Monthly Archives: March 2015

A mulligan for “The big short”.

I got stopped out of my S&P 500 shorts -once again. Total costs of trying to short the market are mounting (3 to 4% of my portfolio over the last year), and the sequence of stopped out trades is testing the limits of my resilience. But my conviction is as high as it has ever been. I’m “bruised and battered” but, unlike Bruce Springsteen, I know how I feel, recognize myself fully, but want to stay the course. Undeniably hardheaded and stubborn, this is not an example of being unable to see the complexity, or the other side of the trade. I understand the bullish arguments embedded in the common knowledge game we are playing. And I sure know timing is tough because they don’t ring bells at tops -and this mother-of-all-bubbles is no exception.

In order to fish, you have to deplete your sardine stocks on board. Particularly if you are fishing for bluefin tuna. To balance things out, the expected reward tastes sweet. On top of the shot of high octane adrenaline, one catch can be enough for the day -if you are a small fishing boat. Financially I am a small boat, and the big short can save the year (and the decade) for me. Smaller drawdowns are conceivable with easier trades, but there is not that many available with the same degree of conviction and decent potentiality.

When we look back in ten years’ time (if we are alive), the trade will be seen as “glaringly obvious”. The timing is not. It never is. It’s tough enough to fine tune a top or a bottom, but in a rigged, herd driven market, it is almost impossible to get it right from scratch. At the very least you need to spend some money in various attempts. And that does not guarantee your success. See what the people in Saxo Bank have to say about shorting the equity market. Hardly encouraging. It shows just how distorted markets have been over the last decades. The past testifies to how unfrequent and short bear markets are. Optimists say this can go on forever. I will just add ¡Amen!shorting the S&P

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What’s next for the USD?

Okay. I concede to loving it. Nothing like a good old-fashioned short squeeze to turn me on financially. I am old enough to remember those great days in which smart, no remorse investors, played the game in pork bellies or corn. Chicago was the financial far west. Short squeezes in commodities were awesome, despite their questionable underlying ethics. ¿Are markets ethical the other way around anyway? ¿Who can talk for POMO desk ethics?

Fortunately, I was too young to be directly involved at the time, but I found those trading techniques exhilarating. I say fortunately, because sailing can compensate for the lost adrenaline, but age is irreversible. I have my crew working hard to prepare the next ORC world sailing championship taking place in ¡Barcelona! That should fill in the adrenaline lost when missing pork belly trading.

Short squeezing the USD is for adults only. Forget lean hogs, iron ore, or copper. They are childs play. EURUSD and USDJPY are the central pillars of the financial universe. Volume remains gigantic, even as liquidity is seriously impaired in most markets. Ten year JGB’s are the paradigmatic example: there is no market without the BOJ as a counterparty!

That’s not the case in the two main currency crosses. Even POMO desks fear both trades. You can corner the JGB market if you own the BOJ balance sheet, but even printing JPY at will, leaves you short of a real control of the USDJPY. The same thing goes for superMario. In the end, even controlling the EUR base money supply, he ends up imploring or jawboning participants to iinfluence currency prices. Well, now that think of it, he never really does that, because “the price of the euros is not a target for monetary policy in itself”. Ha ha. A stunning actors studio representation indeed. A better liar than Michael Corleone in the final scene of the film.

The size of the actual USD short squeeze is mind-boggling. As Confucio said, there is beauty in all things. you just have to see it. Admittedly, it does help to be long the USD, it’s tough to see the beauty of it when you’re being massacred. I’m still there in large size, but no leverage. I wish I had remained leveraged all along. In retrospect, the strength of the move was clear. As I grow old, I become more and more risk averse. I should have been leveraged all the time. Continue reading