I’m sure politicians were once bright eyed…

A thought came to me just now as to why politicians are so lame.

Pretty scathing, but it is true. For so long we’ve had politicians that promise change and then end up being the same as the last.

I mean, the modern day Tory Party is basically New Labour.

Why do they seem to converge to the middle?

They play a game is the simple answer.

You’re always going to have your lifelong voters, but to win at politics, you need those swing voters.

I could be talking absolute nonsense here, but at least it gives something to think about…

Image result for two bell curves overlapping

This is what I imagine occurs.

Consider B as being the swing voter area – I think most people if they could would rather vote for themselves, but there’s relative bipartisanship when it comes to voting outcomes these days, more so in the US.

Then consider the individual standard distributions when the party is in power.

There is the acquisition side of politics, and then there’s the retentive side – the tails towards the middle on the individual curves have to cater to those who are only supporting on a ‘lesser of two evils’ basis.

Whoever wins B wins the election. Just that little area wins it for either the left or the right.

The problem? Policies have to appease these people who are politically indifferent.

This means that policies are always going to reverting towards the mean, or in other words, they’re never really going to be that different from what occurred before.

Generally… I’m not sure I’d apply the same logic to John McDonnell…

This was just an example that I thought of but there are many more.

In trading, many algorithms are based on price reverting to the mean whereby you take a sample of price data and apply buy or sell orders on 1/2 standard deviations from the R^2 of the sample or another benchmark that measures deviation from the mean such as velocity or maybe even volume changes relative to the rest of the sample.

In sales, if you have a big sample, it’s unlikely that you will consistently go long periods of making no sales without a statistical correction happening, as long as you are using the same methods as previously – yes there are external variables but generally there shouldn’t be long term deviation of a massive magnitude (unless the market really changes).

In terms of politics, I guess a change in political party in power shows an example of tail risk, since those at the outer edges of the left and right bell curves are those affecting the change more drastically.

In portfolio management, that’s when a movement of more than 3 standard deviations occurs, which is pretty rare, but has HUGE implications (and which is occurring more and more often).

 

I guess it depends on what the distribution of swing voters are relative to the effect that they can cause is, or in other words, how disenfranchised they are with the current political climate.

Can the Trump and Brexit votes be explained this way?

I think possibly if we consider the elements that go towards creating the desire to want change – in other words, how tail risk is created.

To avoid this tail risk, politicians avoid the outer edges and win by appeasing the majority, reflected in the bell curve distribution… but tail risk in the current environment is always underpriced it seems since multi-standard deviation moves shouldn’t be occurring as much as they are of recent times

 

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One crucial word

How to Be a Stoic

Hannah Arendt Hanna Arendt

Amathia. It is often translated as “ignorance,” as in the following two famous quotes from Socrates:

“Wisdom alone, is the good for man, ignorance the only evil” (Euthydemus 281d)

“There is, he said, only one good, that is, knowledge, and only one evil, that is, ignorance” (in Diogenes Laertius, II.31)

View original post 1,553 more words

Absolute rubbish…

 

Sometimes you just have to accept that you are going to be really silly and maybe just not follow your plan.

Yesterday that was me, and I ended up down 3% on account.

The first thing that went wrong was that I actively wanted to do business on ECB day.

I never do that, and the select few times that I have, I’ve been spanked, with one exception.

The second issue I ran into was buying the Euro thinking it would shift to the upside quickly due to there being a build up of stops. See here:

Price did run them, but I should have used this as a sign that the move would be fuelled to the downside, the reason being is evidenced here:

Trying to buy the Euro at an area of key support with a volatile ECB presser, with market flow being to the downside are you, David?

Bellend.

The third problem with yesterday was that I really didn’t even follow my longer term view for the Euro… which I had posted the night before.

I’m honestly laughing to myself now, because I feel like a total tool and I shall not be making this mistake again… what’s worse is that I had never been this unbelievably stupid before.

However, my saving grace is that I have a 3% limit on the day and a 5% limit on the week.

If I lose 3% in one day, I go away, don’t look at a chart for a day, then come back and see what I’ve done wrong the next day, as I’m doing now.

