Whiff

January 24, 2024

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Whiff

It looks like I have whiffed on the China trade. While I was skeptical of the stock market bailout, they are pulling more levers now and the transmission through to other markets has been significant. Copper did this overnight:

Copper futures, 5-minute chart back to 11JAN

Sadly, I also forgot that Chinese New Year is coming and that tends to be a time when Chinese authorities enforce stability to encourage confidence and spending. Here is USDCNH in the 20 days leading up to and after Chinese New Year. It falls on February 10 this year.

USDCNH 20 days before and after Chinese New Year

20 days before February 10 is January 21 so this information comes a bit late. I just didn’t realize until yesterday, unfortunately. I wasn’t sure whether to share this given USDCNH has already made a move, but in the interest of full disclosure, there you go. Grr. The NZD option is probably dead money.

Meanwhile, Trump won the New Hampshire primary but put up a weaker-than-expected result winning by less than 12% when most had given him an edge of 15% or even 20%+. Haley got 61% of the independents vote (vs. Trump at 37%), and while this is just one state, that result supports Peter Zeihan’s theory that the independent vote will not support DJT. Overall, Tuesday night was a small disappointment for Trump and this has pushed his odds back down to flat vs. Biden after his big Iowa surge.

PredictIt Trump minus Biden odds to win 2024 election

I’m kind of neutral from here. With the data deluge tomorrow, QRA on the horizon next week, stocks exploding higher, China drawing a line in the sand, Trump odds softening, and VIX back in a 12 handle, I am going to cover the EURSEK and get flat. The NZD put will stay in the sidebar but it’s a 6 delta now.

We have the Bank of Canada today along with a 5-year note auction, so there is some small chance for excitement but I don’t really see the BoC committing to anything at this point. They are in the same boat as everyone else with high real rates, uncertain stickiness in inflation, and weakening soft data. They also have the combined issues of zero GDP growth and a much greater concern about consumer debt and housing ebullience vs. the USA.

And in case you missed it, here’s what JGBs have been doing.

JGB future, 5-minute data back to 12JAN

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Quarterly trade ideas recap

Today is my quarterly trade ideas recap. It is scheduled for some time in the month after each quarter ends. On October 24th, 2017, I wrote the following after reading Philip Tetlock’s excellent book Superforecasting:

One of Tetlock’s big beefs, which is a pet peeve of mine too, is the litany of forecasts that stream daily on CNBC, Bloomberg and the internet without any scrutiny or follow-up. Specifically, the relentless stream of “Crash Imminent” predictions is a complete joke. These inaccurate, one-way forecasters are not called out, they are instead deified as “the famed economist who correctly predicted the collapse of 2000 and 2008” etc.

Most analysts that get credit like this predict a crash every year or two and then claim credit in the very few years their call is right. There is no verification (and many forecasts are so open-ended they are impossible to verify) so anyone can make any prediction and it is more important how famous they are, not how accurate they are. I don’t mean to pick on a specific website or forecaster—As an industry, Wall Street is simply terrible at following up on the flood of forecasts we make every day.

It is pretty weird how we don’t even have much data on who is good at forecasting the main US economic data, when this is easily verifiable with a bit of work. Anyone know the Brier Score of the top 10 forecasters of US economic data? Is their forecasting skill persistent? There are many reasons not to follow up on forecasts but most of them suit the forecaster not the users of the forecast.

For example, people sometimes ask me to publish my trade idea outcomes. I hesitate for four reasons:

1. 1. If I am right a lot in AM/FX but my real-world P&L isn’t that great, it looks bad and feels bad. “Great calls, Brent, but what’s with your teeny little P&L?”
   2. If I am wrong a lot, I look stupid. My credibility could be damaged.
   3. If I am right a lot, it looks like I am bragging. Victory laps are annoying.
   4. The purpose of AM/FX is not necessarily to publish ideas which readers blindly follow. My goal is to help you make your own investment and trading decisions. The idea is to reveal my process and put stuff on your radar. Hopefully that helps you improve your process and plants the seed for some good trades on your end.

The thing is, though, after reading Superforecasting I feel it’s lame and disingenuous to make forecasts and then not follow up. So, I will collect and publish my trade idea results once per quarter. Caveats: My real-world trading P&L can differ dramatically from the P&L of the “Current Views”. Also: I cannot guarantee the accuracy of the data (though I present it, in full, on the next page and I’m pretty sure it’s accurate). Past performance does not guarantee future results. Ask your doctor if AM/FX is right for you. Results on next page.

Next, you will find a detailed sheet that shows my trade ideas since the last update (which was in am/FX on October 24, 2023). In order for the trades to be comparable, I assume a portfolio with a $4m stop loss that risks $100,000 on each trade (2.5% of free capital). You could divide all the numbers by 10 if you have a smaller account, and if you have a $40 million stop loss at a hedge fund, you can multiply all the numbers by 10. These trades are all liquid macro, there is not much of a capacity issue.

The $ amounts are not the point; the point is just to normalize the trades because reporting % returns on trades makes no sense. What makes sense is to normalize risk based on how wide the stop loss is. Tighter stops = bigger positions and vice versa. So, to be clear: I risk $100,000 on each trade, backing out the position size from the difference between the entry point and the stop loss. This is all fully explained in Chapter 11 of Alpha Trader. The main point of this results exercise is: transparency and accountability.

am/FX trades 24OCT23 to 24JAN24

Takeaways

It’s been a good three months, though I’m not patting myself on the back at all given the end of 2023 was one of my worst runs at Spectra. There are some solid trades in there, including the AUD put last week and some nice USD shorts in November. Sadly, I left a ton of money on the table with the EURCHF and USDJPY longs as I bottom ticked both of them at the turn of the year (long EURCHF at 0.9292 and long USDJPY at 141.66) and eked out middling profits on those two trades.

Holding period is about standard at 8 days and there was no real bias in the views (some short USD, some long, some bullish risky assets, some bearish), which is good. The QQQ trade was particularly dumb and not well-reasoned and a bit of bad luck on the CADJPY as it went 20 pips through the stop loss then cratered to the TP shortly after.

Overall, a good run. 11 trades is on the low side. When I’m doing well, it tends to be more like 15 or 20.

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Final Thoughts

https://thenewatlantis.com/publications/do-elephants-have-souls

May you live to be 122 years old.

good luck ⇅ be nimble

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Findings from its report included a China-based textile and clothing manufacturer that reported over $2 billion revenues in 2019, despite having only one employee. There’s also thousands of examples of directors below the age of five, and 22,000 entities with a registered address at Egypt’s pyramids. Meanwhile, one individual held 5,751 roles at 2,883 different entities.

https://www.bloomberg.com/news/articles/2024-01-22/shell-companies-pose-millions-of-governance-red-flags-for-moody-s

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