" or "fair traders" (as opposed to straight up free traders). Folks that will try some manvouvers in order to enhance their trade deals. If you apply worst case scenarios from classic mercantilism, you will be wrong, because they know those scenarios aren't good at all and they won't go there. They are not classic mercantilists, they are "fair traders". Worst case scenarios from neo free/fair traders are far less bad, they know that at some point they have to stop and give up
http://www.economist.com/news/finan...will-mount-destructive-trade-war-can-still-be
What you have is are "neo free traders" or "fair traders" (as opposed to straight up free traders). Folks that will try some manvouvers in order to enhance their trade deals. If you apply worst case scenarios from classic mercantilism, you will be wrong, because they know those scenarios aren't good at all and they won't go there. They are not classic mercantilists, they are "fair traders". Worst case scenarios from neo free/fair traders are far less bad, they know that at some point they have to stop and give up
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The Brazilian central bank president said yesterday that they eventually might bring down the inflation target to 3% (from the current 4.5% to 6.5%). With real rates at 2-4%, nominal rates would be at 5-7%, let's call it 6%. The markets are pricing in a long-term rate of around 11% ish. If some version of this scenario starts to play out, then the 'new yorkitification' of Brazil will play out massively as asset prices get repriced much higher due lower nominal and real interest rates.
Also data came out showing that the debt to GDP ratio only increased 4 percentage points in 2016, instead of the expected 8pct points. This was due some 'hidden assets' the government was able to tap into. There is a lot of these assets that people don't take into account at the market lows when everybody is bearish. If there is willingness to solve fiscal problems, lots of things can be sold, cut, tapped into to prevent a debt problem. They even allowed people to access some version of a public 401k that brazilian's have (that the government withholds in most situations), it will serve as an economic stimulus (people will spend the money) but it makes no difference to fiscal metrics (as those debts had already been booked)
At this point one would have to be a crazy to be short Brazil
Also data came out showing that the debt to GDP ratio only increased 4 percentage points in 2016, instead of the expected 8pct points. This was due some 'hidden assets' the government was able to tap into. There is a lot of these assets that people don't take into account at the market lows when everybody is bearish. If there is willingness to solve fiscal problems, lots of things can be sold, cut, tapped into to prevent a debt problem. They even allowed people to access some version of a public 401k that brazilian's have (that the government withholds in most situations), it will serve as an economic stimulus (people will spend the money) but it makes no difference to fiscal metrics (as those debts had already been booked)
At this point one would have to be a crazy to be short Brazil