If I lose 5% then I simply come back the next week. I don’t even bother looking at what I did wrong that week because there was clearly something up and so I wouldn’t be able to analyse my own behaviour properly.

Now I know what I’m doing next week on the Euro, but I also know what I’m doing on  AUDJPY next week now too.

Here’s my plan on AUDJPY:

Stop is above 84, target at 80.75 with a sell above 83.10, depending on how price behaves.

If it does extend higher then I’ll divide my positions between 83.10 and 84.00, but ideally, I just want to sell into a peak above 83.10.

I wanted to write this post more for a cathartic reason – I don’t mind losing, but when I’ve done it in such a stupid and more worryingly, rather careless way, it gets to me.

 

 

Making long term bets: Cable to $2

Sometimes I like to have absurd predictions.

I find that by looking at a long term chart, you can build a macro reasoning around a trade idea.

It doesn’t have to be right, but it has to have validity at least and you have to be open to changing your beliefs.

I think in the next few years, we will return to cheap holidays in the US, where £1 = $2.

Here’s a 6 month chart of cable.

Looks like a head is forming.

I’d argue that a mid term hold of 1.45 and you could hold GBP and keep adding to a very long term position.

This would put British firms who deal in USD in a tight position, since you’d really have to be hedging the dollar downside heavily, although that will be perfect for FX desks looking to make budget.

This could also be reliant on a Euro collapse.

I always note that fundamental moves have to be unwound, and you can see these in the charts.

Just like how the dollar move is currently being unwound (when the Fed stopped balance sheet increases, the dollar rallied through 2014), a failure of the Euro could mean that the EURGBP position is unwound – and that can also be seen in cable.

Take a look.

Cable

EURGBP

When I refer to Euro being introduced, I mean that in 2002, this is when it was introduced as legal tended to the initial 12 countries (banknotes and coins).

This has a vastly different usage to simply being currency, since it is now connected heavily to economic activity of consumers.

This is what has changed.

Back in 2002, no one knew what monetary union would bring (well, they did, but consumers and the EU didn’t).

They didn’t know that it would bring high amounts of unemployment, huge deficits, some nations benefiting more than others, countries requiring bailouts, 5% of loans in the Euro area being non performing, Deutsche Bank holding $75tn of gross exposure to derivatives and the ECB balance sheet being the highest in the world.

They didn’t expect cheap money being the only thing to be propping up large firms.

They didn’t expect a lot of these issues that have arisen.

Yet here we are with Draghi inflating the ECB balance sheet continually.

How is he going to unwind?

Well, he won’t be able to – not at the rates currently; who will be the buyer?

So he’s in a predicament.

This is the main reason as to why I do not think the Eurozone will last. There is inevitably going to be a liquidity crisis when it comes to wanting to get rid of these bonds.

Is China going to be the country to buy EZ bonds? Not with their epic debt issues.

I think confidence will be lost, gradually.

Even as recently as yesterday, the German ZEW Economic Survey had a huge miss, and EZ data hasn’t been fantastic this quarter.

The ECB, by trying to provide liquidity to the market, are actually creating a huge liquidity issue.

Back to the trade though.

The logic is pretty simple.

If we see the Eurozone start to fracture, accumulating longs above $1.45 would be a good idea. Even buy a Sterling ETF like FXB if you don’t want to be sitting managing it. See below:

I think a combination of high dollar funding costs, of which I referred to a few years ago here in relation to oil, Trump’s trade war with China and the Fed’s unwinding are going to keep the dollar suppressed for the foreseeable future.

On sterling side, I think Brexit is going to be a catalyst for growth.

With the service sector infrastructure we have, removing ourselves from EU regulations, especially in finance, should create a more competitive environment – everyone wants an FCA & PRU licence, very few care about being regulated by EU local regulatory bodies.

If the Euro were to go, it would mean that EU financial regulators would also go – because of the above reason, and London’s name as being the world’s biggest financial hub, I’d expect this to be hugely GBP bullish (no sarcastic comments about being a typical Leave voter, please).

There is no timeline for this, since that would mean I would have a crystal ball.

But any fracturing that is apparent will solidify this as a decent bet.

 

Is the FTSE dead?

I’m concerned.

