Saturday, 24 January 2015

Burger or Lobster?

18:20 Posted by The Thalesians (@thalesians) No comments

There is a restaurant (or indeed several) in London, called Burger & Lobster. There is no menu. Instead your server asks whether you would like to eat (yes, you guessed), a burger or a lobster, which are both the same price. Of course, there are many further permutations, would you like cheese on your burger, would you prefer lobster or lobster roll and so on.

The restaurant has now opened up in New York, offering the same spartan menu, albeit for a cheaper price than its London cousins (unfortunately, there always seems to be some invisible London tax on burgers and steaks).

So which you should choose, the burger or the lobster? From a purely financial point of view, surely the lobster. After all, if the burger and lobster are priced at the same level, you are either getting an outrageously expensive burger or a somewhat better value lobster. However, when we go out to a restaurant, is our objective is to engage in financial arbitrage between menu items? I could say no. We might all wish to have a cheaper bill, but in this instance our choice will not change the final price we pay.

The problem I generally have, is I love burgers, a good burger really is joy (as the photo above suggests)! Indeed, whenever I travel, I will invariably check the local burger joints before go (I have already done this, for a trips to Geneva and Hong Kong in February). The burger served up at Burger & Lobster, is perhaps on the large size and is therefore somewhat difficult to eat with your hands as a result. However, if you are able to conquer this challenge, your taste buds will thank you for the quality of the burger you have entrusted them to sample. Despite, loving burgers, should I pick lobster, purely to have the feeling of getting a better value meal? I say no!

The problem is that when it comes to financial markets, people choose the lobster over burger regardless of their initial preferences. Trading might be about making money. Yet when using that as your sole metric for success, it can be perversely self defeating and the wrong metric to use, just as in our burger and lobster example. Indeed it is one of the major themes in my book Trading Thalesians - What the ancient world can teach us about trading today, that simply running after maximising returns can result in excessive leverage in a portfolio. Indeed, Aristotle tells us the story of Thales, who made what is now his famous, trade on olive presses. His objective was not to profit from the trade, but to show that he could make money, if he put his mind to it. We can emulate Thales today. It seems far better to approach trading indirectly, understanding the risks you are taking and then keep them in check, to have a more sustainable stream of returns, rather than immediately aiming for high returns.

When it comes to Burger & Lobster (& financial markets), more burger, less lobster

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you! Also come to our Thalesians systematic trading workshop at alphascope in early February in Geneva, sign up here

Sunday, 18 January 2015

If everyone is expecting QE, what next?

20:40 Posted by The Thalesians (@thalesians) No comments

The size of the recent move in EUR/CHF after the removal of the floor, was clearly of a magnitude much larger than the market has observed recently. We can of course debate whether this was the largest daily move on record. However, whilst the timing of the removal of the floor was a surprise, the fact that the floor was actually removed, is not surprising. I have been working in currency markets for around a decade. Admittedly, this hardly qualifies as a long time. However, despite it being a relatively short time, I can recall quite a few occasions when currencies have experienced similar implosion type moves, albeit at a slower rate of the top of my head, without even a recourse to a Bloomberg plot. There is of course the recent move in RUB, as well as numerous other examples, in particular over the Lehman period. Going further back, other examples include the collapse of SEK and GBP in 1992 (of course, in the instance of CHF, SNB were trying to prevent their currency from strengthening, as opposed to weakening in the examples I have given).

So why did the SNB feel it necessary to go now? Was it the likely advent of ECB QE, which the market is now expecting at the next ECB meeting. Perhaps it was a political decision? There are many theories, but perhaps what is important now, is not so much the past, but will happen in the coming days at the ECB's next meeting on January 22nd.

The size floated around in market circles for the size of a possible ECB QE programme seems to be around 500bn EUR (see FT: Why the ECB should not water down a QE programme 18 Jan 2015). From a currency point of view, should EUR/USD fall if full blown QE is applied? We could argue that if the size of QE delivered is in line with market expectations, potentially not (indeed I was debating this point with @ericbeebo on Twitter earlier today). Furthermore, it has not always been the case that QE elsewhere has been accompanied by currency weakness.

