As if it wasn't difficult enough ..... you can call it right and still get it wrong.

Tuesday 4th October 2016

  

As if it wasn't difficult enough ..... you can call it right and still get it wrong.

ref:- "All or nothing trades on a global crash are not as easy as it sounds", The Financial Times, SMART MONEY by Miles Johnson, Markets and Investing

We can all have a view, and often do, but few of us have to put it up to public scrutiny and in the wider scheme of things even fewer make a living by wagering their own and investors' money on the back of it. Today's SMART MONEY column focuses on the difficulties that may confront Crispin Odey, one of London's most high-profile hedge fund managers, even if his prognosis for the world economy proves correct.

Hedge fund managers are not a demographic that naturally attract a lot of sympathy these days and few outside Mr Odey's inner circle and his investors will be losing too much sleep over the poor performance of his funds recently (even allowing for a post-Brexit slump in equities that reportedly netted a cool £220 million). But sympathetic or not we can at least see the logic behind Mr Odey's overview and it may well turn out that, as so often in markets, his instincts prove to be correct but his timing has been significantly, expensively, awry.

In common with many financial commentators who don't have to back their prognostications with hard cash, Mr Odey's basic premise has been that ultra-loose monetary policy across the globe has inflated an asset bubble that will not only pop one day, but will do so in the most spectacular fashion as markets face the unwinding of Quantitative Easing programmes. It sounds credible but though we often talk about central banks running out of ammunition, up this point Mr Odey and others have presumably underestimated the determination of the authorities to keep adding monetary stimulus to a degree never seen before.

Of course that may very well mean that the meltdown, if and when it comes, is all the more ferocious. That would suit all the doom-mongers just fine, including Mr Odey (assuming he's still in his bearish positions). The FT's column suggests that this could be for the a make-or-break moment for the beleaguered Odey funds  --  if financial mayhem arrives it could be bonanza-time after all, if not it could be curtains.

Some might find the prospect of such a binary outcome unsettling. They might be even more disturbed by the FT's suggestion that even if Mr Odey is proved correct in thinking chaos is just around the corner, the trades that he has put on to take advantage of it may be the wrong ones.

We are told that in the main, those trades revolve around four assumptions: a strong dollar, a collapse in Japanese bond markets, a big rally in the price of gold and a crash in equity markets. The FT's negative analysis picks holes in those positions by giving alternative interpretations:

Strong Dollar: The theory is that a market crash will see investors dive for cover in the world's largest reserve currency, but in the recent past the Japanese yen has been the biggest beneficiary of a flight-to-safety. It could also transpire that the US Fed is the only central bank with room to cut rates in the event of a catastrophe, reducing the appeal that the dollar exerts through interest-rate differentials. And then there's Japanese and European trade surpluses compared with the US's trade deficit ....

Collapse in Japanese bond prices / rise in yields: The rationale behind this is simply that the Bank of Japan has run out of ammunition to continually keep yields lower. Shorting Japanese Government Bonds (JGBs) has often been tried and notwithstanding the recent fall in prices the trade earned the soubriquet "The Widowmaker". The problem with the trade come a global crisis is that that the Japanese are huge owners of foreign financial assets and a crisis could see those assets sold, a repatriation of funds and buying of JGBs (and Yen) rather than selling.

Surge in Gold: We can all see the attraction of gold when the value of paper assets is crashing, particularly when "central banks have printed $80 trn of money backed by only $1.27 trn of gold". But apparently Mr Odey foresees the crash starting in China and Asian markets --  that doesn't necessarily tally with a strong gold price when so much of the demand for the yellow metal comes from that area. A strong dollar (should that be the case) wouldn't help much either.

Curiously, the FT doesn't examine the crashing equity market scenario  --  we can probably just put that down to the bursting of the asset bubble now that equities and bonds have been moving together. Gone are the days when they were expected to move in different directions almost automatically.

Presumably the FT has chosen to pick apart Mr Odey's positions because of his high profile and because they judge it to be a critical moment in the very existence of his funds. We're not sure about that, and in essence every fund manager ultimately lives or dies by his or her trading decisions. There's always a counter-argument to every one of them and frankly it would be just as easy to pick holes in the FT's concerns as it is in Mr Odey's original trading decisions.

But they do make a good point : forecasting future events, difficult though it is,  is one thing  --   making money out of it is another.