The Six Pillars of Long Rates

By | December 12th, 2016|Basics, Featured|

There are Six Pillars of low rates in the long end. You’ve heard me discuss these in the past, but not presented in this way. We have the Big 3 QE central banks (ECB, BOJ and the Fed), plus three other factors (the neutral rate, inflation, and demographics). I thought we should do an inventory of where we stand on these various drivers to gauge the potential long-end selloff: • The ECB’s QE. The ECB was a little late to the QE party. But they had been buying €60B per month since March 2015 (with the exception of this 12 [...]

Watch out for March 2018

By | December 4th, 2016|Featured, Positioning|

I have a whole discussion of the U7 3mo double fly that traded about 100K times last week (including an 80K block trade) in the Appendix emails.  The tl;dr (too long; didn’t read) takeaways and additional implications are: The March 2018 meeting is going to be the first meeting with a potentially new Fed Chair.[1] This meeting has more risk of a “break” in the typical pattern of Fed meetings, and that part of the curve is more susceptible to a severe kink. A large market participant (the “800lb” gorilla) is selling EDH8 (buying the March 2018 meeting). Open interest [...]

Book Review: The Next Perfect Trade by Alex Gurevich

By | June 14th, 2016|Basics, Featured|

I’ll give it 5 stars (out of 5). I’ve referred to Alex a few times in the Forums, but not by name.  He is the former colleague who regularly had $100+ million P&Ls.  I did not realize that he wrote a book late last year.  As soon as I found out, I ordered it on Amazon. Let me give you a little background.  Even though we traded on the same desk and we both did many more trades than the average trader, I would say that the overlap was almost non-existent on the types of trades he did and the [...]

Trade Implementation

By | June 7th, 2016|Basics, Featured|

Traders spend a majority of their time thinking about their view.  Think about ALL the cumulative manpower and brainpower involved in the analysis of markets and most of it focuses on “up” or “down.”  Traders don’t spend nearly as much time thinking about the implementation of that view.  It would be one thing if people were right more than 60% of the time, but it’s typically not if you compare the results to a relevant benchmark. If you are only going to be right 55-60% of the time (at best for the vast majority of traders), then the expression of [...]

Beating the Zero Sum Game

By | June 1st, 2016|Featured, Philosophy|

How do you beat the zero sum game?  You can’t change the fact that trading is a negative sum game with transactions costs.  The expected value of the overall global game is always going to be zero, relative to the benchmark.  But can you create a situation where the expected value of your local trading is positive?  The answer is “yes” - in several ways.   When people trade, they are fixated on looking for that big “up” or “down” trade.  That really only happens a few times a year, if they are lucky.  And they may need to get lucky [...]

Top 5 Reasons to Trade Curvature

By | May 31st, 2016|Basics, Featured|

I trade direction and slope.  But what I really enjoy is trading curvature (for example, butterflies), for a number of reasons:   1) “Concavity.”  This is a term I made up - it has some similarities to “convexity.”  Look at the 4 year scatter plot of an equal-weighted ED13-17-21 fly on the right (blues on X axis).  Note that I exaggerated the close for illustration purposes.  Generally, the possible outcomes for a butterfly and a given rate, will not be a linear relationship.  History will bear this out, but more importantly, it is so by construction (I may discuss in [...]

Draw Me a Picture

By | May 25th, 2016|Basics, Featured|

If you asked someone to draw you a picture, and they drew this picture, what would your thoughts be?  Just say what you would really think... Exactly! So I can not for the life of me figure out why 90+% of the trading population is fixated on “up” or “down.”  Trading does not have to be about only one dimension.  Making “up” or “down” calls is something you can train your pet chicken to do in your spare time.  Considering how many active fund managers can’t beat their index, you could probably get a chicken to perform okay.  Even the [...]


By | May 22nd, 2016|Featured, Philosophy|

Have you ever seen Star Trek II: Wrath of Khan?  There’s a training simulation called the Kobayashi Maru, that is programmed so you can not win.  The goal is to test the captain in a high pressure scenario.  Our hero, James T. Kirk, becomes the only person to beat the Kobayashi Maru.  How did he do it?  He changed the conditions of the test.  He reprogrammed the simulation so it was possible to win.  He even got a commendation for original thinking.  Thus far, I have been discussing what seems like Mission Impossible.  But I want you to start thinking [...]

Trading vs Gambling

By | May 19th, 2016|Featured, Philosophy|

Since I brought up gambling so many times in the last Philosophy post, I want to discuss “trading” vs “gambling.”  In our society, traders are considered one of the “top” professions in the world, and “gamblers” are considered one of the worst.  This has always been curious to me because the line separating the two is extremely thin.  There are traders who I would consider “gamblers”, and there are gamblers who I would consider excellent risk-takers.  In fact, one of the big producers on JPM trading desk (made $100 million per year almost every year) used to say that he [...]

The Active Trading Test

By | May 13th, 2016|Featured, Philosophy|

I’m looking forward to sharing my thoughts on investing strategy with you, in the context of a negative sum game.  But first, a little “yes / no” test to make sure we are on the same page.  All other things being equal: When you go into a casino to play your favorite game, do you expect to win money? A colleague asks you if you want to flip a coin for $100 a flip.  Do you agree? You end up flipping and it comes up heads 10 times in a row.  Do you think the next flip is more likely to [...]