First Law of central bank manipulation: Asset prices must always be maintained at higher and higher levels in order to maintain the illusion of control. Bernanke won't let the S&P 500 meaningfully slip below 1200 level, and he will ultimately need QE3 to pull that rabbit out of his hat.
Just starting reading Hedge Fund Market Wizards. So far I'm impressed. Only have read the first chapter(Colm O'Shea) but I was struck by how similar his trading style is to mine I also noticed that a ton of his 'trade construction' ideas and beliefs were very similar to conclusions that me, Cutten and other traders had both in my past journal and threads, plus this journal I also noticed how much experience can help. Back in 2008/2009 I wasn't that experienced, yet I doing well given my bearish bias. But when the market turned in 2009 a guy with more than 10 years of trading like O'Shea was able to quickly reassess and actually profit from it while I fought the equity market much longer, even though we had essentially the same macro view. I still did ok in 2009 but I should have made much more by doing exactly what he suggested, bought corporate fixed income I agree with him on stops. If one is trading a fundamental view, stops need to be much wider. Its effectively what I do even though I don't have an specific stop. I do know that a certain % move against me combined with certain pieces of news will lead me to cutting the position, etc So far I'm not a big believer in this QE rally, so I continue to hold my TLT. But if it keeps going and going and Bernanke hints something unexpected I will have to take profits
Heh. Okay, I have to play devil's advocate a tiny bit here, because I just started reading HFMW this week too... First off, if I recall correctly you don't believe in stops, in the sense of having a hard and predefined risk point at the point of initiating the trades. O'Shea definitely does. Straight from the text: ~~~ So you don't use stops? No. I do. I just set them wide enough. In those early days, I wasn't setting stops at levels that made sense based on the underlying hypothesis for the trade; I was setting stops based on my pain threshold, and the market doesn't care about your pain. I learned from that mistake. When I get out of a trade now, it is because I was wrong. I'm thinking, "Hmm, that shouldn't have happened. Prices are inconsistent with my hypothesis. I'm wrong. I need to get out and rethink the situation." In my first trade, prices were never inconsistent with my hypothesis. What are some other mistakes you have learned from? I don't have any great example of a mistake that cost me a material amount of money because I have very tight risk discipline on the downside... ~~~ The above revelation from O'Shea was surprisingly basic to me, because it seems so obvious. It is a variation of what Bruce Kovner said in the original MW in 1988, about setting a risk point as a function of technical / fundamental logic first and position size second. I'm surprised Schwager himself did not note and reference the Kovner similarity. If you in fact are like O'Shea, you would have predefined risk points and very tight risk discipline, i.e. risk a little bit and get out if the action is not proving you right. Where was your initial risk on the JPM buy? At what point did you get out (or are you still in)? Another thing O'Shea said: ~~~ The great trades don't require predictions. The Soros trade of going short the pound in 1992 was based on something that had already happened -- an ongoing deep recession that made it inevitable that the U.K. would not maintain the high interest rates required by remaining in the E.R.M. Afterward, everyone said, "That was incredibly obvious." Most of the great trades are incredibly obvious. It was the same in late 2007. In my mind, it was clear that the financial system was imploding and that most market participants hadn't noticed. ~~~ Again, not to pick on you, but citing JPM. What seemed "incredibly obvious" at the time of the Dimon conference call was that shit was hitting the fan internally and that the mess was about to become bigger, not smaller. You bought a large downward gap claiming "mispricing" on the basis of I'm not sure what, when the "obvious" trade seemed actually to be recognizing that optimists had yet to price in the serious and ongoing derivatives mismanagement going on inside the banks. (And let the record of this thread state that we were of two views at the time; whereas your mispricing call was predicated on the notion of no big deal, my argument was it's a pretty BFD indeed.) By "the great trades are incredibly obvious," I think what O'Shea meant is that you don't have to be tricky and trappy, i.e. too clever by half, to see when a fastball down the middle is setting up. The Australian dollar short, for ex., was a pretty no-brainer way to play the fastball down the middle of a China hard landing and/or commodity price implosion, via low risk entry on confirmed price action. I also think O'Shea would disagree with the idea of entering trades based on "human mispricings," e.g. imagining some anthropomorphized actor who is overreacting on the other side of the trade just because there is a meaningful move up or down. One last excerpt: ~~~ I try to avoid conceptualizing the market in anthropomorphic terms. Markets don't think. Just like mobs don't think. Why did the mob decide to attack that building? Well, the mob didn't actually think that. The market simply provides a price that comes about through a collection of human beings.
You could call it loss of faith; I think on the one hand you'd have a shift in the Fed's stated goals from cutting interest rates (the effect of the QEs has been described as 'equivalent to a rate cut of such-and-such basis points') to actually boosting the rate of CPI increase. They would likely call it nominal GDP targeting but it's the same thing really. The demand side is obviously trickier to figure out in terms of timing, but one way to conceptualize it is that market participants at some level presently believe that the inflationary policies will eventually be halted or reversed. Once this belief starts to erode I think you flip very quickly (the span of a couple of years say) from a deflation-threat environment to one resembling the late 70s, only with a much worse economic backdrop. To arrest the situation and restore confidence the Fed would at a minimum need to pull a Volcker, but that would collapse the house of cards. The basic point is that for NGDP targeting or similar policies to work, people must come to expect higher and rising price inflation. It's only a very tiny step from there to 'unanchored expectations' and there's every reason to think the Fed will muck it up. Obviously the Fed hasn't yet moved in such an aggressive direction and they may not do so for a while yet, if ever. Last year I think I made around 5% net on my rental properties (net of costs and fees incl property manager but before taxes). It's not outstanding but compared to other minimal effort, minimal risk, consistent income-generating type investments it's almost a slam dunk. I invest only in the DC area where you get tons of government workers, service members and the like, and the local economy will remain strong until the government runs out of ways to steal from the rest of the country. Rents have at a minimum been keeping up with the CPI. In any event the point wouldn't be to earn a spread over the financing cost but to put on an 'inflation trade' with minimal risk and cost of carry, or even positive carry. Borrow money at record low rates to invest in real assets and pay back the loan in depreciated paper... even a couple years of low double-digit CPI growth would net you significant profits.
