Tuesday, 30 December 2014

Polls (not so) apart

11:55 Posted by The Thalesians (@thalesians) No comments

In a recent blog post, I discussed the notion of consensus expectations following on from my own views for 2015 which I published for Thalesians subscribers (and given it's Christmas, I've given it away for free download). There are many ways to measure market consensus (or the world the market wants to paraphrase the above picture). Notably we can examine Bloomberg forecasts of various sell side firms. However, very often we might wish to ask what market expectations in a more nuanced way, which are difficult to capture via forecasts. We might also argue that a poll of sell side strategists, might reveal different results to one which includes asset managers and traders, which might be more reflective of market positioning.

As a result, I thought I would  conduct a market survey on Twitter about market expectations for 2015. Despite, posting it over the Christmas holidays, I collected 28 responses, so thanks to everyone who participated! Whilst, I have already tweeted the results, I thought it was worthwhile to collate all the responses in a single article, with a few of my own comments. All respondents were anonymous.

1. Which is your favourite asset class in 2015? The clear answer is that respondents are not keen on bonds for 2015. However, the proportion of respondents who preferred cash seemed to be a lot larger than I would have expected. Admittedly, perhaps the lack of alternatives might have skewed the results.

2. What do you think is most likely to happen in 2015? No surprises here, with higher USD being seen as the most likely event selected from the list. Interestingly, higher USD outstripped higher UST 10Y yields in terms of votes, perhaps reflecting the failure of UST 10Y yields to move higher in 2014. One crucial point I'd like to add, is of course, from an FX perspective, it is the rate differential which is the most important, not purely the move in UST yields. Furthermore, in developed markets, currencies tend to be more sensitive to the front end (eg. 2Y) more than the back end of the yield curve.

3. When do you think the Fed will hike? Whilst the largest number of respondents felt that Jun 2015, would likely be the first Fed hike, a near similar proportion felt 2016 would see the first Fed hike. In the past, the market has been expecting Fed hikes sooner, maybe this time really is different, especially given the pick up in US data?

4. When do you think ECB will introduce full blown QE? Most feel that Jan 2015 is the most likely time when the ECB will start full blown QE, with lower numbers expecting Mar or Apr 2015. The proportion of respondents expecting no full blown QE were perhaps higher than I was expecting.

So in summary, the survey suggests investors are bullish equities, cautiously so given the proportion who prefer cash. Elsewhere, there is an expectation that the Fed will hike, whilst the ECB will ease further, which largely tallies with the long USD view expressed in the survey.

If you found the survey useful, let me know, as I'm thinking whether to make this a more regular project (perhaps once a month or every quarter, if there is sufficient interest). Any suggestions for future macro based questions are very welcome. At that is left is for me, to wish you best of luck for 2015. Luck is more precious than skill in these markets!

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of consensus in markets (mixed in with a bit of ancient history). You can order the book on Amazon. Also read my thoughts in 2015, in my Thalesians quant note here (given it's Christmas, I'm giving it out for free!)

Friday, 26 December 2014


00:15 Posted by The Thalesians (@thalesians) No comments

The days between Christmas and the impending new year seem like days in limbo. The current year is withering away by the hour too quickly to amount to anything, whilst the new year is still somewhat of an intangible mirage. Whilst these days might be occupied by the tail end of left overs and frenzied shopping, they seem made for contemplation.

Whilst I might be advocating the idea of idle contemplation, I have to say I fail abysmally at this. My fingers must always be continually typing, my eyes reading something written on a page, my ears continually listening. Even now, the clock has swept past midnight, and my brain is whirring in and out of Twitter, like a child trying to avert sleep. Indeed, Twitter is perhaps the most indefatigable enemy of deep contemplation, a persistent stream of consciousness interlaced between your own thoughts. Contemplation by definition, is the absence of all these things I mention, simply the time to think, unhindered by distractions and pauses. It takes effort to think and to think only. Imagine.

Invariably, thoughts spring forth concerning the year that has passed, and plans form for the year which follows. It is of course somewhat of an artificial edifice, the turn of the year. Indeed, there are other forms of year. The tax year in the UK starts in April, whilst in Japan, April also has a symbolic meaning as the beginning of a year. Whether or not it is an artificial creation, the ending of one year into the next, nevertheless provides an ideal way to break up the various phases of our life.