The market has been selling EUR/USD on the story of Fed hikes and easing from ECB, given the mismatch in growth between the Eurozone and US. We haven't yet seen Fed hikes, although we have seen an exit from QE by the Fed. On the other side the ECB has eased policy, although, has not as yet pulled the trigger on full blown QE. Both short EUR/USD and long USD/JPY have been consensus trades. Currency traders have been rewarded for listening to central banks in these cases. But as the SNB has showed, listening to central banks is not always the most profitable trade.

The question traders face is when will they take profit on these trades? If the policy uncertainty becomes to great, the knee jerk reaction is to close your position or at least reduce it. Furthermore, if the ECB fails to deliver something "surprising", it could be an excuse to take profit, in particular given the extent of short positioning in EUR/USD (at least looking at CFTC data).

Traders are rewarded not for predicting the future, but for an ability to take the right amount of risk at the right time. Predicting the direction of the market, but having an inability to correctly size your trades, is never going to endear you to your investors. The action of the SNB and the pain it caused across the market will be a reminder to anyone who forgot, that traders are first and foremost in the business of managing risk.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you! Also come to our Thalesians systematic trading workshop at alphascope in early February in Geneva, sign up here

Sunday, 11 January 2015

A short story - Snapping fingers

21:42 Posted by The Thalesians (@thalesians) No comments
I have been writing a novel over the past few years, which is very loosely based on thirty snapshots of real events in the Arab World over the past sixty years, told by different fictional narrators. It is a book I shall probably never finish. I had written this chapter below over a year ago, about a fictional event where a cartoonist is punished for a satirical cartoon (this scene is loosely based on the conflict in Syria and a similar event which happened there). The narrator below is the fictional cartoonist in question. After the terrible events in Paris this week, I felt compelled to share the chapter, which begins with the narrator explaining why cartoons are so successful for conveying a message.

