Former trader Richard Breslow has seemingly shaken off the summer doldrums this morning because, for the first time in a while, he’s in rare form.
By way of introduction, recall what we said on Monday afternoon in “‘Party On Wayne.’ What Could Possibly Go Wrong?“:
As long as the accommodation remains largely in place, carry trades will continue to work, the vol. sellers will remain solvent, etc. etc. In short: until someone at a DM central bank makes a hawkish policy mistake, everyone is going to keep picking pennies in front of steamrollers. Because that’s all this is now – just having the balls to hang around longer than the next guy and squeeze out that last little bit of carry or those last few basis points of spread compression before everyone gets run-the-fuck over.
That’s just a more colorful way of saying what Citi said back in February. To wit:
Instead, we’d argue the principal concern people have with decompression trades here is that they tend to be negative carry. When spreads are low, volatility is low and dispersion is low, a few basis points of carry can matter a lot to a fund’s percentile performance against peers. And against the short-term metrics by which performance tends to be measured many will struggle to forego the incremental carry – until a negative trigger becomes immediately obvious.
Well that, in a nutshell, is the context for Breslow’s latest missive, out this morning.
Read below as the former trader explains how, in the good old days, being “bearish as all get-out” but telling your boss that despite your pessimism, you were “long because it’s the only way I can figure out how to make money,” would have gotten you fired…
Forget lucky versus smart. What investors want to be is right rather than wrong. That wouldn’t ordinarily be seen as an insightful observation. But we’ve hit rock bottom where traders believe with all their hearts and minds in something and then promptly go out and do the opposite. I can’t imagine telling my trading boss or one of the limited partners that I’m bearish as all get-out. But instead respond to the logical question, “Great, how many are we short?” with, “No, no, I’m long because it’s the only way I can figure out how to make money.” And that just about perfectly describes a broad swath of the money management community.
- That’s not meant to be pejorative. What’s been working for a long, long time is making investment decisions based on following the only thing that seems to ever work. Analysis be damned: investors have become fatalists
- Is it irresponsible to believe one thing and position in the opposite direction? No longer. Fund managers are in the asset-gathering business and simply can’t afford to sit on mounds of cash other than for short periods. By hook or crook, you need to show some returns and find any portfolio mix that generates them. Investors read cash allocation and start doing the fee math
- But it does raise an interesting dilemma. What will happen when those “ridiculously cheap” TIPS suddenly aren’t going begging, term premium actually begins to mean something when pricing a new issue or investors find there are credits that they don’t absolutely must have? The answer is, it won’t be pretty. And there is a preponderance of fund managers who fervently believe all of the above are coming and are praying it doesn’t happen. Certainly no time soon. And dreading the inevitable, “What do you mean we’re net neutral? You said…”
- Which brings us to those central bankers desperately in search of inflation — with a large dollop of serene financial conditions on top. Can they have both? Unlikely, unless they remain as actively involved in influencing markets as they’ve been. There’s no going back to the halcyon days of believing the market can manage itself. “Tapering” in Europe is code for abandoning the capital key. Which would have been a lot more effective years ago
- And let’s face it, the orderly, fixed speed run-off of the Fed’s balance sheet will, in practice, morph into a perpetual guessing game of faster or slower with every speech or number. You’ll get to see micro-management in real time. The central bank is no more likely to go back to the days when banking was boring than the SIFIs. As Minneapolis Fed President Kashkari pointed out yesterday, their credibility, read egos, are on the line in proving they can achieve their goals. That’s also his way of reiterating Bullard’s point on pausing rate rises
- Investors are interpreting the central banks in the same way they do the markets. Follow what they do, not what they say, because that’s the only thing that has reliably paid off. And then they go out and sell some TIPS to buy some solid BB paper to get those returns up