The Brevity of Modernity

Coffee whispers to my sense of smell, whirring through my consciousness, as I sit here in an American coffee shop. Above me, sitting aloft are skyscrapers their crests emblazoned with the names of American banks, a corner of London more Empire State than Wren. My fingers tap on my keyboard has slowed, no longer are words magically appearing on the screen seeking my eyes’ attention. Whilst headphones are perched in my ears, music pulsating through them, I hear little. I ignore the continual beeping of new Twitter messages, the flickering of pop ups signalling new e-mails, the stream of customers entering the coffee shop.

I am thinking, seeking to find a path through my thoughts to a cohesive narrative to write here. The wonder of thinking is that clear separation between you and the rest of the world, a time to indulge in the unknown. Thinking occurs when you allow the stimulation of the outside to dull, for a time, to allow the wonder of ideas to develop from within you. It is what I love about reading, seemingly abstract shapes on a page, creating words to catalyse my thoughts over time, rather than the gratification of images instantly flooding into my mind, a stream so rich, it can sometimes smother my thoughts. What spurs thought is not so much a flow of information, but the time spent digesting that information flow later.

Yet, how often do we think at length today? The modern world seems to favour brevity. Information seems to grow exponentially, each year that passes in this, the Internet Age, hastening the attraction of brevity. The length of this article is governed by how much time, you, the reader will give me, the writer. Our attention span can seem little more than one hundred and forty characters at a time. The notion of spending time investigating anything at length seems to have lost out. It seems passé, a relic of days past. Books are to be absorbed upon the screens of a device which needs batteries, but only in small chunks, rather than on the wonders of paper, a medium which lasts for a lifetime.

I might seem like a Luddite, expressing these sentiments, indeed perhaps somewhat hypocritical, since new technology is something I embrace. I love using Twitter and have for nearly a decade worked in financial markets, my eyes for hours each day, continually seeking out the words emerging from my news feed and price flashing up or down, analysing this vast trove of data systematically. Decades ago, I would have been staring at a solitary ticker tape of prices, rather than multiple screens, using programming languages with exotic names like Java and Python. My point is not so much that we should abandon modern technology, which has spurred this move to brevity.

Instead, I ask why can't the one hundred and forty characters of the tweet and brevity of news wire headlines, sit alongside books: the novels of Fitzgerald and Dickens, the non-fiction of Hitchens and Taleb, in our society. We need not choose between brevity and length. From tweets, we learn from the thoughts of many people, in brief snapshots, which coalesce to provide a sample of the world at a single point in time. By contrast books give us an opportunity to delve into the thoughts of others at length. However, this opportunity is only afforded to us if we are willing to exchange our time.

The same is true of markets, the incessant media coverage of high frequency trading seems to neglect the fact that it is possible to profit from longer term trading, where we might take a significant length of time to come to a trading decision. If anything, for some investors sticking to longer term trading can be a better approach, than being sucked into intraday trading and potentially the spectre of over-trading. Often with higher frequency trading, more care needs to be taken to ensure the noise of short term price action is not confused with a signal that market dynamics are changing. It can be done, but needs focus.

It's not a question of modernity or a Luddite appetite for the past. It's simply an acknowledgement that modernity should not usurp the idea that sometimes, we simply need to spend time thinking, wondering and reading, to allow us to escape (as the photo above implores us), as well as browsing. The question is this: what will you read next, a tweet or a book or perhaps both?

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 learning from the past (mixed in with a bit of ancient history). You can pre-order the book on Amazon.

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The small in Big Data

Waltzing along the Thames from the Tower Bridge to Westminster, in amongst the plethora of skyscrapers struggling to reach the gods and tourists snapping photos, there lies the White Tower, its stone weathered by a thousand years of rain and wind, battering the British landscape in all seasons. The history of a nation lies there carved into the stone of Caen.

Generations have passed. Ages have passed since its construction. This island nation fell at Hastings, a nation forced to kneel at the sword of William the Conqueror from across the Channel, the man who built the White Tower. In the royal court, the foreign sound of French replaced that of English, the language of the Anglo-Saxons. As this green and pleasant land beckoned before him, the question for William was simple. What was this land which I have conquered?

