TMM’s Guide to Macro Tourists

Friday, August 17, 2012

TMM thought so highly of the Mark Dow piece we thought we’d expand upon it and explain a few garden varieties of macro tourists. Much like mushrooms after heavy rain they have sprung up all over the place and while some of them can give you tasty insights, others will send you on extremely bad drawdown trips or worse. TMM think that in investing there is both such thing as a little knowledge being extremely dangerous (a certain credit manager’s foray into JGBs comes to mind) and a little knowledge being enough to know it's time to get up from the table, find a hardhat and hide (Elliott Associates’ and Baupost’s evasion of the 2008 bloodshed for most credit/equity/value managers). This should not be construed as an argument against trading cross product or that “only big boys can do this”, but that deciding to put a lot of your fund into something you’ve been doing for 12 months is seldom a good way to keep the losses away - or the redemptions.

The Credit Manager Turned Macro Manager: After a few got 2008 oh-so-correct it was never going to be easy for these managers to keep their egos within the confines of a single asset class. However, for a good number of them, they probably should have. TMM think that the one problem with corporate credit guys (who know a great deal about corporate solvency) moving into sovereigns is pretty simple: they’re totally, completely and utterly different. While there are some analogues between countries and corporates, when you can’t issue local FX debt, those issues dissolve when you are looking at countries with a lot of FX reserves and big local debt markets like China and Japan. TMM think there’s a pretty simple solution to this – getting those accounting nit-picky types to learn how a balance of payments works as well as they know how a 10-Q does. Sadly most of them fail to bother.

The “Big Idea” Guy Turned Macro Manager: TMM think that if you want exhibit A of “Big Idea” blowups look no further than some of Jim Rogers’ calls. Light on detail, long on extremely long run trends (“entropy in resources!”), but light on intermediate catalysts, these guys,whose skill set is probably best adapted to betting on long run non mark-to-market trends (e.g. venture capital), seem to drop into macro every now and again with volatile results. TMM love listening to them because they are so interesting, but the lack of risk management does not make for great fund performance.

Event-Driven Equities Guy Turned Macro Manager: TMM know a few event-driven guys and their core competency is talking to everyone in an industry or supply chain and working out what will happen, given what they are thinking. Sounds like betting on political process? It more or less is and some of their skills have really come into their own during the Eurocrisis since it really is all politics. TMM think that while these skills might be here to stay, a time when fundamentals matter might not be so kind to them.

FX Guy Turned Macro Manager: In general FX could be considered the overlapping bit at the centre of the Venn diagram of all asset classes and so a general broad knowledge of all asset classes that is important in FX should give the FX shag a head start and indeed, if married to a decent economics background, they do very well. However, their history of being exposed to value being embedded in knowing what other people are doing makes it very hard for them to stay loyal to their own ideas. In fact we would suggest that this sector of Macro Tourist is more susceptible to influence from “well respected” research sources and peer behavior than any other. However macro their short trade may be, they will run for the hills on a whisper of “China on the bid”.

Posted by Polemic at 5:15 PM  

17 comments:

Seems like quite a bit of disdain for anyone who is not singularly a macro man... but what exactly is a macro manager. Does he have to work at the world bank and have a PhD like Dow? An obviously bright guy but whose performance has been blah...

Watching the old Tudor video, reading soro"s books, and listening to the edge that Caxton had by fed exing European papers to NYC each morning the old school macro guys, IMHO weren't doing anything that couldn't be learned.

So today it is different. Hire 30 bank prop traders in different rates and fx and call yourself a macro shop.

Trading is all about adapting which u do point out but I don't really know what great skills the current macro champions have ( say bridge water, bh, pharo, comac, Moore, Tudor, Caxton) that can't be learned with a small team of economists, technical traders and rates

Perhaps you could fill us in?

abee crombie said...
4:17 PM  

I would be interested too .. abee crombie
Who has been lucky enough to start off as a pure macro trader without coming from an asset class
Now I am sure I may earn some chords of disdain but I always wondered why rates have to be the bastion of macro - an equity index background i thgt may be of equal if not higher macro standing - in particular the education in hedging against a crash which more often than not is generated first hand in the equity sphere
The power of macro and what sets it apart from other styles is our ability to hedge and perform in down markets - and these down markets are more often than not equity driven at the first hand - an education in index risk reversals (aka the tiny puts)as a hedge has to be one of macros most valuable school boy lessons

agree said...
7:34 AM  

FWIW folks my background is in credit but EM credit - ie if you don't understand sovereign risk properly you don't last that long.

I don't think there's anything in macro per se that can't be learnt relatively easily but you do have to specialize. I don't purport to be any great expert in rates arbitrage and other members of TMM don't do long short or even sector basket trades.

The moral of the story is that a little bit of macro helps just about anything - trying to trade something you've been at for 6 months and then make a big fuss about on bloomberg however brings to mind the story of Icarus.

