“Don’t ask me what you should figure out yourself,” is the blunt message from former fund manager and FX trader Richard Breslow this morning.
“What do you think?” is a question you hear over and over again in the trading world. At least some people are still asking at a period of time when you are more likely to get, “Do you agree with me or not?” Still, the proper answer should be “Why do you want to know?”
Context is everything. Are you talking about the next five minutes or six months? Is it a theoretical question about what would happen in a perfect scenario, or are you simply asking to be told what to do? What are you planning to do based on the answer? Traders are becoming less clear about what they’re asking for and too often the respondents are forced to wear so many hats that it’s impossible to know how to use their response.
In an increasingly complex environment we are all becoming generalists when it’s arguable that having a specialty is an underappreciated attribute. In the financial realm it’s easy to see how the last 10 years, in so many ways, contributed to this situation. As have structural changes and economic realities in the industry. Not to mention, to use the term kindly, technological advancements. Computers have fooled us into thinking that facts and details are no longer as important.
Correlation matrices are great things to have. They were far more effective for generating alpha when they weren’t the ubiquitous not-to-be-questioned Holy Grail driving the whole shebang. Traders these days struggle mightily whenever an asset goes its own way.
The first reaction is always that it’s out of whack, or a canary in the coal mine. Sometimes things do just change. And boning up on the situation after the fact is always sub-optimal. As is asserting that yes, something may indeed be going on that we were unprepared for, but the base case is this, too, shall pass. You can only use that excuse so many times in letters to your limited partners.
Passive investing is valuable, big and growing. It isn’t going away. And sometimes funds do indeed have positions because they have no choice. Actually scanning the offering circular is worthwhile. But we’ve gone way overboard by seeing the entire investing universe as behemoth indexes moving their component parts around in lock-step. Ask me where stocks are going and I have a strong opinion. Ask about an individual company’s shares and I haven’t a clue. I wonder how many people with ruble or lira longs saw the carry as “compelling” and jumped in having asked, “What do you think about emerging markets?”
Being right on where the market is going shouldn’t be a burden placed on the shoulders of economists. They should be expected to be smart. And able to lay out the facts clearly. Traders are the ones who should have to figure out what it all translates into. CFTC data is something an economist shouldn’t be concerned with. And traders have a right to expect the economist to know how the numbers, big and small, are trending. It may be an unrealistic economic proposition given current constraints but the lack of distinction of responsibilities isn’t a step in the right direction…
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Author: Tyler Durden