William sent out his men throughout the land, to seek answers (and taxes), by conducting a survey of the nation’s wealth, recording the holdings of landowners, in nearly 13,500 places across the kingdom. The result was the Domesday Book which was completed in 1086, a truly epic work for its time. Indeed, for medieval times, the amount of data collected was truly astonished. Perhaps this was an example of medieval Big Data?

Leaping across a millennium to today, the term Big Data is as ubiquitous as it appears to be misunderstood. The term has seemingly captured an almost ethereal quality. Despite, the regularity with which the term appears, it seems to be rarely defined in the popular press. Essentially, Big Data refers to massive data sets.

The sheer quantity of data makes it computationally very difficult to analyse. Yet, beneath this veneer of complexity, the supposed promise of Big Data is that we can find simple and wonderfully intuitive results and relationship between the data, which can be visualised in novel ways. Big Data is only useful if we can make it “small” data that we can interpret. The web has given rise to masses of Big Data. Simply think of Google and Facebook and the reams of data which their servers trawl through every second. As oil was the way to profit from the twentieth century, is data the basis of alchemy in the twenty-first century?

Clearly, for the aforementioned institutions, data has proved to be valuable (we, the consumers, have freely given it to them in our droves). However, does simply throwing more data at a problem help create solutions? The difficulty is that more data can often mean more noise.

A model with more variables does not mean a better model, in the same way that having more lights on a motorcycle might not improve it (see photograph above). Financial markets are plagued by noise. Every minute newswires buzz with more stories, some crucial for markets, whilst others can be discarded as noise. Human traders have (always) used news to trade markets and have continually needed to make these decisions. We can apply a similar approach to trade markets by examining large amounts of news data (maybe we should call this Big News).

Whilst Big Data is not a panacea, through diligence it can improve our understanding of financial markets. In a sense it is like baking a cookie. We can see Big Data as a set of complicated ingredients, which only taste good once baked. Indeed, I have written about this topic in an earlier blog article, where I demonstrated how Big Data can be used directly for trading. I showed how RavenPack news data can be used to create trading filters for reducing the drawdowns associated with carry trades in the currency markets. The method I employed relied upon relatively straightforward concepts, notably understanding how news volume is related to market volatility and also the impact of the labour market on risk sentiment. Whatever approach we choose to Big Data, a modicum of old fashioned trading intuition needs to be there to start us on our way.

The key is to filter the signal from the noise, as Nate Silver might say, so we can find the small in Big Data.

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, also has some colour on lateral thinking to a trading idea and much more (mixed in with a bit of ancient history). You can pre-order the book on Amazon.

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When an idea gets currency

Anguish had ensued for months, with declining volatility seeming to compound the misery of the market, killing any potential trend. Traders in currency markets were being rebuffed by a currency that did not wish to rise. It had been the consensus year ahead trade at the beginning of 2014. The moves for much of the year seemed to “prove” that the consensus was wrong. Finally, over the summer, the dollar showed the market some love, rallying over 7% against the euro and against nearly every other currency in recent weeks. Perhaps consensus was actually right about the elements (see above) being here for a dollar rally?

The narrative which has been at the heart of the market’s desire to see a stronger dollar is fairly clear. I recently went to a talk by Mark Cudmore at a currency conference, TradeTech FX, in London. He has been in the currency markets for a decade. I have known him for nearly that whole period and I am always keen to here his thoughts on the market. His presentation was based on the premise that the market follows narratives, which can often overshadow other factors. In my experience, this becomes more evident, each year you follow the markets! Trying to point to fundamentals, whilst another set of narratives is in play and a dominant trend is sweeping markets, can be a painful experience even if the narrative eventually pivots to your viewpoint. There are countless examples not purely confined to currency markets. In the dotcom crash, investors who went short, hoping to profit from a fall in overvalued tech stocks, were eventually proved right. However, any investors who went short too early, would have been forced to close out their trades before they became profitable.