Nemo Incognito said...
3:04 PM  

Completely off topic, but, TMM and others, do you have a book to recommend on fixed income investing?

Anonymous said...
6:56 PM  

Anyone who doesn't trade interest rates is not a macro trader.

The bond market is the daddy. It sets the price of money for all the tourists.

It's full of nasty people who make no friends. The people in it (Gross excepted) generally do not publicise themselves because they are selfish, don't care what others think and have a range of personality issues best kept to themselves.

Any newbie is welcomed into the stock market because people want their commissions. Credit is welcoming also because it offers new people a place for banks to dump their risk and the information asymetry is large. FX; a low risk place for sell side parasits to do some quick and easy leveraged fleecing.

Only in the bond market does a customer ring up looking for a price in $10m on-the-runs and get told by a trader to **** off and stop wasting their time.

Ever wandered into a bookshop (remember those?) and wondered why the "finance" shelves are overflowing with tomes on stocks and commodities etc yet there is nothing to educate yourself about the 10 yr ? Because no one who trades it can be bothered to write a book..... what can you say about interest rates except that they set the price.

All these "tourists" can dance around the edges all they like looking for new and inventive ways to "trade the macro" .... bond traders are too busy just doing it.

Anonymous said...
1:21 AM  

so size matters - i will write that down as the first rule of "macro"
you must be big

Anonymous said...
5:03 AM  

C says'
"these down markets are more often than not equity driven at the first hand ".
I don't think so. Equity downmarkets are an outcome of deteriorating economic conditions ,not the driver for them.

Anonymous said...
7:11 AM  

I did 15y FICC both Trading and Sales roles in AUS and UK - I'm here to tell you not many bond traders trade macro (sell side at least). RV is generally more their style. Sure they have macro opinions, who doesn't, but generally, the busier they are, the less likely they are to have a macro view expressed. ie more likely to have a micro rv trade on that only they can spot, and care about.

BCP said...
7:51 AM  

@BCP,

I think anon at 1:21am may have been being using a wee bit of license there for the sake of a laugh.

Nonetheless, I tend to agree his or her point, which I think is that it doesn't really matter how they collectively get there, they set the price..... and Gross aint sell side

l-t-l

Anonymous said...
1:33 PM  

Any average knob can call themselves a macro manager these days, but it's results that count, innit? Speaking as an average knob, one of the things LB has learned here is that understanding of rates is the bedrock of macro, b/c bond markets are huge, and b/c of the intimate and to some degree predictable association between rates and FX.

Given that many commodities are leveraged to FX movements (e.g. CADUSD and oil, ZARUSD and gold, AUDJPY and Cu), then we can infer that bonds, FX and commodities are all highly linked, especially so in the era of central bank arbitrage.

So then the smallest and least directly connected vehicle is equities, which at certain times of the year (earnings and silly seasons) seem to disconnect completely from macro, enticing the unwary to dabble and dawdle in its labyrinth, only for macro to reassert itself at the most inopportune moments.

These moments of macro re-emergence are always associated with a surge in volume, leaving John E Retail scratching his head and wondering what a carry trade is, and why its unwinding could be causing his holdings of "Aggressive Growth Fund", ETeddyBears and China Pig Farms to plummet early in the morning before he has even had chance to put his pants on.

Equities are hence the least rational, often most illiquid, and certainly the most emotional asset class, but also can be the most fun on those few occasions when one sees fit to go BOLIVIAN and make a cheeky 25%, e.g. Spain....

Leftback said...
1:51 PM  

off topic, now that everyone seems to think things are back to normal, and spanish yields coming down, shouldn't the schatz trade at a slightly positive number...



abee crombie said...
2:57 PM  

@ Abee ...

Oh dear no ... that would make it muck too expensive for Germany to borrow. No, no ... we need a reasonable level of alertness so that the core can borrow cheaply enough to make THEIR economies running.

Claus

CV said...
3:34 PM  

Macro is a bit less exciting than the action on the final day of the 3rd Test match, although I don't expect Mangler is watching. I wonder if TMM have already sneaked off down the pub?

Leftback said...
4:06 PM  

Not at pub LB.. just don t know what to say..

Polemic said...
4:16 PM  

But market appears to be driven by hedger's flow rather than risk taking flow.

Polemic said...
4:19 PM  

Anon @ 1.33 - agree with broad point. I guess what this highlights is the difference in strategy/horizon between sell and buy side. I don't just mean HFs tho as of course real money (though often wrong (timing issues), is capable of moving the market much more than fast money...

BCP said...
5:37 AM  

One other category of macro tourist - the specialist rates/FX RV trader or quasi-arbitrageur who sees some other asset class experiencing a major macro-driven bull or bear market, and tries to hop on board.

P.S. quick definition of macro trading - any position where your P&L is driven primarily by macroeconomic factors. E.g. short copper or Italian mid-range fashion brands because China starts slowing down. Anyone who thinks macro is just rates/FX is misunderstanding the term.

Anonymous said...
3:41 PM  

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