Tuesday, September 20, 2011

On The Therapist's Couch

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?"
"Yes, Europe."
"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."
"Twisted inside?"
"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?"
"Not really."
"Well, I really wouldn't worry... There's a lot of it about"

"Can you give us something for it?"


JB said...

great post TMM. hit the nail on the head

Marcf said...

Highly readable and enjoyable. You should keep that format of the dialogue. LOL at the bearded Trichet in the helicopter. Trichet may pull the nuclear option (which is the only true solution: greece default/bank recap/euro-bond/eQE).

Relax though, I truly think that 08 is still SO FRESH in people's memory that we are seeing a reinforcing panic but the fundamentals of europe (ex-greece) are actually sound. One man's opinion (and bets) anyway.

Keep it up.

Anonymous said...

NOW now you understand why I call myself ;

'Confused from Cheltenham' ! Emphasis on the "confused".

I've been on that couch virtually ALL year,in fact I'm in danger of getting bed sores from it.

That was an exceptional read today ,one to be pinned up for posterity.
Summarised, there are still so many reasons to be risk buyers IF policy outcomes are correctly formed ,but there are so many reasons to be sellers if they are not AND yet there is a finite limit on how long we can be allowed to sit and wait. Time is our enemy and the politicians of all creeds seem determined to keep us hanging out there in the wind face to face with that enemy who prevents us from mainga signifcant committment with conviction like weight. Meanwhile,sorry boss,I'll really get to making some money ..soooon.

Anonymous said...

Amazing post! haha! I think that pretty much sums it up how most macro orientated traders view this market... HAL -3 + 3 -9 = ECB. -3 x +3 = -9. It all makes sense now.

Anonymous said...


But seriously, when do we get the results of the TMM birthday vocab comp?

Polemic said...

Re TMMisms, yes yes yes we are sorry..God, it's like not having done you homework.. we WILL be announcing those v soon. Or perhaps we'll just add them and let you work out the new ones. If they are good they should just blend in.! Ok we'll fanfare them tomorrow ..

Leftback said...

TMM, here in NYC, the entire city is on the therapist's couch, and has been for years. LB is also of the opinion that Twist is now unnecessary and it is the FOMC's turn to be the bystander. Your move, Jean-Claude.

So, yes. Maintain a positive outlook since we are 9% off the lows, but why not continue to play the trading range by selling irrational exuberance and FOMC wet dreams and then buying on the TEOTWAWKI days?

Some weeks it's a case of, if you don't know what to do, for heaven's sake don't do it...

abee crombie said...

great post. do you mind to elaborate

" "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."

what kind of paper, corporates? soverign, where in India or Brazil where the FX moves have been biggest?

trading from the short side is always the hardest b/c you know the swings/squeezes will be huge. I think we will be able to reset shorts very soon at S&P 1250-1270

Amplitudeinthehouse said...

F@#$% it TMM, just buy gold. lol

Skippy said...

Perhaps it was always thus, but the endless desire for a policy saviour does my head in. Perhaps that it is due to my sympathy for the Austrian-school?

For goodness sake, just let the markets clear. Perhaps I might regret that wish?

Briliant post.

For-what-it-is-worth, the S&P is sell here...

Anonymous said...

"For-what-it-is-worth, the S&P is sell here..."

For what an hour ,two hours ,tomorow,this week,this month?

I can't see anything of enduring significant being tried out prior to the Fed speaks out.

Skippy said...

Perhaps Anon at 2.51.

I am not convinced the Beard will do anything meaningful. In any case it is probably in the price. Confirmation that he has done something may be positive for stocks as it was last year, but perhaps it also smacks of desperation? Perhaps stocks might rally anyway?

The S&P is near the top of the consolidation range (that is likely a continuation pattern) and I don't see the "right" solution in Europe - massive bond buying by Mr.T or fiscal union in Europe.

Just my humble opinion,


Leftback said...

Skippy said:

"For goodness sake, just let the markets clear."

Well yes. But they never allow that, at least not until the big money is all on the right side of the ball, just take a look at luxury US real estate, still suspended in mid-air. Hence every week, we are left to trade a thousand and one interventions....

" Perhaps I might regret that wish? "

Yeah. They tend to do clear on occasion, when we least expect it.

Anonymous said...

C says'
Sorry skippy I didn't id myself earlier.
I was simply sugesting the market is setting itself pretty obviously for the Fed.As such i see no sell ,or buy of significance until the event itself. As to what that may be I wouldn't even bother to hypothesise as essentially all it is blowing hotair and hoping it is right ,but would i back that,of course not .

Anonymous said...


"For goodness sake, just let the markets clear".

Have said that since 2008!

But, as LB said, there is transfer of wealth to the rich!

theta said...

on the other hand the huge divergence between different stocks/sectors (for example AAPL, AMZN breaking into new all time highs, NDX rebounding strongly and close to multi year highs) would make a bullish case for the SPX more likely than not.

theta said...

Oh, btw, TMM, how about you just kill that whale? You probably perceive it as fatter than it actually is (not only you but probably the rest of the market too thanks to the recency bias) and it's probably too distractive. Things are probably simpler than they appear. We are in the middle of a multi-year attempt to deleverage. This will happen with the help of zero interest rates and a moderate inflation. In the process the weakening of western currencies will allow the reduction of the global imbalances. All of it gradually, automatically via market's automatic stabilizers if you will. In the mean time, rising productivity will offset the small decline in consumer demand and corporations will continue to enjoy solid growth and earnings, which will allow equities to deliver decent returns. Not bull market returns but decent, maybe even in line with the roughly 8% equity risk premium being assigned by the market right now given low rates all across the curve. How fat was that whale? I suggest you kill it if you see it again.

Leftback said...

LB hates wizard days. Closed a few trades and raised a bit of cash today. LB feels there may be less wizardry this time around than some are anticipating. We'll see if there are better punting opportunities at the end of the week.

Dublin Dundee Humberside said...

Au contraire, I wonder to myself if the combination of

1) much lower inflation expectations (as noted by TMM, despite the sellside continuously sticking to its "QE3 cannot happen" tune in the face of turning inflation data)

2) the hint of EM-USD unwinds (BRL, ZAR and even Teflon SGD)

is not going some comfort to the Wizard's Council that the road is clear for some forceful action.

Meanwhile, while nobody is watching, bashing Betty has become lotsofun once again.

SiP said...


Im looking for free quotes for
EUR/USD Cross-Currency Basis Swap Spreads 1y and longer


some 3m eurusd FX swap

any chance for links?


Anonymous said...

I dont know about free but you could try ebay, there may be some cheap second hand ones on there.

Actually I've just found 0.44 and 18/17.8 knocking around in my attic - bit old and worn but should be OK , I could let you have those.

( sorry couldn't resist)

jaguaracer said...


http://www.bloomberg.com/apps/quote?ticker=EUBS5:IND where the 5 in EUBS5 represents the term of the cross-currency basis swap

Anonymous said...

Disconnect between oil and oil stocks just like gold and gold stocks. Is it because traders believe that commodity is overpriced?

SiP said...




Amplitudeinthehouse said...


Is there one for Betty?\

Any big surprises today TMM, and we'll be tag teaming that couch.

jaguaracer said...