Rates of Interest

About The Overnight Carry Trade Implosion: Basics

We had an interesting trading session across FX, rates, metals and equity indices today. With the reversal of the Yen’s direction, we can clearly see what is moving the equity markets, in particular, but risk assets, in general. If you are not familiar with the carry trade convention in the foreign exchange markets, then allow me to inform you:

The carry trade is a foreign exchange transaction whereby an entity buys a higher yielding currency, while selling the lower yielding currency. That is, the entity receives an interest rate differential, the rollover rate of interest, for holding the higher yielding currency while funding the transaction with a lower yielding currency. The rollover interest rate for each currency is based on the overnight rate for the respective country that the currency is tied to.

What does this mean to equities, or risk assets across the board? It is rather simple really: entities obtain leverage on collateral to conduct said carry trade, on margin of course. Therefore, when you see the USDJPY pair going negative it should be no surprise to you to see SPX going red as entities are exiting USDJPY longs by selling equities, for example. You can look at this via any other major currency pair that contains the JPY as the quote currency; i.e. the currency that is being sold.

Why does this matter? I think it is simple enough to understand and believe that an entity needs currency to conduct any transaction in any market. There should be nothing to discuss in that respect. Therefore, an entity that is looking to purchase assets in equity markets, whether in the US, GB, DE, AU, etc, will need to obtain the respective currency to attain said equity. With respect to the US Treasury markets, it is plain to see that when the USDJPY pair sells off, entities are looking to purchase their collateral back; i.e. US Treasury’s. Hence, the price action in relation to those instruments in the market.

I hope this sheds some light into the bigger and more realistic picture of how markets actually work. Thanks for reading.





FOMC Announcement 12.18.2013: What It Really Means

On 12.18.2013 we had the “most important FOMC announcement ever,” again, which also happened to be Ben Bernanke’s last one where he partook in a press-conference as the chairman of the FOMC. The FOMC voted that beginning in the month January they will reduce the LSAPs done in a single month by an aggregate total of $10B: $5B from US Treasuries and $5B from Agency MBS. Totaling in an ever-still astounding $75B in asset purchases every single month. Of course, while still reinvesting the principal of matured Agency paper that is paid out to them, as well as rolling over USTs.  As stated in the minutes release:

Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

As those of us in finance, as well as those in law know very well, language is everything. As I read this statement several times over, the language used in it makes it apparent as to why US equity indices shot up to new highs right after the release: the language. As an example, look at the way I wrote what their decision was, and look at how they wrote the decision. No, this is not a class in semantics, but in the real world, semantics is very much a part of life whether you like it or not. Therefore, it is something that has to be paid attention to, whether you like to or not. Simple fact is: if you do not, it will cost you money. What am I getting at here?

Well, it is something completely different to say: we are reducing x by y, than to say: we are buying x at a rate of y instead of at a rate of z. In the former we are getting straight to the point and are not attempting to make it sound like anything besides what it is. Whereas in the latter, we beat around the bush to get to the result of the statement. The only way to interpret what the Fed has stated in its statement is: QE trade is still on. Why is that?

To start, they are still doing QE, so nothing has changed. There will still be POMOs, so nothing has changed. They are still monetizing debt, so nothing has changed. The amount of reinvested principal is no small amount by any means, and neither is the amount of USTs that are rolled over. So when you take 2 seconds to think through the words used in the release: nothing has changed. What is $10B in reduced asset purchases on a monthly basis? Especially when it is just $5B per leg of this accommodation.

$10B is a seemingly insignificant amount, as the Fed still chooses to continue to engage in debasement of the USD at a tune of $75B per month. That equates to $900B a year. Not a small sum by any measure. However, take note of the arrogance that the Fed continues to display for all to see:

The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

Now, the omnipotent Fed is still hanging on to the notion that stock matters more than flow. I do not know how much higher rates have to go to disprove this ridiculous notion. It should be clearly apparent that it is not the case by now, as the amount of USTs and Agency MBS that the Fed owns has only gone up over the past year, while interest rates have gone up as well. There are some market participants out there that claim: the purpose of QE is to get rates higher. That nonsensical notion is due to the fed stating that it wants inflation as part of its dual mandate. However, there is something deeper that those making such a claim ignore: real rates. I will discuss this at another time in detail, but needless to say there exists a term structure of interest rates. Focusing on the nominal is a fools game.

In closing, QE4EVA & carry on.


