Friday, 20 May 2016

Re-record or fade away

It happened again. The amount of intellect applied to forecasting what the Fed will do is completely out of proportion to the quality of the output. It’s alchemy, where the greatest of 15 Century minds were hell bent on the futile task of turning base metals into gold. Millions of man hours wasted. In the case of Fed studies, the detail of the finest fractal of economic data, the genetic make up of the board members and the analysis of language is all a complete and utter waste of time when any missive from the Fed results is the same. **FED MORE xxxxISH THAN EXPECTED.

Fed forecasting should be as taxed as tobacco and as discouraged as online gambling.  Why does anyone pay people to do this sort of thing? Ah yes, of course, it's media fodder. They do it for the same reason that any horse race on TV has commentators. Advertising. As the job of anyone who works in media is ultimately to sell advertising space, their main source of income, Fed forecasting is as productive a career as creating webpages of 'the top 10 celebrities who you didn't know had size 7 feet'

As regular readers know, I have a simple policy towards Fed shock. Just fade it. You wait a day and do the opposite because you can be pretty sure that every ‘Fed more hawkish’ will be followed by a 'Fed more Dovish’ and vice versa.

The other fade is the Brexit vote where over the course of three days the world has become convinced that the vote will result in 'Remain'. Everyone is looking at the polls but not at themselves nor their surroundings. I do not know anyone who over the course of the last week has changed their mind, but the polls say that a vast swing has occurred and the media are pumping it as a done deal. There is a psychology involved here that is almost self limiting in outcome. If the swing to remain is through a small tipping of the previously uncommitted then those marginals are probably now reassured that it will be a Remain win and so won’t feel their vote is as important and won't turn up to vote. With the bookies now quoting 80% chance of remain, that is worth a bet, probably more so than my GBP/USD options which are looking a bit sorry for themselves.

Mean reversion may be dull and anti-headline but it produces steadier financial returns than constantly betting on the outliers. Fade the knee jerk. Or perhaps we could just re-record what happened last time and play it again.

Re-record not fade away


Anonymous said...

Polemic, I'm trying to reconcile the following:
- You bought the Sep 1.40 puts on the cable, presumably expecting a big drop below there in case of Brexit.
- You have mentioned in the past that the "natural" level for cable is 1.60 and large deviations away from that are not long-lasting.
- You seem to lean in favour of Leave. Admittedly this is not very clear but that's my impression from your posts and tweets.
This seems to be an impossible trinity. If the last point is true, then you probably consider that the UK economy at the very least won't be worse-off (or not significantly anyway) in case of Brexit, so medium term the cable should creep up to 1.60ish, in which case why buy the puts? (other than a short term play I suppose?).

Polemic said...

Anon. You have nearly got the answer through your own dissection.

Yes I think that 1.60 is the natural pivot for cable but I also believe that the short term risks from Brexit are greater than the market is pricing. My own vote will go little way to swinging an outcome so is irrelevant but I just feel that complacency in markets is a method of suicide and that complacency towards a Remain vote is now complacently high. Hence asymmetric shock more likely to the downside in cable. Hence owning short term cable puts and they are short term as I only chose September to get some vega as well as delta in any move.

My views on the UK economy on this are irrelevant to the trade, it's how I see others reacting on their thoughts on the economy that are more pertinent.

If Brexit occurs then sure, 1,6000 as a natural level for cable would have to be reset lower for the next couple of years as GBP would have to move to discount tariffs. If Brexit fails then there is every reason to think we will see 1.6000 again before too long.