So as I mentioned earlier, I think this is rather interesting and nuanced point. Personally, I am 100% on board with the X & Y strategy you describe in your other post. In the world of rates, for example, unless you do outright macro, it's imperative that you find some ways to be long some tail risk to protect the core strategies you're making money on. However, protecting your core strategies with a tail hedge and explicitly betting on an event that's perceived unlikely are very different. Again, I am suggesting that, based on his very own admissions, Kyle Bass's Japan trade belongs to the latter category. So, if you don't mind, I would like to ask about the strategy that explicitly bets on a "crash". I think it's a very interesting discussion that I am hoping will benefit me and further my understanding. However, first we need to establish some common ground. "Bubble", "crash" and "shorting a bubble" are, generally, very vague terms that need to be defined. Shall we try to narrow down in a specific context what these things actually mean? I propose to reuse the old short JGB trade, unless you want to use something else, such as Treasuries or smth.
I don't disagree that yield is the current/next asset bubble, but I would argue that the hunt for yield has another leg to run, pushing yield assets to real bubble levels. Here's my thesis: Global recession 2013 (but short/shallow) Another round of QE/stimulus by CBs Maybe see 30yrs at 1.5 or even 1 The recovery is quick and real, leading to the return of inflation. As the recovery takes hold, inflation rises rapidly and prompts a popping in yield assets. Might take a year or 2 to play out, I would say the biggest sign is the FED finally raising rates. Kinda fits sle's post a few pages back about up and out options. The clients of the street, presumably pretty smart money, wouldn't be putting those on as a hedge or an outright bet if they thought there would be a rapid rise in SPX aka econ growth.
Right, so let me start off on my own... Let's say that I am convinced that Japan is a bubble. I am looking to join Kyle Bass in finding a Japan blowup trade. Here's the very first question I have to answer: what is the right market to look at for the blowup trade? Let's say I only have to choose between two: rates and FX (these are things I can price easily). I know that if I do the trade in rates, I am disadvantaged from the get go by the rolldown being against me, but that might just be the price to pay. On the other hand, if I do FX, I can take advantage of some juicy forwards in smth lilke USDJPY. For instance, 10y fwd USDJPY is arnd 65 mid-mkt.
Hey Martin, Since you're talking FX, two questions if I may, 1, you said price these things, how is these things get priced? From my understandings in forex, the market is always price future expectations.But this thing seems can not be quantified. 2, is Forward market more deep than spot forex? And which market set the tone, forward or spot? Thank you Mike
For the love of god ... http://www.google.com/finance?chdnp...cmptdms=0&q=MUTF:TILFX&&ei=Uy9GUJDWJ5SK0QGSGw http://www.google.com/finance?chdnp...ne&q=NASDAQ:NFLX&ntsp=0&ei=mS9GUJLNKqjJ0QGUdA
Yeah, the fwds are priced based off of interest rate parity, using the deep and liquid rates mkt (bonds & derivatives) that goes all the way out to 30y. FX options are also a pretty deep mkt, although the longer expiries are going to be somewhat less liquid. The fwd mkt is definitely less deep than spot. Spot is where it's at and the fwds will be dragged along with it. Due to the above, the fwds will move on their own as a result of rate differentials being repriced in the mkt. To be sure, this dynamic has been changing a little recently, but it's still fundamentally about spot plus rates.
Well, that's part of it... Mostly I am referring to all the LIBOR sh1te that has been festering under the surface (and recently came to light) since the crisis. Basically, people are now starting to use the liquid FX fwd mkt to imply "real" market rates, rather than the other way round.