Dairylea Dollar Spreads
Aug. 30th, 2007 11:05 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksAnd just as it was predicted, so it came to pass. I took the bull by the horns, increased my long sterling position, only half an hour before Sydney-based Basis Yield Alpha Fund said that US home loan defaults had wrecked the value of its debt holdings, and filed for bankruptcy. This was enough to send the carry-traders scurrying for cover, strengthen the yen and bring back the popularity of US Treasuries. If there was an order of currencies that you don't want to be in when news of a hedge fund going bust in Australia comes out, my guess that it would be A$, NZ$, Sterling, C$, Euro. Currencies whose net index would go up would be the US dollar and then the star performer of the lot, the Yen, which promptly gained just under 1% against an averaged basket.
So, sterling got slaughtered and I had to close out my 'new' position. I kept my 'old' position open.
Unfortunately, Finspreads doesn't think that way. It operates on a "first in, first out' principle, for accounting purposes. So, just as I was closing out a position that I saw as a hundred quid loss (not bad for a couple of hours' work, eh?), Finspreads, because it treats my part closure on a different basis, told me that I had won £110. Where does the vanished money go? Into the 'open' position, which my figures think of as being about level, but which Finspreads tells me is substantially down.
+++++++++++
All of this kind of shows up a paradox in Doubleday's line of thought. If things are going to get a lot nastier (as he predicts) then the dollar is going to strengthen against everything but the Yen, rather than collapse to the $2.12 level or wrose (as he predicts). Even a reduction in interest rates in the US won't stop this if the herds are panicking. I'm still maintaining a short dollar position because I think that things will calm down in the markets, but the credit situation in the US will necessitate a 0.75% to 1% cut in rates over the next six months or so. Betting on currencies. Fuck me, that's a stressful game for you.
+++++++++++
Well, the plumber came round, showed me all the brochures and smples and stuff. And we're agreed on a late-September start, we hope. And my boiler chose to stop dripping a couple of days before he came round. Doubtless by the time I return home this afternoon, it will have started again.
++++++++++++++
So, sterling got slaughtered and I had to close out my 'new' position. I kept my 'old' position open.
Unfortunately, Finspreads doesn't think that way. It operates on a "first in, first out' principle, for accounting purposes. So, just as I was closing out a position that I saw as a hundred quid loss (not bad for a couple of hours' work, eh?), Finspreads, because it treats my part closure on a different basis, told me that I had won £110. Where does the vanished money go? Into the 'open' position, which my figures think of as being about level, but which Finspreads tells me is substantially down.
+++++++++++
All of this kind of shows up a paradox in Doubleday's line of thought. If things are going to get a lot nastier (as he predicts) then the dollar is going to strengthen against everything but the Yen, rather than collapse to the $2.12 level or wrose (as he predicts). Even a reduction in interest rates in the US won't stop this if the herds are panicking. I'm still maintaining a short dollar position because I think that things will calm down in the markets, but the credit situation in the US will necessitate a 0.75% to 1% cut in rates over the next six months or so. Betting on currencies. Fuck me, that's a stressful game for you.
+++++++++++
Well, the plumber came round, showed me all the brochures and smples and stuff. And we're agreed on a late-September start, we hope. And my boiler chose to stop dripping a couple of days before he came round. Doubtless by the time I return home this afternoon, it will have started again.
++++++++++++++
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
no subject
Date: 2007-08-30 01:57 pm (UTC)Over the past five years £1 has gone from ~$1.52 to ~$2.02 ... that's 50 big figures! Ship it! Buy and hold, baby, buy and hold.
matt
no subject
Date: 2007-08-30 02:16 pm (UTC)I bought the December position with just that "long-term" plan in mind (there's nothing longer out there). I then moved up this morning to a bigger position with a stop-loss of 1.2 cents. That's a bit thin, particularly in volatile times, but I decided that I'd risk it.
Unfortunately, that's what hit me. I then had the choice of throwing more money at it or closing out a third of my position. I closed out a third of my position. It was all quite rational. And following your stop-losses strictly is vital to successful currency trading.
Hindsight is a marvellous thing. Did you go long at $1.52 and have you stayed long for five years? I suspect not.
I was quite bullish, and I didn't go long until $1.66. And as for holding on until $2.02. Well, I'd like to see any player who had the nerve to remain long when the pound fell from $1.91 to $1.70 in the midst of your "five-year bull-run".
Ship it, indeed. You'd need fucking deep pockets and irrational self-belief (plus foresight better than Nostradamus), to have predicted the exact trend of the past five years, and you would have made much more if you had gone short at $1.91 and then gone long again at $1.70. The right long-term strategy is only there in hindsight. In reality, you are happy to be right just 60% of the time.
