Global Macro Trading Journal

But the stock market is smart, it isn't dumb like the avg valuation ahole. The stock market seems to represent the money weighted avg opinion taking into account different payoffs and probabilities. Since its money weighted, guys like Buffett represent a larger share of the movement. Its not like a democracy where its one man one vote, in the stock market its one dollar one vote.

So the rich guys represent the bulk of the movement and these guys are sniffing out that paying attention to the whole valuation/trump is crazy/other nonsense is to light money on fire in this new macro regime. So they are buying and they are not stopping as prices goes higher because they judge the risks to be to the upside (plus stocks offer convex payoffs so in this kind of situation you buy first, ask questions later). There is no need to 'know' the future, just by inferring where the risks lie and how they shape up, one can make a smart decision. That's where another set of aholes will perish, the ones that are 'waiting' for details of the trump policies. They will keep waiting for details forever while the smart money makes the money
What looks irrational to someone can look totally rational if they just looked hard enough
 
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Given that stocks offer a convex pay off (risk is limited to 100% of capital but reward is unlimited) it doesn't take much movement in the % chance of a bullish scenario to justify a large move to the upside of the stock.

And its not even just the % chance of the bullish scenario, its the % chance of the % chance going higher and the % chance of the payoff being higher than previously though (so a stock bought with an upside of 50%, turns out to have an upside of 100%). So the 'upside risk' (the risk that you will be wrong by not being optimistic enough both in the % chance and the size of the payoff)
Trump comes out and affects all these variables in a positive way, stocks go higher, its just what you would expect. There is no need to the policies to actually be presented for stocks to go higher in a 'rational' way. When dealing with a convex payoff the smart policy is to buy first and reasses later. Even Soros has a rule of 'invest first, ask questions later'. Open ended pay offs (with bounded risk) enable the investor to do such thing
 
Daal said:
Given that stocks offer a convex pay off (risk is limited to 100% of capital but reward is unlimited) it doesn't take much movement in the % chance of a bullish scenario to justify a large move to the upside of the stock.

And its not even just the % chance of the bullish scenario, its the % chance of the % chance going higher and the % chance of the payoff being higher than previously though (so a stock bought with an upside of 50%, turns out to have an upside of 100%). So the 'upside risk' (the risk that you will be wrong by not being optimistic enough both in the % chance and the size of the payoff)
Trump comes out and affects all these variables in a positive way, stocks go higher, its just what you would expect. There is no need to the policies to actually be presented for stocks to go higher in a 'rational' way. When dealing with a convex payoff the smart policy is to buy first and reasses later. Even Soros has a rule of 'invest first, ask questions later'. Open ended pay offs (with bounded risk) enable the investor to do such thing
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I suspect this is why some people misunderstand the stock market and say 'the bond market is smarter than the stock market' (and I used to be one of those).

They are not taking into account that the different payoffs (stocks limited risk huge potential gain, bonds huge risk small potential gain) drives the smart money to behave completely different in the 2 scenarios. If the stock market is not making sense is because people are not taking into account this sort of open ended potential which makes 'speculation' (and ignoring of certain risks) far smarter than it would be the case in the bond market (where is suicide)
 
I just shorted EURUSD at 1.0536.
8.5% position
Stop at 1.11
So a little less than 0.5% at risk. Potential gain is a 10-20% drop in the EUR (minus financing costs which are around 0.5% a year on Oanda). So risk-reward of around 2-1 or perhaps 3-1 4-1 under more extreme scenarios

My reasoning is that there are so many ways accumulating for the EUR to start to desintegrate:

-There is this French election and the potential for a populist to win
-There is Greece which might decide to walk if others keep asking for austerity
-There is the fact that the UK already decided to leave
-Plus it plays nice with the Trump AND Fed policies (which are USD positive)

I'm guessing there is a correlation there (the more countries start to flirt with leaving, the more others will be doing that as well). Once a member actually leaves, I believe there is a decent chance there will be a cascade of countries talking about leaving or at least expectations of such thing. Once the first country leaves, there will be a lot of citizens that will lose a lot of wealth (as the new local currency plunges). This will horrify other holders of EUR and they will see how big 'redenomination risk' is. Selling EURs to buy USD, CHF, gold will start to make a lot of sense to them
It will also help to 'hedge' my Greek position as well as US/BR equities since a EU implosion would tend to be negative for global risk taking
 
