Monday, March 12, 2007
Last week, the Financial Times printed the transcript of an interview with George Soros. This is the same periodical, you may recall, that last month published a limp plea for the BOJ to sell some of "their"dollars and buy yen.
So Macro Man supposes that it wasn't a big surprise that the yen was a major topic of conversation. What did surprise Macro Man was Soros' apparent explanation of a (yen) carry trade unwind as the underlying source of recent market volatility.
Now, Macro Man will readily concede that Soros made more money in his career than Macro Man ever will, in all probability. By the same token, Soros also lost more money (in terms of drawdown) than Macro Man ever will (knock on wood.)
And Macro Man cannot help but wonder if Soros is reliving one of those drawdowns and falling prey to the false consensus effect- the tendency to overestimate the degree to which other people are like us.
Rewind to 1998, when men were men, Russia was a basket case, and the yen carry trade really was a big deal. Soros, Robertson, Bacon, Kovner, Tudor-Jones: giants of the macro investing arena, all of whom (if market intelligence is to be believed) had the yen carry trade on in chunk-tastic size.
However, that kind of risk generally isn't taken any more. Not only are PBs less lenient with credit lines in the post-LTCM world, but investor appetite for bum-clenching drawdowns simply isn't there. The year-on-year change in the Tremont Global Macro Index before and after 1998 illustrates the decline in appetite for uber-risky investment strategies.
Yet here is Soros in the FT, banging on about the size of the carrytrade (though admittedly he says he doesn't think an unwinding will "get out of hand right now".) Macro Man cannot help but wonder if, somewhere deep inside, Soros wants to believe that traders today are caught in the same trap that he was nine years ago.