Something I Subscribe To

This article is from a site that I subscribe to that essentially provides you with free knowledge. As we all know, there is no such thing as a free lunch, but this is as free as it gets.  You will find some of their posts on ZeroHedge from time to time as well. To be clear, I am proponent of the facts, not ideology. This post addresses the reality that those born after the year 1983 face now, and into the future. Please, enjoy and check them out.

December 30, 2013
Santiago, Chile

[Editor’s Note: Since this article was originally published in 2010, what has changed for young people who follow societies’ expectations? More debt. More war. Lower incomes. Less freedom. No future. But the world is full of opportunity for those heed the poignant advice below.] 

If you’re reading this and under 30, let me be absolutely clear about one indubitable point: your government is going to sacrifice your future in order to pay for its own mistakes from the past.

To give you an example, students in London came out to the streets in droves last Friday to protest the British parliament’s most recent austerity measures which tripled the cap on their university tuition to $15,000.

Sure, Britain is imposing all sorts of austerity measures on its citizens… and while I won’t get into a discussion about the absurdity of government controlled education, I will point out that students are having their benefits cut far more drastically than any other segment of the population.

Are pensioners seeing their costs triple? No. Are middle-aged workers seeing 50% tax hikes? No. Aside from the very small segment of high-income earners who will be forever robbed and pillaged of their wealth, the younger generation is next in line to receive the butt end of the crisis fallout.

Younger folks have comparatively lower incomes, benefits, job opportunities, and political clout than their seniors, yet they are increasingly expected to assume a disproportionately larger burden of the consequences of government folly.

It’s the younger generation that is called on to go fight and die in pointless wars in faraway lands; it’s the younger generation that is forced to assume the debts of their forefathers; and it’s the younger generation that gets relegated to the back rows of the political amphitheater and dismissed by the establishment.

Meanwhile, retirees aren’t seeing massive benefits cuts, and middle-aged wage earners income earners are being protected from above by politicians. In fact, let’s take a minute and look at the looming fate of the average young person today:

1) Your government-run university tuition is going to go through the roof, saddling you with unfathomable debt before you even enter the world as an adult;

2) Once you graduate, you’ll be the last in the hiring queue;

3) If you do get hired, you’ll be the lowest on the totem pole and the first to be let go when tough times befall your business;

4) Once the labor market eventually stabilizes, you’ll enter your prime earning years with some of the highest tax rates ever seen as your government continues to cannibalize your generation to pay off its largess and indebted entitlement programs that benefited older generations;

5) For your entire working life, you’ll pay into a pension system that is going to be bankrupt by the time you’re qualified to draw on it;

6) More than likely, you’ll never achieve the standard of living that your parents achieved;

7) Whatever wealth your parents accumulated won’t be left to you– the bulk of it will be confiscated by the state (unless your folks were smart enough to plant multiple flags) due to a host of death taxes.

If you’re in the millennial Facebook generation, this is going to be the standard storyline of your peers. The system that’s in place right now– the failed cycle of debt and consumption fed by continuous government intervention– has stuck you with the bill.

Fortunately, there’s a silver lining (as always). Younger people are generally less anchored and more mobile than their elders, hence it’s much easier to opt out of this perverse system.

If you’re angry that your government is saddling you with the responsibility to pay off generations of bad decisions, then get out of dodge. Stop playing by the same rules of the game that used to work in the past– the old playbook of “go to school, get a good job, work your way up the ladder” simply doesn’t apply anymore.

Don’t stick around a society that has completely forsaken you and is waiting with knife and fork in hand to carve up your earnings once you finally enter the labor market… get out of dodge now, while it’s easy to do and you have little to risk.

Go explore the world and get an education based on experience, not expensive academic theory. Seek opportunities in thriving, frontier markets overseas… places like Kurdistan, Mongolia, Botswana, Kazakhstan. Soak up the local intelligence and become the grease guy on the ground who can make things happen.

Find people whose lifestyles you want to emulate and make yourself indispensable to them as an apprentice… this will be the only time in your life that you can afford to work for nothing in exchange for a valuable, first-hand education.

Most of all, stop playing by everyone else’s rules. Refuse to be enslaved by the idea that it’s your civic and moral responsibility to pay off the debts of your government’s failures. Cast off the yoke of their control… and summon the courage to live a life by your own design.

The path to prosperity in the Age of Turmoil depends on this ability to reject the old system, declare your economic independence, and carve your own path.

