On Wednesday, former FX trader Richard Breslow couldn’t hide it. He was, like every other sane person in the world, disgusted by the Trump administration. Here’s what he said:
I’m appalled by the shenanigans. The lack of dignity alone is enough to repulse.
Yes, yes it is.
But Breslow went on to note that we should probably save our hyperbole for when we really need it, as the reality of the situation is that “bloodbaths” in risk assets aren’t really “bloodbaths” to anyone who has been trading for longer than central banks have been easing.
A “bad” day is relative. (Well, unless you’re in Brazil on Thursday – there’s nothing “relative” about that situation).
Today, Breslow is back and he’s got the following message for you: watch what trades people are exiting for a “real-time” look at the “competition’s position reports.” He also reminds you that whatever unwinds you’ve seen over the past 36 hours are “just the tip of the iceberg.”
The latest moves in the market aren’t the kind of risk aversion that drives investors into really safe places insulated from world events. That’s the wrong way to think about it. And in any case, if you believe this particular news merits the reaction, such safe places don’t really exist. Rather it’s risk-off as in get me out of everything I’ve done in the last couple of weeks. Traders are collectively calling over to their execution desks and saying, “I’m off that!”
- On the bright side, it’s certainly valuable, even if uncomfortable, to find out what everyone else has been thinking. You’re getting a good look at the competition’s position reports in real time
- Traders and algorithms may change their minds on a dime, but macro models don’t and can’t. Certainly not after a couple of days. There may be a risk level override based on P&L, but there will be a built-in inclination to put these positions back on if and when the bleeding stops. And now you know exactly what they are. Take a look at how the euro is trading today and you’ll get the point
- It’s vital, therefore, to remind yourself that these moves, while portrayed as dramatic, represent only the very tip of the iceberg of positions built up over a very long period of time and in massive size. We’re mostly back to levels seen merely weeks ago, having broken no new ground. Proving once again in the starkest of terms that traders are massively more sensitive to losses than gains
- So the question you need to be asking is whether this is a true game-changer or not? And whether it’ll be a slow death by a thousand cuts that the market falls in and out of focus on or something brutal and swift
- Do what you have to do to manage your risk, but it’s probably good to step away from interpreting the price action in terms of the most widely watched assets. Those that typically attract the greatest number of marginal speculators. The S&P e-mini future has just too much noise emanating from it at the moment. Especially as it gets knocked around at all hours
- You’re better off watching some of the slower moving credit spread indexes to see how deeply these cuts are being perceived by real investors. Their long-term moves have been just as momentous as other assets but with much less zigging and zagging to the theme of the day. And don’t just watch U.S.-centric measures such as the Markit CDX North America IG Index, but also the Markit iTraxx Europe Crossover for signs, or lack thereof, of contagion
- And you will have to go back to careful central bank speech watching. Will this derail the Fed? How about the ECB? It matters way beyond the next few basis points in official rates, but whether we are indeed escaping the deflationary spiral that’s keeping sovereign yield curves in the sewer and propelling carry mania
- And despite all the outrage, real and feigned, remember the benefits of keeping your head when all about you are losing theirs