The below chart of the FTSE does not look healthy to me.

We are currently facing a lot of downside pressures, with the FTSE breaking below 7000 and pushing back up twice in the last few weeks.

This gradual probing is worrying and it’s not really being spoken about too much.

Let’s face it, we’re currently off the highs up at 7800 by 800 points. This has been a gradual grind down over the past few weeks.

Why? Well I have one main reason.

The Fed is unwinding their balance sheet.

We have to remember that a huge amount of the FTSE is denominated in USD, since many sales are done in the greenback.

This therefore has a direct correlation with Fed tightening monetary conditions – one component of that is shedding the huge $4.2tn balance sheet that they have acquired over the last 9 years through quantitative easing.

No more will firms be able to stay afloat by cheap credit.

No more will retail investors be able to hold as cheap margin positions on US equities, and more specifically, products such as $SPY, an ETF that tracks the SP500.

The former has a direct effect on the financial fundamentals of a firm.

If a firm’s price has been propped up for 9 years trough cheap credit, buybacks and corporate bond purchases by the central bank, and these are all of a sudden removed, investors will see this as a negative price effect.

This has a knock on effect on FTSE firms, not only purely from an investor standpoint, but the BoE tends to follow the Fed’s Mon Pol signalling.

The overarching mechanism here is something known as equity risk premium compression – there has barely been an attractive risk free rate for such a long time, that investors have been looking for yield as if they are jacked up on testosterone.

Here is a chart showing this.

What is hugely dangerous about this current market cycle is that only 9% of the price increase of the SP500 on the past bull market is due to earnings growth.

The majority of this cycle has been caused simply by low rates.

And now that rates are increasing, I see the most violent move to the downside that we have ever seen occurring when the Fed, and consequently the BoE, begin to really shed the assets off their books.

In fact, I believe that the Fed are only increasing rates to accommodate when another crisis hits.

It is easier in terms of economic confidence, to lower from $4tn to $2tn than to increase balance sheet holding to $5/6tn when the inevitable occurs.

I drew up the below chart a few months ago of the USD.

And this is the chart now.

The Fed has been hiking, which should mean a bullish dollar.

But the dollar has been falling.

For me, this signifies a lack of confidence in the US economy, where we are reversing the 2014 move I.e the end of the balance sheet increases.

I’m not advising to do anything, but if I look at the probabilities and where the easiest money will be, I’d be looking to get short on the FTSE (or long GBPUSD as an easier trade, although with that method you’re more susceptible to price shocks).

Why Warren Buffett is wrong

Please see alternative non clickbait title: ‘Why the media’s interpretation of Warren Buffett’s claim that ‘low cost index funds are better than actively managed funds’ is wrong… I wouldn’t get as many clicks that way though.

Yes, I am shameless.

That is quite a statement.

I do not claim to know more than Buffet, obviously.

But the way the media have taken a statement and run with it is ridiculous.

Take a look at this article for a recap.

Buffett made a bet with Protegé Partners that buying a low cost SP500 tracker ETF from 2007 til 2016 would return more than the fund of funds that Protegé bought.

I don’t actually believe that anyone would argue that long term, SP500 trackers are the best investment…

And the stakes that they were playing at in relation to their total managed capital was so small; they initially bet $320k which then you have to question their convictions over this.

But what financial journo’s have seemingly forgotten is the motivations for investing in both and the client types that use both vehicles.

Hedgefunds are totally different to passive trackers for many reasons.

The ‘hedge’ part of the word indicates some kind of risk management or risk aversion.

Hedgefund managers want their strategy to be as uncorrelated to traditional market benchmarks as possible.

In this way, they are able to provide more consistent returns with less drawdown than you may receive where you simply invest in an index.

The returns are more bond-like where it may not beat an index benchmark, but it beats an agreed benchmark set by the fund manager in the prospectus provided before an investor comes on board.

Do you not think that all hedgefund investors would be pulling their money out if they wanted to simply buy $SPY or chuck a load of cash at other passive index funds?

The dishonesty that many outlets push with this is crazy.

Sure, a low cost index tracker is fantastic for non accredited investors and possibly as part of a wider portfolio, but when you have $100m, you certainly do not want your cash following the herd.

