Tuesday, September 20, 2011
TMM have been chatting amongst themselves this morning having convened feeling non too happy for various individual reasons. Normally, the mood waves tend to cancel out, but today a set of troughs have interfered to create a rogue wave of grumpiness. To try and understand what has caused this we thought we'd get on the TMM therapist couch and answer ourselves some questions from the red tape recorder behind the "in case of emotional crisis break glass" glass.
So here we go...
In HAL voice:
"Can you hear me TMM...?"
"Yes, we can hear you."
"How is your P/L TMM?"
"Its a P , but it should be bigger."
"Why do you feel like that TMM?"
"Well look at what's going on in the world, there is so much of what we've always believed would happen happening yet we are fighting so many twists and turns in the shorter term that fading short term news and emotion just adds to our own."
"So are you telling me, TMM, that the space-time reference frame is interfering with your P/L?"
"Err... Yes, we suppose so."
"Well why cant you just put on a long term trade and walk away?"
"Because of the pressure to have stuff on."
"Just when the world is busy talking 'stuff off'?"
"Yes. Look at Asia. That is a 'stuff off' story that is so obvious that its obviousness had become clouded in unobviousness."
"What do you mean?"
"Well, the Emerging Market FX complex has seen a massive unwind of leverage yet the underlying local paper hasn't really budged. We would just sell that normally."
"Well, why haven't you TMM?"
"Because EVERYONE expects it to fall as it's so obvious and so must have front run it and yet it still hasn't fallen and so if it hasn't then the front runners will have to cover and and and..."
"I can see you are confused TMM, just relax..."
"Just think clearly now. DO you KNOW that the world has front run a sell in underlying Asia?"
"Well, we haven't got figures, but if the CTA's are all over it then EVERYONE must know about it!"
"OK... well, let's leave that and come back to it later. Is there anything else troubling you?"
"Ahhhh yes... this is very common."
"You mean we're not alone in having that dream of being chased down a dark alley only to come out of the other end into blazing sunshine, but it isn't sunshine it's a nuclear flash and it's coming from the old home we lived in as kids? Oh... and there's this big whale and helicopter in it too somehow?"
"No, that's completely normal. It represents the current turmoil of indecision by the Eurocrats, but the growing positive newsflow pointing towards a cobbled together solution that, though eagerly anticipated, turns out to be a complete disaster destroying all the stability that you have known through your life. Oh, and that whale is a reference to Fat Tail risk that you are trying to hide from, but can't. And that helicopter... was Trichet wearing a beard at the controls?"
"Yes he was! Ah right, well at least understanding it makes me feel better."
"Yes, so your long DAX belief and faith that the Europeans will come up with a solution are being challenged by your concerns of the fat tail risk of europe collapsing in a Yugoslavian style cataclysm."
"OH I seeeee."
"And are you at one with yourselves over the US?"
"Well no not really, we're all twisted up over that too."
"Do you think you need a twist operation?"
"We think probably not and it's priced in anyway. But whereas QE3 proper has been off the table given inflation expectations, things might be changing in some respects."
"Have you asked why you feel that way?"
"Well one of our metrics for the Fed to expand its balance sheet is inflation expectations, and in particular the 5y5y forward breakeven. And the Fed's version of that is close to the 2.5% level. And in 2009 and 2010, when we moved below it we got QE1 and then QE2."
"Hmm I see. You are in quite a state arent you? Why don't you take some time off and give yourself time to reflect?"
"Time off?!?! Are you mad?! Do you know whats happening in this industry?! If you so much as blink you'll be packaged up and HR'd off to spend more time with your family. Love 'em as we do we cant afford that!"
"Ahh... Yes.. Depressing isn't it?"
"Yes it is. What should we do?"
"HMMMMMmmmmm... Well as I see it, you are struggling with the problem that the usual narrative for a really bad year has worked out thus far: (i) sell the rubbish (Eurobanks, China property, finance and cyclicals everywhere), (ii) sell the liquid hedges and try to scare the carry monkeys (AUD, ZAR, Itraxx crossover), and (iii) start dumping core conviction positions ($Asia, US tech), but on (iii) we seem to have taken a pause. You see, for (iii) to really, really make sense you need to have a full blown systemic crisis and funding squeeze and per a previous post there will be no funding squeeze."
"Err yes... That about sums it up."
"So... feel any better?"
"Well, I really wouldn't worry... There's a lot of it about"
"Can you give us something for it?"