Until tomorrow, 
Simon Black 
Senior Editor, SovereignMan.com

My Goals for 2014: Something To Aim For

I have been the kind of individual that has usually had to learn things the hard way in life. I could use many excuses as to why, but I do not & cannot. We are all capable of making choices, and to me that is what life boils down to: life consists of a series of choices that we make. Whether guided or not, we still have to make choices. I have had the odds against me from the start. I could easily clutch to my past as an excuse to be a failure if I wanted to: blame the system, etc. That, however, does not lend itself to being productive. The fact remains that I have made a series of choices that have led me to where I am right now.

Nothing is the way it is supposed to be, it is just the way it is. It is up to you to play the hand you are dealt, no one else. With that said, I have learned that one has to set goals for themselves. Those goals should be treated as a guidelines. Mainly because we all know that nothing goes as planned, ever. For example, I started out in the arena of finance wanting to be a Research whatever. I got a position as an equity research analyst at some hedge fund and got what I would from it and moved on. However, I relish in the experience that I gained because I can value a company; a very useful skill. I realized what I really liked and decided that I needed to make a move  to take me there.

I did not start out in finance thinking that I would end up trading. Given all of the heartache and pain of learning how to trade, I cannot imagine doing anything else in my life. However, I set goals. These goals are what have led me to where I am now. Successful or not, every stop that we make in this journey – aka life – is not in vain. 

With this self realization in mind, I have decided to write down my goals for the coming year. I have come to a point in my life where I know exactly what I want to do; trading. I know that I have to work hard to get myself to a certain level in this game. Luckily for me I have come across many folks on twitter that have been great teachers, and have helped me step my trading game up. I am all about improvement and evolution. So a big thank you to those that have interacted with me on a consistent basis.

Goals for 2014

1. I have come up with a few option trading strategies that are applicable across all the markets that I trades/watch. I plan to come up with more widely applicable strategies. Not as easy as it sounds.

2. Fine tune the current trading strategies that I employ. Just because something works does not mean there is not room for improvement. There is always room for improvement. In this case the goal is to reduce risk in any way possible. Why risk 4 when you can risk 3?

3. Identify the appropriate risk parameters in options for the other markets that I currently trade. I have targeted risk parameters specifically for the rates markets, but have not for the other markets that I trade.

4. Expand my option trading strategies into markets that I have not traded in a while, such as gold, crude and spooz. With this I would just have to take the time to identify the appropriate risk parameters, as the process to identify the opportunity is the same most of the time but the risk is not. Different contracts have different tick values, thus, needing different risk parameters. But you all already know this.

5. I have always been interested in doing something macro-oriented with FX – think big long term trades. I have decided that I will commit time to developing spot FX strategies in uncommon currency pairs. I will be shooting to start trading this strategy in Q314 the earliest, but more than likely Q115.

6. Make a mountain out of a mole hill!

Thank you for reading. I would like to wish everyone a bountiful new year, with more health and happiness than you need! The simple things are what make us.

Making Market Calls: Why It Is Not As Easy As It Seems

It is easy to make a market call. Whether you are correct in your analysis or not is a completely different animal all in itself. There are a million ways to determine a point of view, as we are all different. Thus, market views realistically lend themselves to a finite, but large, amount of potential perceptions, as we all have different minds, realities, backgrounds, etc. It can easily become an exercise in philosophy, but we wont go there.

Now, what does this mean? It means that varied market participants can play the market on the same side for completely different reasons. However, that does not mean that one is more correct than the other. That is just the way the market works. It will go wherever it is going to go. What one  thinks or believes is irrelevant in all reality. Reality is you will make correct and incorrect market calls. The rate at which you are correct or incorrect ultimately depends on the process you implement to make a decision given the market environment.

As we have all heard before: the market is like a big ocean, you either swim with the current or drown. Catching the turn of the waves is no easy feat either. How you develop a process and implement it depends on many factors. The first, and most important one, in my humble opinion,  is knowing yourself. I am sure that most have heard this one before, but many might think to themselves: what does that even mean? I know I did when I first read that line. I will try to be as simple and concise as I can.

Who are you? How are you the way you are? What has made you like that? Are you naturally patient or impatient?  Do you have mettle or not? Are you adaptive or not? Are you receptive to change or not? Are you studious or not? 

I hope that these initial series of questions help you in attaining the truthful answer that you need in order to somewhat answer that one question. Knowing who you truthfully are is not easy, and it took me years to kind of learn the answer to that question, and I still learn something new with every new experience that I have. This is just to let you know that we are not truly static beings; it is just not the case. This first question is what allows you to pivot accordingly when adding to, or taking away from your process. 