What if a downturn occurred?

Would there be sufficient liquidity to pull $100m out of the market?

Many live off the interest – people with a lot of money aren’t exactly saving for retirement.

If you have $100m and you’re making 6% a year net of fees (underperforming the broader market) that’s $6m for doing nothing.

The financial media, once again, has ignored specifics of the three W’s – ‘who, what, why?’

Zero nuance.

But hey, pushing money towards Vanguard is always great right?

I am adding to my short AUDJPY position

I’ve been short AUDJPY for a fair while now since 86.80.

This was based on deteriorating Chinese conditions, which affect demand for Aussie commodities such as iron and copper, and the evident risk off situation we faced through January and February, and arguably are still facing.

For this trade I’m just looking at taking some cash and covering the rest of my position that I have running – this is pretty high probability in my view, so I’m confident about changing my stop loss criteria and upping risk to 3%.

Let’s see how this plays out.

Cryptos vs Small Cap Equities: the same, but different

I’ve asked myself two things recently.

1) Why the hell aren’t cryptos bullish again?

And

2) Why is the interest in cryptos when micro cap and small cap equities have been about for years?

Before I go further, I just want to put a disclaimer: I believe that cryptocurrencies and blockchain are going to be vitally important over the coming decades as we moved towards an even more digitised form of information and money transfer.

However, we have to overcome the primitive nature of the industry first – I believe that investors make their own luck through correct due diligence and own research, however, many of the crypto firms are just downright dodgy.

Notwithstanding Bitconnect, because that was just plain stupid and so easy to see that it was a Ponzi scheme, we’ve had a fair few ICOs popping up that have been fraudulent.

You tend to not have any fraudulent IPOs or equities listings where your money will be in effect, stolen. You might make a crap investment decision, but the company balance sheet, business plan, and overall health is available for all to see.

But this comes down to regulation – something that I am not sure that I or anyone wants.

The reason being is that, by doing your own research, you should come to a valid conclusion as to the business and investment risks. I don’t necessarily want a government department telling me what is good for me – if you’re stupid enough, for example, to join Bitconnect, then you deserve to lose your money (if you live in a country with adequate investment education).

For what reason would an investor choose to buy Dogecoin as an example? Are there any fundamentals behind it? Well, no, apart from ‘moon!’. On which planet is that a valid investment case? If you make money then fantastic, but someone else is always losing in this case, since there is no value being added.

And it’s the same for many others.

People seemingly go headfirst into a nice sounding white paper, where, if one were to approach a seed investor for regular backing, you’d get maybe 0.1% the total capital at that stage due to there being no actual product and the angel/VC not wanting the undue risks.

The AIM market for example can act like a mini crypto market, just with possibly lesser gains on average – but that’s simply due to the fact that the market isn’t on major steroids.

You can put forward the idea that there have been many crypto millionaires made, but they are in a small minority compared to the rest (and the amount of losers probably outnumber the winners, the losers just don’t tell you about it) – there are similarly many AIM investors who have made a lot of money through simply buying and holding a select few good companies, or even day trading (except with no leverage).

I just find it odd that a huge bull market in AIM and small/microcaps to the same extent as crypto hadn’t really occurred, but you could say that it’s really due to the differences in the assets… but I mean, buying ultra low on any asset and making 70-100% pretty quickly (as occurs on AIM relatively frequently) is nothing to be unhappy about… unless you compare it to crypto.

This I’d argue, comes down to the demographics of those involved in the two markets.

I reckon we’re going to see larger gains over the next year or two in cryptos. When Fintechs start pushing for them to become more mainstream and the payments use cases are made even more viable, this is when regulators will get involved though.

But the good aspect is the nature of the beast… it’s pretty hard to regulate post ICO stage, the same as fiat currency markets, which are OTC and largely unregulated, and for good reason too.

I am totally here for what the developments in blockchain and crypto tech can bring, but providing credibility through weeding out the fraudulent ICOs will benefit this 10-fold in my view, and this will be a huge contention over the next 2-5 years (and probably a lot of money involved if a private solution could be found for weeding out the crap with total impartiality – thinking caps on).

How to stop procrastinating with one phrase.