A short story - Snapping fingers

Children see before they speak, as John Berger once said(1). What is a smile but a reaction to what a child senses, a deeply powerful visual message, which surpasses any words, to the outside world. Although each sense has its own place for deciphering the world, the visual sense can often be deployed much quicker than our others senses. Every event in the outside world ripples into our sensory sphere, at each point spreading its tentacles into a different sense, until finally our brain processes a reaction. It is perhaps for that reason that children so love cartoons, because of the way a cartoon immediately has meaning without the need to delve further, a singular burst of flow into the visual cortex, a gamete of vibrant colours, shining like rivers of light and filled with caricatures. Sometimes I think that caricatures, although seemingly grossly skewed perceptions of the outside world, are closer to the way we remember images, than an oil painting faithfully rendering its subject.
Unlike cartoons aimed at children, the satirical variety can be interpreted on many different levels, on a purely superficial level, but also a deeper more philosophical level, a thousand words bundled into a single snapshot, catalyzed by humour. That is the power of a satirical cartoon, that in amongst the beautiful artwork, when the viewer takes a second look, the message surges through the ether, like a man rising to the surface of the sea, frantically gasping for oxygen.
For every cartoon, the process of creation is the same, whatever its message. The artist’s hand dips its brush in paint, later to sweep it across a page, creating an image from nothing, but a mere spark of creation, leaving behind a trail of joy. For every act of violence, the irrationality is the same, whatever the message. The aggressor’s hand dips its sword in the fire, till it burns red hot, later to sweep it across the artist’s hand, leaving behind a red trail of blood. Why you may ask should the aggressor’s hand do this: is the artist’s hand such a threat? I had thought the artist’s hand to be little more than an irritant. However, today has taught me otherwise: what a tyrant fears more than people losing their fear, is to be laughed at publicly. For with laughter, loud, bellowing across the rooftops, rather than in the privacy of homes, his time is finished.
My morning had begun as it always does, a stroll through the ancient streets of Damascus, as old as civilization itself, the very first imprints of mankind’s attempt to tame nature. The mind is a powerful creation, but without inspiration, it dulls and withers. As such, I used each moment of my stroll, to gather the ingredients of inspiration, the smell of fresh bread lingering through the air, the laughter of children being dragged to school, the sweet sight of beautiful Damascene women, their hair fluttering crisscrossing in amongst itself creating a shadow of intrigue as they walk past. My mind was a cross between a blur and a high, tired by severe lack of sleep whilst also eager to begin my daily work. The solution that day, as every day, was a burst of caffeine. It was just early enough to contemplate sitting outside at my favourite café. Any later and I suspect, it would have been foolhardy, for August is the month, when the Damascene sun breathes fire, and the rain is a distant memory of the winter. This year more than any the streets had been alive with fire, not from the sun but from the hearts of my fellow Syrians burning for change.
I chose my spot to sit. I could see all the regulars, most of them my friends and those not, were at least acquaintances. I did not even need to order, as soon as the café owner, Badri, saw me through his spectacles with its edges worn down by years of usage, bandaged together by sellotape, he brought out my coffee. I nodded my head in thanks and he smiled, revealing his teeth, all somehow arranged at different angles and some missing. He never wanted to talk about what had happened.
All I knew from the others was that in the 1980s, he had refused to serve a man. The man had been drunk and raucous, and had begun to swear and make lewd remarks at women walking past. He returned the next day, more sober, but with some henchmen, their hair perfectly coiffured and their faces filled with evil. Strange that, the mukaharat are supposed to work in secret, but for them to be effective, they have this unmentioned uniform, difficult to precisely describe, but obvious to any observer. They sat at another café opposite, the whole day, sneering at the café owner. When it was time to shut up shop, Badri could see them walking across the street for him. He knew screaming would be useless. So he accepted his fate. They placed his head in a headlock and proceeded to beat him. It did not last long, but long enough, to do that to his teeth and he is too poor to ever fix them.
Whilst I thought of the misfortune that befallen Badri, I stared at the coffee cup he had broad. It was thin and spindly, with a small protruding handle. Inside it, lay coffee, its colour the darkest shade of brown possible, nearly indistinguishable from black. I stirred and stirred the coffee with a small spoon. I looked up across the street, and could see three men seemingly waiting for something, their backs perched against the sand washed wall of another coffee shop. Smoke trailed from the cigarettes precariously hanging from their mouth. I could see their cigarettes perceptively rising and falling, in tandem their breathing, which forced them to suck in clean air, before expelling it, tainted by white smoke. They seemed disinterested, with everything, except the Damascene women, who passed in front of them. Occasionally, they would look up at me. As if in unison, they would squint, trying to focus their sight on me. I continued to drink my coffee, quicker than I ordinarily would, forcing my mouth to bathe in the bitter taste of Arabian coffee. Even with many spoonfuls of sugar, the bitterness was still perceptible, rather than some faint memory of an aftertaste. Sometimes, sweetness in whatever quantity is unable to glide through an atmosphere filled with despair. As the coffee’s taste permeated further through my consciousness, I noticed the three men across the street, continually looking at me, no longer seemingly distracted by Damascene women. I thought it was time to go. I slipped a few coins onto the table to pay for the coffee. Jumping up, I immediately started walking further on. Behind me were the three men, whose young legs were carrying them much quicker than my old legs. I kept trying to walk on quicker, but it was futile. Sometimes we can ignore our age, but at times of our greatest need, our age is reminded to us forcefully. As the crowds thinned, they became closer, the scent of violence seemed more forceful than ever. Finally they had driven me into a lonesome alleyway, where the only light lay above from the heavens, but to my left and right, forward and back, there was nothing but the emptiness of darkness. My wary feet had begun to ache, my heart was beating far too fast for a man of my age, as my body forced my pace to a near halt. I turned. They halted. What little light my eye could gather, was reflected by my pursuers eyes, glowing white, broken by their pupils, which appeared to be little more than dots. They stood next to one another, such that together, they seemed to coalesce into a single being, wide enough to dominate the whole path. I could not make out which of them was taller, indeed which of them was fatter than the next, as each seemed to be an identical copy of the other.
“Why have you been running from us?” mused the man to my right, the words coming out of mouth, spaced by short gaps. He stepped forward, just enough such that the sunlight was able to catch his face. Emerging from the darkness was a face, as bland as it was colourless. The only colour I could decipher from his face, was that of his brown eyes. The rest of it had a whiteness, which seemed outside the norm of the spectrum of colours afforded to human skin. It was more like that a bleached sheet of paper, than that colour usually sees in skin. The glint of his golden touch served as the only break for my eyes of the colour white which made his face, and the blackness of the shadow surrounding him. The other two men remained quiet, but I could hear their hands moving towards their pockets. The rumbling of change from their pockets, was swiftly replaced by that of a snap, which was rather too similar to that sound I grew accustomed to in the army years ago, the sound of a gun being made ready to fire. In my mind, these two men, became the quiet ones, whilst the man talking to me, was in effect the speaking one.
“I didn’t know who you were,” I replied, knowing this to be a feeble excuse.
“You knew precisely who we were,” the speaking one said, grinning in such a way, that I was unable to ascertain whether it concealed a grimace. He raised his right hand, clicking his fingers as he did so. Slowly, he extended one of his fingers so that it pointed directly at me, a silent order for the quiet ones to begin their work. Like hungry animals, they swarmed towards me, grunting in near unison, their faces still largely cloaked in darkness. I closed my eyes, thoughts of the Almighty began to flood my mind.
              I opened my eyes. Greeting them was a hand, clenched into a tight fist, skin stretched tightly over the hands knuckles, so that the bone was visible underneath. Then only pounding. Pounding. It came towards my face repeatedly, buffeting me from side to side. Then the fists appeared to multiply. It was though a thousand fists were coming towards me, flying in such a way to inflict maximum damage. I could feel blood, running down my face, its iron taste trickling past my taste buds. Their faces began to be peppered with red specs of my blood, Syrian blood. With each strike, their faces became more red than white, my eyes becoming more glazed over with a mix of blood and tears. At some point I fell, I cannot remember precisely when. It was when I fell, that the smell of leather and shoe polish became more obvious. Their shining shoes struck my jaw, several times. How many times I don’t know, it was simply enough times to deliver their message.
              In all this time, of punches and kicks, blood spilling, they had forgotten my hands, the source of my voice, until I heard the leader cry:
              “His hands!”
              From that point on, their efforts to destroy my hands, far outweighed any possible violence they had previously inflicted on my face. All I remember is the sounds I heard, my eyes could no longer remain open, as though my instincts were telling me, close your eyes, close them now, and the cliché will be true: it’ll become a scene played out in your nightmare, rather than in reality. I was very nearly tricked, for at the time, I couldn’t feel the full intensity of the pain, that came in my hands later.
There seemed so many sounds. The sound of snapping, like that of a shutter coming down in a camera, but much louder. The sound of grunting coming from them, like animal a frenzy at feeding time. The sound of violence has many forms, but silence is not one of them.

