Against the Gods - version 2.02016-11-02 15:00, Edited at: 2016-11-02 15:43
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“Risk is good - when everything goes well”. Many funds, institutions and banks does perform greater when everything goes well and leverage can be added. This makes totally sense and it’s easy. If index perform - just add leverage and you beat index. What differs the great investor from the market investor is the ability to make money when everyone is losing money.
Against the Gods – version 2.0
“Risk is good - when everything goes well”. Many funds, institutions and banks does perform greater when everything goes well and leverage can be added. This makes totally sense and it’s easy. If index perform - just add leverage and you beat index.
What differs the great investor from the market investor is the ability to make money when everyone is losing money.
Stanley Druckenmiller said: “Back in the days, when hedge funds where new we were expected to deliver high returns despite what the market did, while most hedge funds today focus on making the most money when markets perform well, and suffer when markets slipper”.
Remember the ugly brexit day?
Today 5 months later, no one is mentioning Brexit, financial markets have bounced up, and the macro risk (asset-ly speaking) remains the same as pre-brexit.
It is a human phenomenon, how quickly we tend to clear away fact’s that are irrelevant for our own best. No investor like to price the risk of an asset into the asset, several years in advance before the risk plays out, even though we all know that the price reflects all future cash flows from the asset.
Everyone likes to squeeze out the most of that last remaining ketchup before handling over it to the next person on the table.
Everything remains the same, except for one thing – The British pound (GBP)
Prior to the Brexit election, markets anticipated a Bre-main as surveys against brexit was greater one week before election day. The British pound bounced to the highest level against the US dollar since December 2015, even though in theory, a Bre-main didn’t mean anything (any change) for the economy. Today the GBP is 18% lower prior the election, against the US dollar.
If you thought Brexit was scary for financial markets, wait for the reaction to a possible Trump victory. There would be panic, and a rapid repricing of assets across the world. Expect the dollar’s bull run to end, and the euro to stage a rally; expect a plunge in China, rippling out to the rest of the emerging markets; and expect the price of gold and every other kind of safe haven to soar. It would certainly be dramatic, and possibly ugly as well.
Learning from the past to beat the gods.
Let’s sum up todays macro situation.
US: Considered to have the strongest economy and first out to raise rates.
EU: Risk on downside, policy remains until sign of greater inflation.
China: Still in the cheap currency making. (As Donald Trump hates)
We don’t have to go further…
Today 6 day’s prior to election day, the market seems cool about the outcome even though we know that a Trump victory, will shake things up like never before.
One area that Trump will focus on is Trade. Especially the trade with China, which he several times has stated: “They are winning, thanks to currency manipulation”.
One week ago Polls showed a huge gap between Clinton & Trump, with Clinton as a leader.
Yesterday, the Polls showed a lead for Trump, and today CNBC and Washington Post says it’s a dead race.
Let’s learn from history, which is 5 months ago. Two weeks prior Brexit, some newspapers stated that the exit-side were leading. A week before Brexit, it was a dead-race and 3 days before Brexit, the stay side was announced as a winner by several newspapers.
What did we learn? Never trust the surveys or the polls when things are too tight, and definitely don’t invest based on them.
As I and many of us missed the opportunity to profit from the last market shake up, this time we may have the opportunity to profit.
As we don’t know what a Trump affect will mean for the markets, 1-week, 1-month or a year after the election (Referring to where I started about The ugly brexit day), we do know that maybe nothing will change, except for one asset – The super US dollar
Many asset’s will provide positive returns, such as going short or stocks or going long gold if the Trumpet wins. But I would say that the downside is as big as the upside on those assets.
Fed’s policy will not change based on the fact that Hillary is in Office, in fact nothing will change. No race in trade with China or nothing. Nothing that I can see that would strengthen the dollar more than +1-2%.
We should not anticipate the same fall in the dollar as the GBP since brexit, but even a modest 6-8% (without leverage) fall in the currency makes it one of the most tempting bets on an asset since Brexit.
(Lesson learned, I will never ever again miss an opportunity like this or brexit, where clearly the odds are 5:1).