So what should the next year hold, given I have advocated that this is an ideal time to ask this question? Ignoring markets for once and thinking more abstractly, what will you do next year? These two questions are subtly different. What will happen, influences what we do and how we are impacted by events. We cannot control everything in our path, but it is our choice, which path we lead.

We can sit idly by, allowing events to subsume us or we can do act in a decisive manner. A trader sitting in the market, with positions which are at odds with the price action can berate the market for being wrong. That trader might well end up being right, but at that moment in time the market is right. Moaning is of course simpler than taking a step back and understanding events.

Let this be the time for contemplation for the following year and a time to reflect on the past year. A mistake is the worst sort of mistake, if we are intent on repeating it. Whether or not next year proves to be your year, a modicum of contemplation might just help. I have no idea what 2015 will bring. However, that won't stop me from doing that one thing humans do best, thinking. So whilst the fireworks shower the skies, the year advances by one, the sound of Auld Lang Syne whispers to me, I'll be contemplating for what lies ahead, whatever it might be. Imagine.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you!

Saturday, 20 December 2014

Consensus-ing agreement in FX markets in 2015

10:37 Posted by The Thalesians (@thalesians) No comments

Why is Manhattan real estate so expensive? The simplest explanation is that a lot of people want to live there. There seems to be a consensus that Manhattan is a great place to live. At the same time, supply is relatively constrained. Yes, developers are continually building higher, providing more apartments, but many of these are to the upper end of the market.

Despite being such a desirable place to live, it might not be the right place for everyone. Perversely, the fact that it is so sought after and hence relatively crowded, results in a scarcity of certain amenities that we can find elsewhere. Want a garden? Central Park is likely the closest thing you'll get. Want a house? You'll likely have to share it. Want some quiet? Again, try Central Park and not the streets heaving with traffic, punctuated by the sound of car horns.

Depending on your viewpoint, these compromises are either too much to make, or for someone like me who has lived in a city for twenty years, entirely reasonable. We could also argue that the fact that Manhattan is crowded, is the reason people want to live there, and which makes it so lively. So often the word crowded has negative connotations, that the benefits seem to be forgotten. Whilst real estate is an asset class, when it comes to your own house or apartment, a primary concern is to live in it (whilst hopefully benefiting from rising house prices). When it comes to financial markets more broadly and investing, the idea of consensus and a crowded market can be more nuanced.

If we think of the market today, particularly in FX, the consensus for market moves is deafening. Despite reading numerous bank views in the media, talking to many contacts in the industry, scanning Bloomberg and Twitter on a repeated basis, it's been incredibly difficult to find anyone who is bearish USD in 2015 (think I only managed to count one so far). The consensus is overwhelmingly bullish USD, and this is made even clearer by the forecasts from the various sell side banks available on Bloomberg, which as a group see EUR/USD lower and USD/JPY higher. I also agree with them, although I think we're closer to the end of this USD bullish move than the beginning.

After all the rationale behind the view is fairly simple: the Fed likely to hike, the ECB likely to embark on full blown QE and the BoJ engaged in QEn (where n might end up being a large number, if I'm being really facetious). If you'd like to read my fuller thoughts on 2015 please download my latest Thalesians quant paper (free to download given it's Christmas!)

Does this necessarily mean that USD will actually strengthen? Of course, if we look into the past, the market has been bearish EUR/USD for a while. In 2014, the consensus view finally worked. For over a year before it evenutally fell, EUR/USD seemed to be driven more by peripheral spreads tightening following Draghi's promise to do "whatever it takes", rather than more traditional drivers such as monetary policy expectations. As a result EUR/USD had remained stubbornly bid. Even though in 2014, forecasters saw the move in EUR/USD, they failed to see the move lower in UST 10Y yields, I suppose you can't have it all!

So should I be afraid of being with the consensus? Furthermore, will the fact that the consensus is so strong for a bullish USD view cause a crowding of positions and a potential for painful unwinds? I have no easy answers, only to say that these are questions every investor should be asking. All I would say, is being on the side of consensus is always "safer". Even if you get it wrong, many others will be in the same group. If you are against consensus, it is far more difficult to rationalise a loss to your boss! Also, we could argue that simply fighting the consensus and the broader market narrative, simply for the sake of it is questionable. (Of course, if we think the market narrative might change and use that as a reason for going against the consensus that is an entirely different matter!)