(1) John Berger, Ways of Seeing

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

Wednesday, 7 January 2015

Are you being "Piketty" about other economists?

09:36 Posted by The Thalesians (@thalesians) No comments

I recently wrote an article discussing the "Unusual cult of deriding economists". As the title suggests, I talked about the derision economists can often receive from outside their community, as illustrated by a quick peek Twitter. I argued that criticism of economists is justified, when it is accompanied by a solution, using the example of George Cooper's ideas. In his book, Money, Blood and Revolution, he suggests a circulatory growth model designed to unify the various economic schools of thought. However, the contrasting approach of simply mocking economists for the sake of it, without any attempt to come with an alternative, can amount to something akin to name calling.

One point I missed and which was picked up in Twitter comments in my article (by @LadyFOHF amongst others), is that I failed to identify the biggest group who criticise economists: namely economists! We can find numerous examples of this. Piketty's recent book, "Capital in the 21st Century", is a case in point and a quick Google search can bring up all manner of somewhat unfavourable critiques from other economists, such as the following. Jason Russell picks out the following quotation from Acemoglu and Robinson new paper on Piketty's book:

“It is quite striking that such basic conditional correlations provide no support for the central emphasis of Capital in the 21st Century,”

However, it is not just Piketty that other economists can be a bit "Piketty" about. Anyone who follows economists on Twitter is used to regular sparring matches between (think of the former members of the MPC, Blanchflower vs. Sentance as an example, among many others).

A point made by Jordan Terry (@The_Analyst) seemed to sum up the situation better than I could ever do so. He noted that very often it is the case that political views shape the way people view economics, rather than allowing economics to shape their politics. Hence, they might already have a conclusion based on their political views and work backwards from that to justify it using economics. In the case of Piketty, it amounts to asking which came first, r > g or his book (detractors would say the former, supporters would say the latter).