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Plus I want to get better in my currency trading, and I tend to learn more when I'm trading (and thinking about the trade and the movements of the currencies) than when I'm just observing or reading books
 
This guy seems to have nailed it
"Martin said the three most important Fed officials to comment this week were New York Fed President William Dudley, Fed Gov. Lael Brainard, usually very dovish, and Fed Gov. Jerome Powell. "When the regional presidents go out and talk, they're not as coordinated. When we see two people come out from the board and give a similar message, that feels like a coordinated communication, and I expect the chair to echo those sentiments when she speaks," said Martin. Brainard and Dudley are viewed as part of the dovish core of the Fed, along with Yellen and Fischer."
http://www.cnbc.com/2017/03/02/three-reasons-the-fed-wants-to-hike-rates-in-march.html

For them to come out saying the same thing, it feels like something is up on the back stage. So I might just hold Fed futures all the way down to the FOMC decision. I might be risking 21bps to capture 5bps, but I'm suspecting that 5bps will be really hard to lose. Barring a terrorist attack or a massive NFP surprise, they will hike. We will see, if Yellen pops Fed futures some more, then I might just take profits otherwise I think I will stick around for the last 5-6bps
With SPX on a tear, inflation surging and employment doing pretty well (and fiscal stimulus coming) if they don't hike it now, when would they? It just wouldn't make any sense to delay 1 meeting because there will be no press conferece and projections in the meeting after that. Its now or June. June might be too late as their hands will be tied for months

A preemptive hike (as 'insurance') now makes a lot of sense. My gut says there is no way in hell they 'miss' a chance to hike like this, not with the balance of risks shifting to the upside
 
March is a given, the question is how hawkish will they be after March. At least 1 more is in the cards, but depending on your Fed Funds expiry it may or may not be a good idea to hold.
 
jj90 said:
March is a given, the question is how hawkish will they be after March. At least 1 more is in the cards, but depending on your Fed Funds expiry it may or may not be a good idea to hold.
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I'm in the April contract, my bet was for a March hike, down the line I haven't a clue how many hikes they will do. Depends on Trump I guess
 
I was thinking about one thing that Buffett said on CNBC this week when the discussion was about 'mean reversion' and my views about valuation and the stock market

He said:

"But when you say reversion to the mean, I'm not sure what the mean is. I mean, the mean is going to be based upon returns on equity, the amount of equity reinvested and reemployed."

Lets imagine companies are earning 10% on equity (net income for a $100 book value company would be $10 per year).

Then, for whatever reason, companies in that country go through a boom period where ROEs rise to 15%. A prominent bear (lets call him Jeremy Grantham) comes out and say 'this is unsustainable, the last 100 years ROEs were 10%, this will come back down'.

You know what is the problem with this kind of garbage? Its that this thesis is short COMPOUNDING. The longer companies stay at the 15% ROE, the more income they will be able to retain, revinvest and become much bigger companies with much bigger net incomes (and if the excess income is being distributed to shareholders through buybacks and dividends, the compounding can be achieved by the investor redeploying that cash into financial assets).

Effectively, the Grantham guy is short a convex function (if you not sure what that is, check out the book Antifragile). So the idea of using a model based on 'mean reversion' is worthless if you don't talk about the ERROR rate of the estimation. That is, how off can you be about how LONG it will take for that reversion to take place (and how off can you be that the variables that you are using are wrong in the first place because they are subject to change by the future).

If the Grantham guy will by off by 10 years (that is, it takes 10 years for the mean reversion to take place), even though it happened, you would have STILL made a boatload of money by not listening to him, that's the effect of that compounding of high ROEs. So when these assholes come out and talk about mean reversion, they need to talk about the likelihood that it will take a LONG-TIME before they are right and that will effectively make their theory worthless (at least for money making purposes)

Being short a convex function is a very dangerous game, very dangerous. That's why people in the stock market appear to be 'optimistic idiots', its because often its the right thing to do
 
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