“Petty” (And Pesky) Narratives

One day after warning that “frazzled” would be “the word of the month” for traders, Richard Breslow is back, and Wednesday’s missive finds the former FX trader warning on the dangerous of becoming too wedded to any one narrative and/or long-term view on markets.

To be sure, Breslow’s “frazzled” call was proven correct just four hours after he published it when Theresa May shocked markets by announcing snap elections, a move that presaged what turned out to be a rather harrowing day for markets.

Breslow’s latest reads more like trading instructions than it does like market commentary and indeed that’s probably on purpose. After all, these are “traders notes.”

Read below as Richard explains why you probably shouldn’t “lean” on “petty narratives.”

Via Bloomberg

This latest iteration of the global trading environment involves lots of short-term volatility followed by, what seems to traders, all too short moments of flat-lining. It’s the wind-sprint part of spring practice. Made more maddening because there’s no coach, let alone order book, to watch for the body language signals that the whistle is about to blow again. How quickly people came to wax nostalgic for the gentle jogging they got used to in the quiet days of never-ending quantitative easing.

  • On the one-hand, it’s a shame that there’s no longer the market infrastructure that allowed for profitable, and responsible, trading by pure liquidity providers. Who by and large had little interest, and less need, in worrying about all of the petty narratives that have become the crutch upon which all non-algorithmic activity now seems to lean
  • On the other hand, these periods give those trapped in their own ossified reasoning a chance to wash the slate clean and try to get back on-side with more current events. It’s a hard task for both analysts and traders to stop out of grand ideas. And why that function is usually best left with others
  • Of course, big picture ideas are often misunderstood and misused. By both the pronouncer and the pronouncee
  • For those giving the advice they too often forget that, by definition, they’re making enormous assumptions in a world where error factors are most likely bigger than the clever sounding reasoning. And everything gets filtered to fit. Just follow the tortured clutching to arguments of soft versus hard data. Ego becomes the P/L and that is often in enormous supply and given great flexibility. Especially when it involves OPM
  • The takers of such advice commit the unforgivable sin, of wanting something for nothing. It’s an input to a broader calculus that must be one’s own. Selling reflation trades shouldn’t have been an idea that just became a serious consideration yesterday. Falling inflation expectations is an effect not a cause
  • Of course, the biggest mistake everyone makes is that one- or two-year ahead calls will inevitably include periods, long ones, where it’s best to be flat or counter-trading. Remember those dips that people got a chance to buy? Very few of us can or should kick back and say see you in 24 months. Long-term calls represent a theme. Have a bias, look to sell bounces. Be prudent in respecting technical signals to manage risk
  • There wasn’t any game-changer yesterday. People ignored clear technical signals and rather than managing their risk, were once again buying, where they should have been salivating at the potential gift to put it back out

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