Global Macro Trading Journal

Lets say someone is worth $100,000 and its July 2008. This person thinks global stock markets are getting quite cheap and wants to invest all of those assets in a global stock market ETF. After investing, markets fell apart and went even lower.

Thing is, that person also happens to own a car worth about $35,000. Then the person decides 'why don't I sell this car that I don't even use much and buy more global stock markets? This stock market selling is getting out of hand'. But he/she doesn't want to just liquidate the car fast and not get full value for it, the person wants to be resonably patient. At the same time, the person doesn't want to miss the current prices that the stock markets are trading at. They might bounce back at anytime. A decent solution is to buy more stocks using futures or margin leverage (up to $35,000) and when the car is finally sold (say 1 or 2 months later) use those proceeds to deleverage (repay the margin loan or to use it to provide more collateral against the futures position)

Pretty simple case of someone doing responsible/smart leverage. You have your cake and eat it took in both sides of the equation, with tiny risks given that the leverage ratio is very much under control

Now why cant this be extended to savings arising from salary income? Lets say someone has a quite stable job (say a doctor/dentist/psychologist with a large client base in a major city), why can't this person count on the next 12-24 month worth of savings as part of future proceeds that can be used to repay margin loans or to collaterize leveraged futures positions? If such logic is applied, that person can run a modestly leveraged growth portfolio and still be fine since those salary savings are in effect 'delevering' the portfolio as they come in

Another case of smart leverage. Can that be misapplied? Yes but so can just about any investment/trading concept.

Reason why I bring this up is two fold. First is this chart I posted a while back


Daal said:
saupload_Growth-in-real-GDP-per-capita-1300-2007--620x490.jpg
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So real per capita GDP has had a giant secular rise that was unlike the world has ever seen, I do no think its a suprise to see the world being deep into debt (Both governments and private debts). I suspect its a similar logic to the 2 examples I gave, people are using future income/wealth as a form of 'reason' to lever up. There is future real income gains, future savings, future capital gains from home prices, stocks, etc, all giving 'reasons' for people to borrow . Usually they do it with consumption intead of investments, which brings less benefits in terms of expected value but it might bring better quality of life today.

I'm not saying that it is smart leverage like those previous examples, this could be smart, it could be dumb, the jury is out on this one. It will depend on how sustainable the progress arising from technological discoveries is. Since the industrial revolutions, new technologies have produced gigantic economic gains. People saw that and leveraged up because they felt confident it was safe. I don't think this leverage has much to do with central banks/bubbles or Austrian theories or anything like that. You can't force people to do things, they will only do if they want to. People decided that with rising incomes and rising asset prices it was ok to increase leverage. And this whole thing created a self reinforcing cycle
One day this could all go bad but this whole thing (the antecipation of future money) helps explain what is going on

And the second reason is, if there are some simple smart ways to employ leverage conservatively (like those 2 examples) and boost returns, how many other ways is there that most people haven't thought about because they are not trying to?

Leverage gets a bad rap as a result people don't think about it but I bet brainstorming safe leverage methods can lead to some interesting discoveries
 
Here are two potential sources of future money for smart leverage
-Inherhitances that highly likely to be able te estimated/counted on and that might within a few years
-Social Security/Retiree pensions for old investors that are getting close to retirement

There are probably many others
 
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https://www.ft.com/content/5d0c4ed2-19ff-11e7-a266-12672483791a

Good FT article about Brazil. I would add that if pension reform fails to pass, it still has a shot at passing in 2019 when a new president and new congress takes over. Its highly likely they will be more to the right and willing to pass such reform, especially if early on their terms. There will be plenty of time to recover popularity if you pass necessary but unpopular stuff early on.
So far the polls of congress people are not looking good but these things are so unstable, impeachment looked like it wasn't going to pass based on the early congress polls and it passed. So its tough to say what will happen in the coming weeks. Its probably a coinflip
 
Daal said:
I used to be a big believer in 'valuations', CAPEs and other things like that. You see the historical numbers and somehow feel this sense of control about how the market behaves. Then I decided to do my backtesting project of testing out allocations, portfolios, random tests using US data from the 1920s to 2000s. I learned quite a bit but a big lesson was, how quickly historical conclusions that you develop (or theories) are completely destroyed as you add more data. I learned how fragile 'empirical' stuff really is.

CAPE is a great example of that, it has a great history, then the 90's and 2000s come along and the true believers (people like John Hussman) blow up like there is no tomorrow because anyone that goes to cash, buy puts like crazy, shorts based on that, is inherently short the convexity of the stock market. And when you do that, you need to be right a huge % of the time. Stock market 'idiots' on the other hand (the ones buying at 'crazy' valuations) don't need to be right as often. Worse case, they overpaid some but that is fine because people get salaries, dividends, interest income and a fall will enable them to invest those proceeds at better prices/implied returns. Therefore what the true idiots are afraid of (folks like Hussman and Jeremy Grantham) is actually a bening risk people shouldn't even care much about. Its a lot worse watching markets go up for years/a decade without you, then to overpay some for an investment

But if someone needs follow this CAPE religion that badly, here is a way to do it:
Sell out of that market that has the high CAPE that one is afraid about but immediatly rebuy another that has a much lower CAPE (a different country stock market, or better, several countries). That way, if selling was a mistake in the first place, the repurchase of a different market is likely to offset that mistake

Worst thing you do is to join the church of CAPE and then go to cash, post bearish articles around, short, buy puts like they are going out of style, etc.

I learned this lesson the painful way, by watching something rise exponentially for years without me on board. I wish I had more critical thinking of this 'empirical' crap back in the day

This valuation stuff only truly works with figuring out what is 'cheap', there is a zero bound to the downside that makes estimates a lot easier. Finding out when something is too expensive is a lot more difficult because stocks are unbounded to the upside (so are nominal and real earnings)
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People in the US generally always have money coming in and combine that with an aggressive investment sales force, means it all goes into the stock market. I mean your average investment advisor is not going to recommend putting money into USDJPY or into oil futures. S/he is going to recommend stocks. Hence the massive up drift of the stock market.
 
Problems with doing stat analysis on the markets:

1) dynamic distribution i.e. underlying distribution is not known and is changing
2) not enough data points
 
I used to be very against debt in general, as time went on I realized that was a stupid idea. Most traders trade on margin in 1 way or another. That's debt right there.

As long as your cost of carry < return, and you can handle risk reasonably well leverage isn't an issue. There are bigger things in life to worry about besides VAR.
 
Daal said:
https://seekingalpha.com/article/4060737-berkshire-hathaway-depth-look-normalized-return-equity

My favorite BRKB analyst gives an update on the stock. This is probably the safest way to play the Trump bull market. Worse case, you own something quite a bit cheaper than the S&P500. Less downside, but very good upside, especially if corporate tax reform is well done. I'm looking to increase my BRKB stake soon
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The Buffett buyback trigger right now is ~$137 (20% premium to book value). When they report Q1 earnings and file the 10-Q, that is likely to move to $140 (as book value grows). From current prices then, there is a -16% downside to the stock until the trigger kicks in. By year end, that figure is likely to be almost $150 a share
 
STRP received a giant buyout offer by AT&T ($95 with last trade at $36). Great example of the Hempton 'short small and mid caps and claim you take less risk' approach flaws
A lot of the risk in that approach is hidden on the tails, what shows up in the normal period sample matters very little
 
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