Thursday, July 31, 2008
Readers in Europe may not be aware of the American phenomenon known as the "fantasy camp." This is a primarily (though not exclusively) sporting phenomenon wherein members of the public (usually middle-aged men) pay a not-insubstantial sum of money to spend several days playing with old and retired professionals, many of whom are nonetheless younger than the customers.
The camps are sold as offering a taste of "big league experience", though unsurprisingly the quality of play is anything but big league, as this photo from the Chicago White Sox fantasy camp suggests.
Macro Man is pleased to offer readers a bit of a "macro trading fantasy camp", which aims to give them a taste of what it's like in the market crucible (while carrying the added benefit of being free of charge and not requiring you to dress up in an unfeasibly tight-fitting suit in public.) The incident described below actually occurred yesterday, though some of the key particulars are hypothetical. Enjoy!
Fortunately, you had a nice June hopping on the short equity train, and you even had the foresight to get out early this month in the vague neighbourhood of the lows. This has left you up 4% year-to-date. It's better than cash, but you're going to need to do better than that if you want to outbid the kleptocrats for that chalet in Courchevel you've got your eye on.
There's one small problem, however. The ruling party in Turkey, the AKP, has overseen an unprecedented period of growth and stability in Turkey, and even helped kick-start the arduous EU application process. Unfortunately, they also have ties to the conservative religious community, which is a no-no to the fiercely secular armed forces and constitution.
It's such a no-no, in fact, that a lawsuit has been filed to outlaw the AKP and to ban Prime Minister Erdogan from public life. It's possible that the AKP could be banned, but Erdogan still permitted to hold public office. This wouldn't be too bad, as the members of the ruling party could simply regroup under a different banner.
The case is being heard by Turkey's Constitutional Court. You have done a scenario analysis , and come up with the following:
1) AKP and Erdogan survive. In this case, you'd expect USD/TRY to fall 2% on the day and 7% within a month. Call the agent immobilier and tell him you'll be on the Netjet to pick up the keys to your new chalet in a month's time.
2) AKP is banned, but Erdogan survives. In this case, you'd expect choppy price action on the day, with an unchanged USD/TRY by year end. You'll make a few bucks, but you'll be renting when you ski next February.
3) AKP and Erdogan are banned. This means that the Turkish government is, in effect, declared illegal, leaving a political vacuum that could potentially be filled by the military. You believe that at best you lose 4% if you get out immediately; if you hold the position until year end, you'll lose 10% on it- even including the carry. In this case, you'll be using the student travel agency to book your ski trip.......in Scotland.
However, the afternoon drags on with no news but plenty of rumour. Finally, at 4.10, your phone rings. You glance at the Turkish newswire that you've been reading all afternoon, but nothing's come up...not even in Turkish.
You pick up the phone, and the first thing you hear is "The AKP's been banned! We're hearing it out of Istanbul! AKP's history! You look at your intraday USD/TRY chart, and this is what you see:
SO WHAT DO YOU DO? Do you start buying your position back- you see that at another bank, someone else is already paying 1.20- or do you sit tight?
Welcome to macro fantasy camp, as this is exactly the sort of position that traders find themselves in with alarming frequency. Make your choice, then scroll down to see the outcome.
USD/TRY starts drifting lower, but there's still nothing on the newswires. To add a bit of spice to the equation, your daily P/L mark occurs in 1 minute: you have no idea if this will be a great day, a horrible one, or something in between.
Then it comes. A fiery red Bloomberg headline appears on your newswire:
TURKISH COURT REFUSES TO BAN RULING PARTY
"YEAH, BABY!", you shout, no doubt deafening your poor salesperson on the phone. You hang up and high five the guy next to you, thankful that you didn't panic and pay up to cover when spot jumped.
While this little bit of role-playing is fantasy, there is more than a kernel of real-world truth in it. If you do this job long enough, you get to experience plenty of make-or-break flashpoints over which you have no control.
In this case, not paying up was the right thing to do, though had the AKP and Erdogan been banned, you'd be kicking yourself. However, insofar as there's a moral to this little story, it's that it's generally better to make a later, informed decision than an earlier, uninformed one.
Well, either that, or to hedge yourself ahead of time.