On being wrong + GBPJPY

Wrong

I was exactly wrong in my piece yesterday as I headlined with “Hike is bullish bonds” and the correct answer was “No hike is bearish bonds”. The bond market desperately wants a Fed that will back up its words with action and it’s not getting that. It’s getting the same old incremental Fed of years gone by. The same Fed that always predicts 2% inflation but never gets there. The same Fed that will turn to cuts on a dime but waited for 7.5% YoY headline inflation before deciding to stop its MBS purchases.

Yesterday was an interesting example of a psychological phenomenon that I have encountered over and over in the past and has led me to bad decisions like yesterday’s choice to buy bonds expecting a Fed hike. The phenomenon is this: I have a strong view about an event or a setup. But as the event nears, the noise builds and my mind becomes a pretzel as I lose conviction on the original view and get sucked into the super-convincing alternative hypothesis and price action.

In this case, I was writing through most of June and July that I did not believe Warsh’s hawkish words at the June FOMC. I believed that the data would not support the hawkish bias. I believed it was the same old Fed. Then, as the Fed meeting neared, I discarded what I think (because that doesn’t matter, really) and played the runup into FOMC which seemed clear would be to buy USD and sell stocks in anticipation of a hawkish Fed. That was fine and worked out okay.

But then, in the last few days before the event, instead of holding on to my core view on the Fed (all talk / no action, business as usual) … I got sucked into the hawkish narrative. The price action and some well-written analytical pieces and a few conversations with more hawkish clients got me believing in a Fed hike. Instead of holding on to my own independent thoughts, I let myself get sucked in by the hivemind. I got mindpretzeled at the last second.

This happens to me more often than I would like to admit. I have a view on an event, then as the event nears, the noise builds and I lose my conviction and get sucked in by that noise. In future, when I come to a solidified view about an upcoming event, I am going to write it down on an index card and put it on my desk.

Then, as the event nears, I will ask myself: What was your original view before the pre-event cacophony started? Has anything changed? Are you getting sucked in by the hivemind narrative and/or the price action as the event nears? This happens a lot to me, especially around central bank meetings. I remember three separate RBNZ meetings over the years, for example, where I had a view a few weeks out, and then flipped near the time of the event after reading all the ANZ, BNZ, and other writeups. And my original view was right. But I lost money betting the other way.

Anyway, something to think about in future. I embrace the idea of strong views/weakly held, but if they are held too weakly, they can be overpowered by last minute narrative and price momentum. So anyway, being wrong is part of the game. Hopefully I can learn from this one. On to the next trade.

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Now what?

If the BOJ are thinking about a hike to tame the long end, the price action in the U.S.A. certainly supports the idea! I still think that there is a non-zero chance of a surprise hike given the pattern in the past of BOJ surprise following MOF intervention. In case you missed it, here is the chart and link for the piece I published last week:

https://www.spectramarkets.com/amfx/interesting-jpy/

The name of the spreadsheet I used for that chart.

With essentially nothing priced in, the risk/reward of going short cross/JPY spot into BOJ is attractive. Given I already have CHFJPY via options, and month-end will likely be LHS AUDJPY and GBPJPY, I will pick GBPJPY as the weapon of choice. It has had a nice bounce off 217.50 (currently 218.10) and the huge failure in GBP after the Burnham news makes it a decent-looking setup for shorts.

I like short GBPJPY here (218.00) with a stop at 219.76. It’s in the sidebar. Two inputs:

1. A positive EV lotto ticket on the idea of BOJ following up the MOF to deliver a stronger yen. Bam bam.
2. Month end tomorrow should be LHS GBPJPY. Below I show the P&L of long GBPJPY on the last day of the month (7 a.m. to 11 a.m. NY) when stocks were down that month. Those are months where hedgers sell GBPUSD, USDJPY, and/or GBPJPY.

This is a short-term, tactical trade. Out by early next week at the latest.

ICYMI: My latest essay for Panoptica, called “Dear Ben”. My guess is you will love it or strongly dislike it. Have a $10 million dollar day.

Someone will find this card in a Topps pack and get paid $10,000,000 or more for it. Shohei Ohtani double logoman with English and Kanji autographs(!)

https://www.nytimes.com/athletic/7460603/2026/07/27/ohtani-judge-skubal-topps-logoman/

good luck ⇅ be nimble