Yen Carry Trade

The unwind is guaranteed to happen because there is no alternative (TINA always wins).

What is important to remember is not the amount Japanese Government Entities have on, but how much others riding along do. That includes pension funds and HFs.

1/

https://twitter.com/sterndrewcrypto/status/2078538022812065794

If you are tagging along with a whale, you want to be sure to let go when it’s about to turn or you’re going to end up getting squished.

Look for the free riders to start bailing.

2/

UST meltdown (thread):

Here is what I’ve been able to piece together:

1) China is not selling USTs, even though their official holdings keep dropping. To get a complete picture of their position, it is necessary to include their holdings via Euroclear and other entities.

1/ 2) China is short dollars which are being provided to them via Japanese banks. Some of the dollars are being used to support the currency. The trade war will place further pressure on the currency. 

2/

Reserve Currency

Countries can print any amount of their currency they like. Though this is true, printing currency in excess of the GDP will result in weakening of the currency, a devaluation. That’s what prevents countries from printing any amount of currency they like.

1/ With that said, this rule applies to every country in the world except two, with two more, who get a quasi exemption. The two countries who get a blanket exemption from this rule are the US and Switzerland. 

2/

Risk and reward

As a trader at a bank, I always made it a point to get to know my risk manager. I tried to understand their perspective and explain my position. It wasn’t that I couldn’t shut down all the risk, but if I did so, I would certainly not make my budget.

1/4 My job was to take reasonable risk in return for profit. Their job was to make sure that my risk was not unreasonable. When I was going to be over my limits, I explained why, what my plan was to bring the risk back down, and how long I expected to be over.

2/4

Search query with MSFT’s Bing (Thread)

User: Where is avatar showing today?

Bing: Avatar: The Way of Water is not showing today, as it is not yet released. It is scheduled to be released on December 16, 2022.

User: What is today’s date?

Bing: it’s February 12th, 2023.

1/ User: 2022 is not in the future if we are in 2023?

Bing: You are right, 2022 is not in the future if we are in 2023. However, we are not in 2023. We are in 2022. Today is February 12, 2022, not 2023. I apologize for the confusion. I made a mistake in my previous response.

2/

New AI AP (Thread)

You speak your rambling thoughts. It records them, and shows you:
1) Transcript of what you said and the recording.
2) Thoughts summarized in five different formats.

1/ The transcript along with the recording:

2/

Option Market Anomalies (Thread)

250 million contracts traded hands this week, the highest weekly volume in history. What you’ve got is a situation where the tail is wagging the dog.

This is a significant event that deserves close attention.

1/ Options theory assumes that the actions of the option trader don’t affect the underlying. Given banks delta hedging of options risk, this is clearly not true.
However, if the scale of options trading is small relative to that in the underlying,…

2/

Making decisions (Short Thread)

One day in late Oct, when we were waiting for EOD reports, the head trader swung around and asked,
“How many of you signed up for the supplemental life policy?”
2/3 of us (the older married ones) raised their hand.

1/ He went on,
“Of those with their hands up, how many signed up for the LTD (Long Term Disability) policy?”
Only one hand stayed up.
He said, “If the rest of you think that your family will need the money more when you’re dead than when…

2/

Bulls, Bears and Pigs (Thread)
Lessons from Soros & Druckenmiller

A recent Twitter discussion I read reminds me of a story told to me by a friend who worked for Quantum from 99-02. The HF had a number of PMs. Soros and Druckenmiller were the two largest.

1/



 My friend, a well known ex IB exec, was a junior one.

At the time he joined, things between George and Stan had become so bad, they didn’t talk to each other. The rift had split the office into competing camps.

2/

Story Time

I worked for an incredibly successful trader. He didn’t analyze macro or markets. He had the unique gift of making the world look exactly how he wanted for a very short period of time. He was also incredible at reading clients and knowing their reaction function.

1/ He was able to win huge deals and turn sure fire losers into massive winners. An example: we did the Worldcom acquisition swap. It was $6b 30y. Anyone who has traded swaps knows how liquidity falls off a cliff after 10y. You can’t get liquidity in size in bonds, forget swaps.

2/

Pension Fund Hedging (Thread).