This is where the true difficulty lies in making market calls, as far as I am concerned. As having a process that allows you to identify opportunities in the market, whether on a 1 minute time frame, or on a weekly time frame, is just something that you need. I have learned this the hard way, which is usually the best way. Saying x is going to y because of z is not a process that lends itself to successful repetition. That is the key to being a permanent fixture in this business, or any business, repetition.


Have You Ever Noticed?

What good is it for you? I have never been one for trends or fanfare. For no reason in particular, really. I have come to realize several things over time, however. The things that people are usually fanatical or adamant about rarely benefit them directly, nor do they know as much about that thing as they claim to. They are usually pushing someone’s agenda. They do not have a clue that is the case, however. This is due to them blindly accepting another’s ideology as their own. Once this has occurred, an individual’s ability to reason or use logic has diminished, and the ideas become facts. There has been no research done behind the idea, nor any questions regarding the ‘why’ behind the idea. When questions are asked and they have no thought out response that covers all bases its obvious that it’s just fanatical gibberish.

Do yourself the favor and do not be like the majority out there: do your homework, find objective sources and come to your own conclusions.

Thank you for reading.

The Most “Measured” Speech Kyle Bass Has Given Yet

Kyle Bass is more level headed than usual in the speech he gave at the AmeriCatalyst 2012: The Entanglement event on October 1, 2012. Unfortunately, it was just published 3 days ago. It is pretty good so I decided to post it. Here’s the link to the video, as the embedding is “disabled by request.” Whatever that means.

I Am Not Going to be A Macro Tourist

Opinion is ultimately determined by the feelings, and not by the intellect. ~ Herbert Spencer

I have been a student of the finance and economics for about 5 years as I have noted in previous posts. However, as a student of both economic and financial theory and the markets at the same time, many things have become quite clear to me. That is what this post is about.

TAKE EVERYTHING IN THOSE BOOKS WITH A GRAIN OF SALT… In my experience all they have been good for is definitions and some basic theory. However, what you might find in those books might not even be relevant in today’s markets. You might come across some relationships you never heard of in school unless there is a specific class about a specific instrument. For example, one of my previous institutions of higher learning offered a course on Fixed Income, they probably talked about yield spreads, which are pretty important for a variety of reasons.

Given all of the many disappointments that I incurred in college, the one that bugs me the most is what I learned in the one year I worked on the Street: reading academic papers is a very important habit to have. An indispensable habit as far as getting some knowledge about the real world and theory in one, and much better than just textbook learning in the majority of cases. I do not understand why universities do not require this of students. I suppose you have to start somewhere, and that is what your principle courses are for. The reality is that professors could choose relevant academic papers to be intertwined into most lame duck curriculums that departments already have in place to actually give their students an edge if they wanted to. Also, my intermediate courses were very lacking in mathematics and as irrelevant as it may seem to some, when it comes to having some type of edge in the real world it makes a huge difference. Being able to grasp mathematical relationships is what trading is all about. Whether one chooses to realize it or not is a different story, and may it not bite you in the ass one day… It probably will. Math is everywhere.

So what? You may be asking yourself at this point. Well here goes… If you want to understand why things are happening in the markets you better have not only the principal relationships down between fundamental economic/financial factors, but you better also be able to deduce what’s what. As I said, things are never wholly out of the book in the real world. So you better know the book material, but you need to understand that the real world just doesn’t work like that. Humans are not rational consumers, savers if rates are high, blah blah blah… One has to read yesterday’s financial news a.k.a. financial publications that are published today, in order to get a somewhat decent summary of what happened and why. This is not to say that they are the only way to go.

There are many smart individuals on the web that are nice enough to write blogs and give real useful information about how they see the markets. Whether its on the spot or not is irrelevant. The objective is to learn how to think and to not be a typical drone like all of those so called experts that appear on television and add no value on top of being incorrect or inhumanly vague. Learning how to think is one of the most important lessons that I have gathered from many traders. That is the cornerstone of how you either make it or blow up your account.

Now, there is something to be said for the straight market technician in their market dealings, and that is that they usually do not have an edge because they easily miss market moves waiting for technical “confirmation.” When a lot of the times fundamentals don’t confirm the move in the first place then they take a position with very low probabilities. I’ve seen it firsthand and it is the only reason I feel that I can write about it. Of course, the best approach seems to be a combined use of both fundamental and technical analysis, however that will be for another post.

Therefore, one must do their own homework and attempt to make an educated guess as to why something is happening in the markets, and having a thesis for possible future developments does not hurt either. Note, that you will never really know if you are right or wrong until you are either right or wrong. However, it is very important to have a grasp of any factors that move markets and what it is that creates the disequilibrium in prices because they are always there. The question is which ones will you focus on to determine if a disequilibrium exists, or whether you are even focusing on the right ones in the first place. Thinking outside of the proverbial box is key.

