To sell implied volatility at current 50yr lows, investors must imagine tomorrow will be virtually identical to today. They must imagine that bond yields won’t rise despite every major central bank eager to hike interest rates and exit QE. They must imagine that economies at or near full employment will not create inflation; that GDP will neither accelerate nor decelerate; that governments will tolerate historic leve
“What are the odds we come across an opportunity in the coming 4yrs to earn 20%?” the investor asked his team. “High,” they answered. “The odds are 100%,” he said, having seen this movie a few times. “So our cost of capital is 5% per year (20% divided by 4yrs), plus the 1% we earn on cash,” he said. His team nodded. “Under no circumstances should we deploy capital unless it earns well more than 6% per year from here
“Let’s step into my office,” he said. So I did. He was my boss. “The firm’s most important client needs help.” I listened, uninterested, unconcerned about clients, their problems. Barely cared about my boss. I had a game to play, solo sport, and loved it to the exclusion of all else. “They need to do a very large trade.” A twenty-six-year-old proprietary trader’s mind is rather primitive. Which is good and bad. Being
“The market has an accident, the Fed returns to QE, slashes interest rates, bonds surge, stocks recover,” said the CIO, high atop his prodigious pile, alone. Staring into the distance. Squinting, straining. “The correlation between bonds and equities remains negative, the risk parity equity/bond portfolios are dented but not destroyed. And we descend to the next lower level in real interest rates. US bond yields turn
“Bitcoin is important,” said Lithium, handsfree on Highway One. “It reminds people that supply scarcity, capital flows, and imagination, matter more than anything.” Bitcoin printed another 20% weekly range. “Risk tolerance is the market’s most important fundamental,” said Lithium, racing through Malibu, SoCal’s sun streaming, steaming, “It’s also the most mysterious of all market drivers.” Like every form of intangib
“The most common example is a ball sitting atop a hill,” she said, polished accent, hint of condescension. “Locally stable, but one nudge and it’s all over.” She drove terribly fast, discussing Minsky Moments; the idea that persistent stability breeds instability. “Naturally each cycle is different in key respects, and that’s because you’re far better at preventing past problems from recurring than new ones from aris
“The trajectory will be a bit like the market,” said my friend. I’d reached out, looking for direction, a path. A recent knee operation has left me on crutches. A gimp. Which is no big deal but for the fact that my long daily walks, runs or cycles are off the table for three months. Perhaps more. “The long-term trajectory is up and very rewarding,” he continued. As a young man, I filled my life with noise. Commodity
“China’s financial system is a hermetically sealed snow globe,” he said. “They’ve built a system to resemble ours on the surface, but scratch it and you discover something altogether foreign.” China has banks. They lend money. But pierce the patina and you find a vast subsidy machine, with no cold-blooded allocation of capital. There are no defaults to speak of; just bailouts, no reckonings. “The appearance of a mode
“Every single trading decision leads to another,” said Roadrunner. “And when you get offsides in a market, it’s difficult to get back in sync,” explained the biggest market maker in equity volatility. “So I spend my quiet hours going back in time, revisiting the series of events and decisions that led me to the present.” The world rushed past us, a never-ending flow, and I recalled a point far upstream when we first
“When a measure becomes a target, it ceases to be a good measure,” said the Englishman, stepping outside of himself. “That’s Goodhart’s Law.” Charles Goodhart observed that central banks measured money supply, and found certain M1 growth rates to be optimal. But once they targeted that optimal range, M1 lost its value as a measure. Market and economic actors adjusted their behavior to game the M1 system. So central b