The last post on the UK was 10/9. This sketch provides an update.
The flaw to most economists’ models remains in place – to understand this reality is to be better equipped to capture fixed income price change over the near-to-intermediate term.
We all have our method. Ours is the reverse of most others. We assign a risk-of-result to key releases. Historically this has worked very well.
Economists / analysts are like members of any crowd; they share the same characteristics. Into the fall most observers, holding hands together, shouting out in the dark could only see reason for real sector weakness; they were overwhelmed. Into the fall, most observers assigned too much relevance to sentiment measures, consumer and business – always a hazardous practice. Finally, into the fall, observers sold the Administration short – on public finances and fiscal consolidation, and on various schemes such as the regional growth fund.
So once we understand how the consensus is flawed, we have captured price change just ahead. We had/have an anchor and in the case of the UK it was/is this – most analysts will miss most key releases to the side of weakness. That is exactly what happened. Not every key print, but most. Naturally the UK is not strong in the absolute sense but we are only concerned with economic reality vs expectations.
We are not journalists; rhetoric is not enough; we need to convert to the bottom line. For purposes of this blog we generally revert to the simplest of spreads – the term structure (there are a galaxy of other ways traders may have converted our insight). Knowing then that the UK real sector would just outperform, and knowing the view remains in place for additional Bk of Eng firing ahead, it was simple – own the curve.
Results have been nothing spectacular for goodness sake – 5-10, 95 / 2-30, 268, mid July recommendation / last, 105, 292 – but worth the effort. And this spread has never run against those entry levels.
Do not look for the opportunity to sell this spread. The course-of-least resistance to remain wider into year end. But key to any operation is to understand the flaw built into most models.
Robert Craven
The flaw to most economists’ models remains in place – to understand this reality is to be better equipped to capture fixed income price change over the near-to-intermediate term.
We all have our method. Ours is the reverse of most others. We assign a risk-of-result to key releases. Historically this has worked very well.
Economists / analysts are like members of any crowd; they share the same characteristics. Into the fall most observers, holding hands together, shouting out in the dark could only see reason for real sector weakness; they were overwhelmed. Into the fall, most observers assigned too much relevance to sentiment measures, consumer and business – always a hazardous practice. Finally, into the fall, observers sold the Administration short – on public finances and fiscal consolidation, and on various schemes such as the regional growth fund.
So once we understand how the consensus is flawed, we have captured price change just ahead. We had/have an anchor and in the case of the UK it was/is this – most analysts will miss most key releases to the side of weakness. That is exactly what happened. Not every key print, but most. Naturally the UK is not strong in the absolute sense but we are only concerned with economic reality vs expectations.
We are not journalists; rhetoric is not enough; we need to convert to the bottom line. For purposes of this blog we generally revert to the simplest of spreads – the term structure (there are a galaxy of other ways traders may have converted our insight). Knowing then that the UK real sector would just outperform, and knowing the view remains in place for additional Bk of Eng firing ahead, it was simple – own the curve.
Results have been nothing spectacular for goodness sake – 5-10, 95 / 2-30, 268, mid July recommendation / last, 105, 292 – but worth the effort. And this spread has never run against those entry levels.
Do not look for the opportunity to sell this spread. The course-of-least resistance to remain wider into year end. But key to any operation is to understand the flaw built into most models.
Robert Craven
No comments:
Post a Comment