Thanks for reading, and as always comments and suggestions are encouraged.

A Beginners Tool’s

“Life is too short to waste time” ~ Me

When I first started attempting to learn about finance it was the fall of 2007. I had always been interested in finance, but didn’t realize it until all hell was breaking loose in September/October 2007. These occurrences, which were happening everyday, just piqued my interest for whatever reason. I had always thought of myself as the engineering type. I have always been interested in physics: electricity, mechanics, and things of that nature. Never ever really thought of finance/business. I used to think it was a boring subject, and really had no positive connotations of it at all. Reality is I had not done my research on the subject and just thought I knew what I was talking about. Obviously I did not.

Then comes this little weird project that I had to do for one of my first college courses in fall 2007. It was a computer literacy class, so the aim here was to use PowerPoint and Word cohesively to create a presentation. We were to amass a group of stocks that we would purchase and explain why, obviously in line with current events of the time. My personal list was a disgustingly, poor put together list that included companies that I knew and thought produced quality products. A very laymen way of doing things? Yes. However, I knew nothing else. We all presented and no one sounded like they knew what they were talking about, including myself :). This bugged the living hell out of me to be honest, as I do not like to be on the same footing as others. Not that I think better of myself than others in a defamatory way. I just choose to identify that I can be better than others and find an approach to becoming better, and becoming better everyday is what matters to me. For example, this blog is a tool that I will use to become a better trader.

Now, I have always been a watcher of financial news and geopolitics for some reason or another, I love history and have always had this admiration for math, but nothing ever clicked in my head that maybe I should look into the subject. For example, when I first came across the publication, “The Economist,” I was 18yo, and have not put it down since. Point is I thought I knew what “right” was supposed to look like and sound like (obviously financial media is generally incorrect as well, maybe for another piece). From this personal embarrassment is where my journey truly began into the world of finance.

So how did I attack this subject, and how did I arrive at trading futures? Well this could comprise a book because of the time and effort it has taken me to get to this point. Fact is everybody has a different way of doing things, and I am very methodical and detail oriented in the way I approach things, which while it elongates the process, it is also more thorough and precise. I guess majoring in Math fitted my personality after all: this statement is very relevant in the process to my figuring out what I wanted to do in life, and why I would suggest you think about taking a similar approach to things. Especially when it comes to trading, where knowing yourself is a key part of the process to becoming a successful trader.

I realized, during my search as to what I wanted to do with my life now that I was in college, the most important thing one can do to start the process is to know one self. This is the utmost important part of the process in my opinion. As it allows you to understand what you are capable of putting up with on a day to day basis, given what your personality is like, among other things. If you like a repetitive process, you find something that fits that and go from there, for example. The main thing is knowing who you are as a person. This was step one for me, and it was also the hardest step. It required a lot of thought and deliberation with family and friends. Talk to people that know you, they might know more about your personality than you think. That happened to be the case for me. So step one: soul searchin’.

In conjunction with that I looked into all fields of finance and just read job descriptions. I think that gave me a better understanding of what the knowledge base had to be given a specific position within finance, and that allowed me to find further details to research. Finding more granular details to research was really the key in my process, due to the fact that I realized that I wanted to be able to pick something that I know I would want to do for FREE. YES, FREE. My line of thinking is that if you want to be happy working, it should not be work, at least not in your eyes and especially not in your mind. Trading for me is not work and I can do stuff related to it 24/7. I do take breaks, do not worry :).

Research, research, research. This is the way I decidedly came upon many of the prime positions in finance. You know, the “prestigious” front office jobs, and so on. I found those, looked them up and to be honest, I didn’t find trading to be all that interesting (sell side vs buy side here, so for another post). I digress, the key here is that I assaulted the internet. I used Google to research, research, research. It has been the best tool in this process for me. From one link to the next, I just let it take me through the web to find what I was not looking for. I say that becuse I really did not know, I was just looking. You might never know until you find something and research that specific topic. That process will allow you to better determine whether you like what you are finding, and if you do not, you can ask yourself why you do not.

The main point is that you must be determined to search not only within yourself, but also within the world, because what is for you, more often then not is not in front of you. If it is, odds are you don’t even see it. Therefore, to summarize, soul searchin’ and Googling are the beginners tool’s.

I hope this helps all aspiring traders out there, and those looking to figure out things in life in general. Thanks for reading and write to you soon.

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