Best of luck for 2015. Whilst luck is key for trading, it cannot be bought by skill!

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, has some colour on the topic of consensus in markets (mixed in with a bit of ancient history). You can order the book on Amazon. Also read my thoughts in 2015, in my Thalesians quant note here (given it's Christmas, I'm giving it out for free!)

Sunday, 7 December 2014

Tip of the ice-burger

19:16 Posted by The Thalesians (@thalesians) No comments

Minetta Tavern. New York. Black Label Burger. Everything about this burger suggests it has a certain quality lacking from most other burgers. The meat is tender, from a sirloin steak, without any of the unpleasant stringiness that might afflict other burgers. It appears that many people agree, judging by the difficult in finding a table here. Yet, at $28, perhaps this burger defies the whole logic of a burger: a relatively inexpensive meal, which is also thoroughly satisfying. With such a high price, any diner is expecting something thoroughly phenomenal, but still, $28 for any burger seems to be expensive.

If we instead focus on price, we might be cajoled into having a Whopper from Burger King. Whilst, it will satisfy my hunger, the meat is of somewhat lesser quality than the black label burger. Then, we need to address the controversial issue of "accessorising" a burger. For some the notion of lettuce and tomato, sullies the whole experience (well, you never make friends with salad?), whilst for me, it breaks up the richness of the beef patty. We haven't even begun to mention the types of cheese or how onions in a burger should be prepared. It also depends on what type of mood you are in. At times, I might be in a MeatLiqor mood, a fashionable burger joint in London. The burgers are fantastic, but the music always seems to loud, and the decor is perhaps not quite what I would term as decorous. Maybe burger sliders are the answer, mini tapas style burgers, offering diners the possibility of sampling several different flavours on a single plate?

At other times, I might eschew the greasiness of beef burger, in favour of a chicken burger (I know this might seem shocking). If there is one thing I find tough to cut out of my diet, it is the humble burger. I tried for one week, and it simply made my fondness for them increase. Or could the chain burger of places by Shake Shack be sufficient to satisfy most diners?

It brings us to the question, which I am asked regularly by friends, who are aware of my love of burgers. What is the best burger? This is a question which I confess has no real answer. Trying to use Google gives approximately 43 million responses. I like burgers, but perhaps not quite enough to sample 43 million burgers, to answer this question. Furthermore, my answer is unlikely to be as other judges. There are also so many degrees of freedom in this question. Does it refer to classic burgers or cheeseburgers etc?

So how do we solve this problem? You could argue it is a somewhat trivial problem and not worth answering (unless you are a burger aficionado, a self confessed burgermeister!). However, it does illustrate a problem which faces everyone, whether in markets or in any form of decision making. We have to make decisions in absence of imperfect information. Markets in particular produce too much information to deal with. The notion that traders can adequately absorb every single piece of relevant news article, whilst somehow dispensing with all the "noise" seems optimistic. Yet, despite this, traders still need to make their best judgement when it comes to putting on positions. For quants, creating systematic trading models, they might have the ability to process more information and use advanced techniques such as news processing. Even in this case, there is a limit to how much information they can aggregate. It is also often the case, that simplicity underpins the best trading strategies. Excessive complexity can often render a trading strategy less robust when it comes to running it out-of-sample.

The best we can do is to find a solution. It might not be optimal, but might be good enough for our purposes. Spend too much time deciding which burger to eat, and you might become hungry. In the meantime, I might start writing a bit more about burgers (and probably eating a bit less of them). If you're interested in reading more about burgers let me know (or if indeed you don't!)

Feeling hungry after reading this? If you are in London this Wednesday evening (10th Dec), come to our Thalesians Christmas dinner, a 3 course meal at La Tasca, a tapas restaurant in Canary Wharf. The dinner will be preceded by a talk on Deedle, a time series library for .NET. Get dinner tickets and details here - a great way to celebrate Christmas and be part of the Thalesians community.