This makes sense and, if there are no Fed apologists in the wings with a stronger defense as to what QE3 could rationally achieve, it fits my gut feeling that global monetary policy is up shit creek without a paddle. I guess I would say I agree with you, then, with one caveat in the form of a question: Is the Fed really that stupid? And the answer may be "Yes, in fact, they really are that stupid." I say this because, if the Fed tried to launch QE3 on the ridiculous rationale of "nominal GDP targeting" or some other such hand-waving bullshit, they would get called on the carpet so fast it would make Bernanke's head spin. Such a move would be so transparently desperate, such a blatant admission of "We got nothin'," that it would be akin to the Wizard of Oz deliberately showing Dorothy the hidden mirrors and smoke machines. My suspicion, then, is that the Fed has to have at least some idea how badly their goose is cooked, and if so, they will be less inclined to bring about QE3 rather than more because, in addition to the dangers of appearing to help an incumbent during an election year -- thus jeopardizing Fed independence -- there is the even greater danger of facilitating just such an "out of bullets" moment you hint at: The point at which all trust in the man behind the curtain vanishes, and is replaced with long-term extrapolations of the U.S.A. as a banana republic. Is Bernanke really, really that dumb such as to tip his own hand blatantly? Maybe he is I suppose... but my growing suspicion is they may hold out of self interest, or jawbone without following up on the jawboning for as long as possible. It's like the old fable: A long-time adviser has fallen out of favor with the king and is set to be executed. In desperation, before being led away, the adviser blurts out that if the king lets him live for one year, he will please his majesty beyond words by teaching a horse to talk. The king, intrigued, agrees to a one-year stay of execution. Back in private chambers, the adviser's assistant asks him: "Are you mad? You know there is no such thing as a talking horse!" To which the adviser replies: "A lot can happen in a year's time. And maybe the horse will learn..."
Interesting, re, TIPS and inflation expectations: http://soberlook.com/2012/06/tips-curve-has-inverted.html http://soberlook.com/2012/06/inflation-expectations-collapse.html
I dunno. I hope not. But I struggle to come up with plausible alternatives. We've spent a century erecting an intellectual and bureaucratic structure around the Fed and the principles of statism, interventionism, and more recently no-bondholder-left-behind, not-one-negative-quarter absolutism. How likely is it that the central figures involved will suddenly and as one decide that the whole thing has been a terrible mistake, the models are all useless and their policies have been a catastrophic failure? The other point is they might full well appreciate the risks of an explicitly inflationary policy but decide that there's just no alternative but to go nuclear, if the alternative is to accept 1932. As a final note it's very important not to underestimate the tunnel-vision echo-chamber of the economics priesthood. I know a few of its lesser members personally, most of whom worked in the government back in the 90s. These guys don't think it's physically possible to get meaningful inflation with high unemployment, they think the 70s inflation was 'caused' by OPEC, they're wringing their hands over the "fiscal drag" caused by the government's failure to keep stimulating (nevermind the 10% deficit). They've never heard of Austrian economics, certainly don't see anything wrong with the Fed in principle, consider "boosting aggregate demand" to be the only and absolute priority of government policy, and completely disregard the risk of a debt crisis or currency crisis or whatever simply because last month's data report shows no evidence of one. I have one hundred percent confidence that they will lead us right over a cliff if permitted to do so, just as leaders in Greece, Spain and Ireland have done, with Japan on deck.
Take out "illusion of control" and insert Potemkin illusion of prosperity. It should read, "Asset prices must always be maintained at higher and higher levels in order to maintain the Potemkin illusion of prosperity." In 2010, SPX was maintained at 1,000 level. In 2011, SPX held the 1,100 level (except brief dip in Oct). In 2012, the "goal" is to hold SPX above 1,200. I suspect the next bear market bottom coming within the next # of weeks will be right around 1200, maybe even dip slightly below it and trap many shorts. The power of today's rally emanating from the QE3 leak made me come to this realization.
Before I start a thread on it, I figured I'd poll the thread on Argentina. I may have asked this before but anyways, does anyone have any view on it? I'm aware of YPF, Argie's inability to access global credit mkts and it's BOP problems, but does have any other insight as to it?
Yes I said I don't believe in stops but I effectively use a similar type as O'Shear, it doesn't have a number, its just a wide price move against my position specially if combined with new information. I wouldn't object at his use of stops instead of the typital TA type 'put at the recent low bro' because it address the issue I have with stops, it doesn't invalidate the thesis unless the price move is quite large With regards to JPM, you must have misread what I wrote. I never bought the position, I said I was afraid that they would become a pinada for fear, stock could get hammered and/or Dimon could get kicked out and that would not be a good thing. That pretty is much happening right now. I'm on the lookout to buy on a VIX spike, it haven't happened yet