Yesterday I shared what I’ve learnt over the last 7 years of trading.

There’s honestly so much more, but I’m not here to do a biography, partly because Jaegermeister would have caused periods of severe amnesia – it would be rather disjointed.

There was one element that I spoke about yesterday that I’ve been trying to employ for a few years now, with some success, but abject failure in other areas, purely because of willpower & poor time management, but I think I will get there in the end.

‘Practice choosing discomfort.’

I think I mentioned ‘front loading pain’ yesterday in the piece I wrote.

That’s it.

The brain works by finding the most ‘comfortable’ route to completing tasks.

There’s been so many times where I’ve done 2/3 of the easier tasks on a to-do list, felt accomplished, then thought that because I had completed those then the bigger task needn’t be done…

Then the next day comes…

And you repeat…

Until your deadline hits and you’re in a worried and rushed mess.

Do the hard tasks first.

In trading for example, many don’t write down their thoughts on the market at the starts of the week, the key levels etc. It’s almost like pre-planning is ancillary and they can’t be bothered.

Arguably that’s the most important part because when the time comes to deal, you’re prepared and do not second guess yourself.

The feeling you get when you frontload pain is the anticipation of going into a cold shower; so the best way to get used to the feeling is to have a cold shower for a month in the mornings.

Then apply the same feelings from that to everyday tasks.

It really does work.

7 years of trading: what have I learnt?

Today I learnt two things.

Mixing sweet potato and normal potato is one of the greatest things ever.

And secondly, Heikin Ashi candles are almost a cheat code for how I trade one of my strategies.

I’d never thought to really change my chart configuration from standard candlesticks before.

The furthest I’ve ventured is to use a line chart for simple, unbiased highs and lows.

But Heikin Ashi has given me a totally different perspective that I’m obviously going to have to test with over the next few weeks, but instantly makes sense as to why it would work with my strategy.

But this is just one example of what I have learnt after 7 years (the first two were just pissing about in all reality though, thinking I’d cracked it but being a million miles away multiple times).

You genuinely learn something new everyday when trading…

You know that saying ‘in the long run we’re all dead’?

I want to change it to ‘in the long run we’re all dead comfortable’.

Looking back, I’ve noticed that any short term discomfort has been lessened each time, the longer that I have traded.

I’ve learnt to embrace the discomfort of a loss or taking a position because I understand that the short run is entirely irrelevant to conducive trading.

What’s more important is that this has probably translated into life.

Planning for a few months and years at a time has become enjoyable, and even though there might be hiccups along the way, it smooths out when you have one eye on 6 months, 1 year, 3 years etc.

You learn to adapt; I don’t think I would have developed this resilience without facing millions of other people daily looking to tear me a new one with the click of a few buttons and a horizontal line drawn across their screens.

More practically, trading makes you aware of risk – it’s everywhere and in everything you do. I always think back to my favourite paper ‘Prospect Theory‘ when making a decision based on the future and remember that I’m most probably going to be irrational and so I keep that in mind.

The reason I never sports bet is because the odds aren’t in my favour, firstly because the bookies are just as crooked as market making retail firms, but secondly because I don’t have an edge.

By participating in sports betting, in the long run I won’t make anything. So what’s the point? Sometimes not trying something if you know you’re crap can save you time and energy – especially if you focus on the things you are good at instead.

Having studied economics at university, I can tell you one thing.

90% of it is absolute rubbish and doesn’t apply whatsoever to the real world, how markets move or how people actually act, whether rationally or irrationally.

Econometrics was useful – but having to look at market dynamics everyday and update my fundamental view every few weeks is what taught me real economics.

For example, you note that some fundamental activities bear more weight sometimes than others – then others this will be flipped. See the US Dollar currently weakening even with the base rate increasing.

My economics professors would have told me that the dollar should rally…

I don’t think I’ll be doing this forever, but I am so glad I did because trading is one of the hardest things you can do and it’ll teach you so much about yourself – more than the majority of other ‘jobs’ (or degenerate capitalist addictions – however you want to frame it).

I’d actually recommend everyone to try it just to see how hard it is, and if you want to, I’m more than willing to help you begin, but prepare to be humbled time and time again.