Harry Potter: The final chapter....?

Regular readers of this space may have been surprised over the last month that Macro Man has made very little reference to the July publication of the last installment of the Harry Potter series. Surely someone who calls another market participant "Voldemort" should have something to say about the long-awaited conclusion to the series?

In point of fact, Macro Man was waiting to read the book before writing a comment. And while he did in fact read Harry Potter and the Deathly Hallows whilst on holiday, subsequent events obviously took precedence. But now that things have calmed down (and indeed, now that Voldemort and his counterparts are back running over the G4 foreign exchange market), now seems as good a time as any to jot down a few thoughts.

First, a bit of background: Back when Macro Man was but a lad, his career aspiration was to be a writer, not a financial market participant. He was an avid reader of fiction (though his tastes have subsequently morphed more towards non-fiction) , and loved the fantasy-type genre in which the Potter series resides. And while he did have a bit of his fiction published in his early teens, by the time he got to college his focus was much more on the kind of stuff that he does today.

Yet he can still appreciate the Harry Potter series, because it is a superbly-crafted example of its kind, the sort of thing that he would have loved as a kid and can still enjoy today. In a sense, though, reading the books is a bit depressing for him: they are considerably better than anything he could come up with in several lifetimes of trying. That J.K. Rowling has reaped incredibly large financial rewards makes him wonder "what if?" he had pursued his early dream of literature.

So in a sense, the allusions to Harry Potter and Voldemort are a tribute to an incredibly successful series of books and a hat tip to what Macro Man's career might have been in an alternative universe. Indeed, one of his reasons for starting this blog was to flex his writing 'muscles' that so rarely get used in the day-to-day grind of watching Bloomberg screens and doing trades.

However, the metaphor wouldn't be effective (insofar as it is so) if there wasn't an easy parallel to be drawn between some aspects of the Potter series and the real world. Just as Harry struggles against forces larger than himself, often with imperfect information, so too do humble private sector traders and portfolio managers in markets that have come to be dominated by public sector actors. For those of us educated in the Anglo-Saxon tradition of government non-intereference in private sector markets (and yes, that includes bailouts at the drop of a hat!), the brave new world where central banks are trading for profit is a bit difficult to swallow.

Similarly, in the books the forces of Voldemort seem to be everywhere, and acknowledged as such, though are (famously) rarely called by their proper name. The same holds true for CBs, who have come to dominate markets while cloaked in a shroud of secrecy.

Of course, there are important differences between the books and the real world as well. In the books, Harry, while appearing smaller and less powerful than Voldemort, nevertheless has a hold on his rival that forces Voldemort to seek him out. America's own HP, Hank Paulson, is the one that goes hat in hand to the Chinese to demand greater currency flexibility and strength. And while Macro Man does not like the role that "his" Voldemort plays in real life, his use of the epithet is not an attempt to call SAFE, CBR, et al. morally evil like the one in the books.

And of course, Rowling's Harry is guided by the benign and virtually omniscient hand of Dumbledore. In real life, Hank is working for and with a leader that many people in the world would characterize as just plain Dumb.

Finally, in the books, the whole story plays out over seven years and reaches a definite conclusion. Things in the real world are rarely so tidy. Macro Man's children are a little too young to understand and enjoy the Potter series, though they are beginning to show an interest in it. Over the next few years he looks forward to reading the early books to them and then watching them read and enjoy the books for themselves. He can only hope that by the time they find out what happens to the "real" Voldemort in the stories, his own adventures with Voldemort will have reached a satisfactory conclusion as well. Somehow, though, he has his doubts....

Elsehwere, perhaps Macro Man was a tad premature in concluding that current market turbulence would not impact the real economy. The ad below appeared in yesterday's London Evening Standard:

Elsewhere, Macro Man decided against the FFU7 options play, as a poster pointed out some particulars of the contract that make the risk/reward less compelling than at first glance. However, a similar bet can probably be constructed with equity index options. The Sep futues roll off three days after the FOMC meeting. Macro Man is willing to bet that a stock market at 1500 would mean no rate cut, and thus come under some pressure. By the same token , the very thing that would inspire a monetary tonic-financial panic- also suggests lower stock prices.

It therefore looks to him that a good "not rate cut" bet is to sell Sep calls on the S&P 500. He will initially try to sell 500 ESU7 1500 calls at 17 (they closed at 15 yesterday). If done, he'll then think about offering some more of a slightly higher strike.

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