Indeed, as Aaron Brown notes in his book Red-Blooded Risk, it is easier to work out if an economist is a hawk or a dove from understanding what his or her political leanings are, than it is from reading their published research. The result is that arguments about economics end up being about politics and explains how they can quickly become so vociferous. To some extent, it is difficult to separate the two, because economics and politics are so intertwined.

When we move from economics and closer to the financial markets, the lack of agreement is even more obvious. In fact, the absence of agreement makes a market... after all, if everyone agreed on a price all the time, would there be any volatility? In financial markets, we often encounter reasoning which starts with a conclusion. Whilst, economists might sometimes use economics to justify political views, so traders might work backwards from a trading strategy to explain why it is "good".

Indeed, in recent weeks, I have been grappling with this abstract question of what makes a good trading strategy, in an attempt to select various trading strategies, which I am planning to present at a systematic trading workshop (I should add that, if systematic trading is to you, what bickering is to Twitter, you should sign up for my workshop at alphascope in Geneva here!).

A somewhat facetious answer, would be that a trading strategy which makes more money is better than others that make less. However, this is simply ignoring so many other properties of a trading strategy. What are the drawdowns? What are the volatility of returns? How have each of these trading strategies been constructed? Furthermore, what might be a good trading strategy for one trader, might be inappropriate for another. One trader's idea of acceptable drawdowns might not be palatable for others.

So yes, economists might disagree with one another. However, so do traders when it comes to financial markets (otherwise there would be no market). When it comes to the more abstract question of what makes a good trading strategy, it might be best to agree to disagree. A trading strategy, that is "good" for you and your risk profile, might be unsuitable for others, just as an economic theory might seem "good" only if it fits with your political views. Maybe there really aren't any trading strategies which are right "for all occasions"?

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you! Also come to our Thalesians systematic trading workshop at alphascope, sign up here before Friday 9th January to get a 10% discount.

Sunday, 4 January 2015

The Unusual Cult of Deriding Economists

16:36 Posted by The Thalesians (@thalesians) No comments
The Internet has its way of amplifying opinion. Praise spreads like a whisper, whilst criticism is amplified like a rabbit overdosing on crack. As a group, economists come in for seemingly relentless derision on the Internet, most notably on Twitter. I am all for free speech, that is after all the power of the Internet, an amalgam of different opinions, which coalesce to give you a snapshot of the world. Constructive criticism can be a powerful device, to filter out the signal from the noise.

Indeed, in George Cooper's Money, Blood & Revolution, he discusses the various schools of economic thought, offering constructive criticism. He creates an extremely simple diagram to illustrate the differences, which Cooper dubs "The Economic Plane". What quickly becomes apparent, is that it can't be the case that all these schools cannot be right simultaneously. Rather than simply reveling in this lack of cohesion, Cooper offers a solution. He comes up with his own theory circulatory growth model designed to unify the various economic schools of thought, which I found quite intuitive. The key point is not so much Cooper's idea, but that he offers an alternative viewpoint to understanding economics.

Simply criticising economists without ever offering some alternative, can end up being little more than an exercise in name calling. Sometimes, it feels economists can do no right, observing Twitter. Some might mock economists for using mathematics to bring some rigour to their field. Yet, perhaps if they avoided mathematics they would be equally maligned for simply relying on words to make their point.

The difficulty is that economists are trying to model human behaviour, which is tough to model! People have emotion, they react to their environment, they are all different. Hence, trying to model people as a single cohesive unit is always going to be challenging. I am not an economist, my specialty is systematic trading models. Whilst it is possible to make profitable trading models, it is not the case that they will work forever (I would be somewhere on desert island if this was the case). Markets change and whatever trading model I am creating is merely an approximation for market behaviour. It simply emphasises the fact that models will never be precise, whether we are trying to model an entire economy or some facet of the market. Other accusations banded about against economists (and strategists), is that they don't take risk. From my own experience, risk taking is a different skill and can be very different to analysing the market or the economy. Some people like taking risk, some do not.

Economists aren't perfect, but neither is anyone else mixed up in this wonderful miscellany called life. Perfection is something we all crave, but will never achieve.

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