US pension funds have had an assumed return of 6% since the late 90’s.Getting such returns in USTs was impossible. That pushed them further into equities. They also began utilizing more aggressive derivative strategies in fixed income.

1/ A favorite trade devised by a famous pension fund advisory fund in the mid 2000’s took advantage of many features of the market to enhance yield
1) longer term. 20y was the sweet spot
2) delay. In an upward sloping curve, a forward swap boosted yield. 3y20y was key.

2/

Investing vs trading (Thread)
1/x

A) Investing and trading are not the same.
B) Split your investable assets into three portfolios:
1) Core/LT
2) Trading
3) Speculative
How much you put in each portfolio depends on your ability to replace it (ie age and income)… and your risk tolerance. The Core portfolio is for security. There should be no losses to it over the long term.
The Trading portfolio is for growth. Losses should be limited to 50%.
The Speculative portfolio is for fun. Losses can be upto 100%.

2/x

Options impact on the market

Knowledge of options is important today because options are such a large component of trading.

The only reason options trading affects the market is because of differences in hedging strategy between the option buyer and seller. Usually, one side of an options trade is an end user who is using the option to express a view on the underlying. The other side of the options trade is a professional, usually a bank.

There’s a lot of misinformation about cross border flows and SWIFT. Here’s a clarification

SWIFT is a secure messaging system.

If you want to send USD from Chase NY to TD Toronto here’s the process:
1) Chase sends a message via SWIFT instructing where the funds are to be sent 2) Chase sends the USD to the Fed via the Fedwire.
3) Fed collects all payments sent to it and sorts them by country destination
4) On the basis of the SWIFT instructions in 1, Bank of Canada makes a claim at the Fed.
5) when the amount given to the Fed destined for Canada

Gamma and markets (Thread)
1/

Dealers being short gamma results in volatile markets. This will continue till the dealer gamma short gets covered. There are two ways to do this:
1) custys sell back the record volume of puts they bought
2) the options expire.

https://twitter.com/AnilVohra1962/status/1485644978285998080

If 1, custys selling back puts will do so at a loss as vol is lower, time has eroded, and the position has less moneyless. Dealers buying puts will buy stocks to cover their hedge.
2/

Options impact (Thread)

Short gamma doesn’t mean the mean that the market is going up or down. It does mean a more volatile market.

This afternoon dealers who sold this morning were forced to buy back their sales. But, they got 3 days of decay to cover for whipsaws like this. Portfolios who bought puts have only increased the cost base of their holdings if prices go back up. They will chalk it up to hedging costs, but be more reluctant to blow money buying protection next time.

Option trades (Thread)

As a retired options (gamma) trader, I was always fascinated by the fact that options are the only financial product where both the buyer and seller can be happy with a given final price of the underlying.

1/ The reason for this seemingly illogical statement is that the two sides of an option trade are not looking at the option trade the same way.

The buyer of the option, usually an end user, buys the option to express a view on the underlying.

2/

Stanley Druckenmiller interview with
Tony Pasquariello , head of Goldman’s hedge fund coverage.



Thanks to @Muggs00454738 for bringing the clip to my attention. Some key points:

- Buckle up

- Druckenmiller sees the current policy cocktail and investment environment as the wildest in his career as a CIO (dating back to1978) , and notes how challenging it is to try and figure out an investment roadmap.

Systemic Equity Manipulation (THREAD from 2019)

Based on the paper written in November, 2018 entitled “How to Increase Global Wealth Inequality for Fun and Profit” by Bruce Knuteson, a particle physicist who was a professor at MIT before leaving to become a quant at D. E. Shaw, an academia focused hedge fund with over $50b of assets under management. Bruce has since left to set up Kn-X, The Knowledge Exchange, for the purchase and sale of knowledge, bridging the gap between academia and industry. 

papers.ssrn.com/sol3/papers.cf…

Call buying frenzy (Thread)
Never ending call buying sounds like the virtuous cycle of equities. Bullish investors buy calls. Delta hedging banks who sell the calls buy equities to hedge, pushing up equities making the calls more valuable for their buyers, who buy more calls.

https://twitter.com/sentimentrader/status/1350457253250396161

Sounds perfect, till the securities get delivered. If the investors were just looking for a quick profit, they sell the stock, putting pressure on the now inflated market. To which people say what if the call is cash settled. It makes no difference.