PJ
no subject
Date: 2007-08-30 04:26 pm (UTC)I'm surprised that you can't trade currency futures out to a year or something. Short-dated futures are really what you don't want in volatile markets. Are there no other instruments available to individuals. I suppose not given the default risk. Perhaps taking out a dollar mortgage wouldve been the way.
matt
no subject
Date: 2007-08-31 02:38 pm (UTC)FWIW, I was mainly suggesting that the Market at the global level was going to get a lot nastier -- led by the various US markets exposed to sub-prime in one way or another.
On the more individual level, I predict that things are going to get an awful lot worse for the SMC (Small to Medium Consumer) in the US. Mortgages going poot, jobs down the toilet, trade wars with China, that sort of thing. The whole US economy feels tremendously over-leveraged at the moment, with a deficit overhang, a trade balance overhang and a tax-base underhang. It's pretty much too late for the Bush administration to do anything about any of this, even if they had the inclination, and Bernanke isn't going to do a Greenspan any time soon. Two 0.5%s in each of the next quarters would be my prediction (in fact, anybody's, really).
Interesting, your chain of currency hits. Sounds reasonably plausible to me -- I had a think about the Euro at the end and then realised that the Frankfurt market is probably impacted more than the Dow by an Australian fuck-up. It'd be even more interesting to construct a similar chain for other financial failures; at least it would be, if I had a few billion to bet on the results.
taking directions? ask the traders
Date: 2007-08-31 11:13 pm (UTC)regarding currencies, the newsletter I subsribed to (which seems to make a killing when I'm not in) has suggested to stay away from cable and go long Euro/Yen.. yes, that's what they said.
Marc
Re: taking directions? ask the traders
Date: 2007-09-01 12:58 am (UTC)Did he comment on Taleb's theory (and I extrapolate from his second book) that there are a number of head traders who make money by effectively reinforcing their belief until it works? And that this number is something like 5% or less, and the rest blow up in a spectacular fashion?
Not the way to go.
The market still needs liquidity, and will for a while. Barclays have just made asses of themselves twice over in a single week (with utterly absurd excuses. When did market players rely on PR hacks to back themselves out of a corner?). And what's the cross-ownership between Barclays in general and Barclays Capital in particular? (Confession: I went for a job at Barclays Capital and failed because I couldn't remember pointless Unix command-line primitives. The spotty twenty three year old opposite was delighted. So, yes, I have enjoyed the last week or so.)
Going long on the Euro would be absolutely insane. If I were you, I'd go short on these idiots' houses, children, and livestock. Yeah, even unto the third generation.
Going long on the Yen makes some sort of sense, although if you'll follow the advice of the Birks-Buddha, you'll take a stop position.
Other than that, you appear to be working for contrarian geniuses, or quite possibly a trading house with a lot of positions that they want to hide for the next few weeks.
Might be a good chance either to pray to whatever God you pray to, or change companies.
Re: taking directions? ask the traders
Date: 2007-09-02 10:26 am (UTC)If newsletters say "stay away from a pairing" then that's definitely the pairing that I want to be in! The point is, newsletters steer clear of 55/45 shots. They look for "safer" moves and, if it goes wrong, at least they have plausible explanations for the balls-up. If you are out on your own and it goes wrong, the only guy backing you is Taleb.
That said, I can't see the logic of long Euro/Yen. I don't follow the Euro that closely (the complexities of its relationship with a raft of economies confuses me) but I do follow the yen. To be long Euro v Yen in any kind of long-term plan would seem to assume four things, of which at least three need to be correct:
1) The legendary "Mrs Watanabe" (Japan's retail Everyman) will continue to invest her spare cash in higher-yielding currencies.
2) Everything will calm down in the subprime disaster and the world will carry on as before, sooner rather than later.
3) Japan's interest rates will not be increased.
4) Europe's interest rates will not be cut.
In other words, long Euro is a default "things will be back to normal before you know it" line. Unfortunately, it isn't true, because "normal" is not what things were before everything blew up. Credit spreads were too narrow and the appetite for risk was incorrectly high. From 2008 there will be, at least for a while, a more correct attitude to how risky an investment is and how big a spread above Treasuries you want to invest in it.
Just as subprime was waiting to blow up, so the "carry trade" system is waiting to blow up now. People have been caught out in this technique in the past and it will happen again. If it happens next year, you will see a massively appreciating yen (think, 99-102 against the dollar, rather than 114-116) as investors quit carry trades and head into other waters.
I should point out, btw, that this would also be bad for sterling, because sterling benefits from carry trades and it would benefit the Euro v the dollar.
So, for 2008, you have two scenarios:
a) Back to "normal" (not the situation immediately before the subprime mess, but a longer-term "normal"): Winners from top to bottom:
Sterling, NZ$, A$, C$, Euro, SFr, Yen, Dollar.
b) A carry-trade tsunami: Winners from top to bottom
Yen, SFr, Dollar, Euro, Sterling, C$, A$, NZ$.
IMHO, as they say on 2+2.