In currency markets at present, the market narrative is of a central bank considering when to hike, the Fed, whilst another is in easing mode, the ECB. Indeed, this has been prominent in most market research that I've read and in the media. This is the classic divergence play, which has so often been central to currency markets and has helped to trigger the rally in the dollar. It is the type of trade, which has been lost in the muddied waters of the past few years, where central banks seemed to be engaged in a race between one another for the bottom in yields. Much of the post-crisis period has seen markets driven more by shifts in risk sentiment than anything else. This contrasts to monetary policy expectations which are linked to expectations around growth and inflation. If we look at unemployment rates in the US and the Eurozone, we can see an illustration of why there should be some monetary policy divergence, in particular once the buffer of Fed QE has been eroded. I could show you numerous other plots to illustrate the same point. (Of course, there has been this divergence for years, but the market narrative was somewhat different!)

Figure – US vs. Eurozone unemployment

Indeed, the ECB has been easing policy, cutting deposit rates to negative territory and committing to purchase ABS. The potential for further moves, notably through the purchase of sovereign bonds remains a possibility. The Fed are still conducting asset purchases, admittedly in smaller sizes, and this will finally end in October. Of course the market is pricing in higher short end Fed rates and the Fed “dots” are also pointing to hikes. The “dots” are representative of individual Fed governors’ forecasts of future rate policy at various Fed meetings.

Figure – Fed dots and market pricing – In case you didn’t know markets expects the Fed to hike soon

UST 2Y yields have also risen, as we approach the end of Fed QE, which are traditionally the most important part of the curve for developed currency markets (by contrast to UST 10Y yields, which are markedly lower on the year). However, despite all these moves in the UST yield curve, the answer to whether the Fed have hiked is clearly “no”. Hence, the dollar is rallying partially on an expectation that hikes will happen soon. Whilst, I find it difficult to disagree with the view and I am (like the rest of the rest of the market) forever enamoured with a trend, we need to consider several factors.

Positioning in short EUR/USD trades is at an extreme, if we look at public sources such as the CFTC’s speculative net positioning data. Hence, this suggests that many market participants are already in heavily long USD. I know some of you will bemoan that I use this data, given that it is largely dominated by CTAs (those funds which predominately trade trend following strategies) and it is also quite lagged. However, in my analysis, I have found that it is generally best to go with the “flow” in CFTC positioning data. Hence, at extremes, it is generally profitable to follow it, but to be weary once it starts to pull back and traders begin the process of liquidating their positions. In particular, there is crossover point, where existing shorts can feel enough pain from a liquidation to force a squeeze which can be self-perpetuating. It also does begin to concern me when forecasts are rapidly being cut by many banks in succession, something that is happening to EUR/USD.

Figure – EUR/USD CFTC speculative positioning – is very short

On a broader point, price action often gets ahead of itself. One example, cited during Mark’s talk, was the rally in USD/JPY which began when in November 2012 and accelerated following the election of Abe in that December. In a Draghi-esque “whatever it takes” manner, Abe pledged to restart the Japanese economy with "three arrows" of fiscal stimulus, monetary easing and structural reforms (via FT/Wikipedia). The market’s love of Abenomics was perhaps even deeper than what we are currently witnessing for the dollar. USD/JPY rapidly rallied from around 80 to 95 from November to April, just before the BoJ’s historic meeting when they announced a massive program of QE. I have fairly vivid memories of that time, which felt somewhat electric from my viewpoint, working at the time of the currency desk of Nomura, a Japanese investment bank.

Figure – USD/JPY rally since 2012 and mentions of Abenomics in Bloomberg News

Since that historic BoJ meeting in April 2013, USD/JPY has managed to rally to 110. However, this second part of the journey higher has been fairly disjointed. In other words, the yen was weakening during a period where there were expectations of significant monetary policy easing by the BoJ, rather than actual easing. Does this sound familiar, a currency moving ahead of a central bank actually changing their policy? Furthermore, the most recent rally since August has come at a time of broad based dollar. Perhaps more of a dollar narrative playing out than a yen one at present?

As Mark remarked (I give no excuse for that pun) and what is so often said in the market, don’t fight the narrative. At the same time, we need to consider whether the market is getting ahead of itself. When will the motivation to take profits for market participants be stronger than following the narrative on the dollar? When the Fed does actually hike, will the market have already been exhausted by a rallying dollar? A great story only translates into profitable trades when the rest of the market also listens.

My book Trading Thalesians - What the ancient world can teach us about trading today is out in late October on Palgrave Macmillan, also has some colour on this generalised topic (mixed in with a bit of ancient history). You can pre-order the book on Amazon.

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