What are your thoughts on how to profit from this strange new European bond bubble? I'm thinking it continues to inflate until the EU implodes and finally decides to break up. Is it as simple as buying gold and oil while shorting bunds and euros? Is there a more asymmetric way to trade it? What pitfalls do you foresee?
Draghi isn’t close to being done. He is using negative rates to devalue the Euro against the Dollar. And Oil isn’t the “flight to quality” instrument that it used to be now that North America is the Worlds largest Natural Gas and Crude Oil producer by a comfortable margin.
I agree. The unraveling of the EU is probably at least another 5 years out. However, when it does happen it'll probably happen more suddenly than people expect. Whoever gets this trade right will be the next Soros.
did soros have insider information? lots of water under the bridge since, maybe someone has seen info that has come to light in the duration?
I tend to have my doubts. The same could have been said about the 2008 housing crisis and subsequent equity / financial markets meltdown - too few saw it and correctly timed it. Soros and Buffett made their trading fortunes over a protracted period of time with multitudes of wise bets.
Well of course you can't write history beforehand. But you are right to be concerned about the structural risk that the ECB is introducing into the EU financial system by taking rates so negative over such a protracted period of time - especially because the underlying purpose is for currency manipulation as a means to gain competitive edge and NOT for the traditional charter purposes of Central Bank monetary policy. European banks have riskier leverage profiles than American Banks, and as you are well aware there is plenty of systemic risk in the ECB (like Greece and Italy) and the Bundesbank has made it clear that Germany is NOT going to backstop the EU like the US Fed did to essentially the entire Western Banking System in 2008. So yes, Draghi is most definitely twisting the dragon's tail. Under your scenario buying Gold would be smart but I have my doubts that it would pay off as much as being short the EuroStoxx Banking Index. Shorting the Bund at the first hint of trouble wouldn't be the first trade I'd personally consider. I might consider buying US Tens and shorting Bunds as a spread - but in the short term Bunds would likely pop before they crash (I traded Liffe and Eurex interest rates for several years). Sovereign debt would attract a flight-to-quality bid as a cash proxy but after the haze has lifted IMO most definitely the US Tens would be considerably stronger than the Bunds but you wouldn't want to be caught delta directional because the market will be crazy volatile short term. You may be right in two weeks with your bearish Bund sentiment - but can you take a short Bund position going three points in your face in a single trading session ?
I agree with not putting anything on until the first or even second hint of trouble. I like your idea of using a spread but is there a way of doing it with swaps so there is an option style reward profile that will gain from the volatility...similar to what they did in The Big Short? What would you consider a "hint" of trouble...no deal brexit...Deutche Bank bankruptcy...Euro at parity? If everything does go well the hardest part will probably be getting the massive winnings repatriated during all the political mayhem.
You will personally not be able to trade swaps unless you’re a billionaire with an ISDA agreement in hand and a major Investment Bank clearing you. I would urge you to explore options volatility spreads and options Bear spreads.
Since I am still only working on my second million the closest thing I can come to a swap is a leveraged ETF. CDS is probably not the most elegant way to do this anyways. I like options but the bid/ask pricing is a total scam. There is plenty of time, years by my estimation, to figure out a great way to express this trade. I'm sure the opportunity will arise.