Sunday, January 25, 2015

Greek Elections

So the Syriza party has won. FX markets are opening back up and as you can see the EURUSD is back under pressure to the downside.

There is nothing surprising about this election nor about the movement of the EURUSD. The Greek tragedy is far from over however. Syriza is going to negotiate hard with the ECB and the EU. I don't see any scenario where they won't ultimately leave the EU which would be in their best interest. What's not in their best interest is embracing more socialism as the solution to their problems. The Greek government is completely bloated even under the current austerity measures. The Syriza party wants to subsidize pensions and maintain government jobs with money the government that doesn't exist and considering that Greece will not have access to global capital markets for awhile their only option will be to print Drachmas. This will lead to hyperinflation and then a rise in even more extreme political parties such as Greece's neo Nazi group Golden Dawn.

The best thing Greece could do is right now is have an honest conversation with their citizens and tell them the truth is that there is no way the government will fund all its promises. Greece should go for a full default and hit the reset button by trimming their government by about 90%. This of course will not happen because it's the harder route and people want to be told there's a magic solution to their problems. As a reminder Syriza's platform was to end austerity not increase it. The hard truth is that the country over borrowed and over consumed for many years and now the bill is due.

Europe is in tough shape and fragmentation of the EU is only going to spread. None of this is news to our clients and friends whom we've been saying this to for the last five years. Here's the call I'm going to reiterate right here and now: the Euro currency will not survive the next five years. It was flawed from the beginning and now those flaws are becoming visible.

Why are Americans in Mariupol Ukraine???

If you've been watching the news you probably heard that there was a serious rocket attack in Mauripol, Ukraine yesterday. Both sides are already blaming each other but something else disturbing has emerged. Videos allegedly from Mariupol News Service show a journalist trying to question an armed soldier. The response "Get out of my face" is in perfect native English. 

Just last month while most people were distracted with preparing for the holiday season congress quietly slipped through S.2828 and H.R. 5859 authorizing further sanctions against Russia and the sale of weapons to Ukraine. These bills were barely reviewed yet sailed through both house and senate.

As if we don't have enough problems on our hands we're going to interfere even more between Russia and Ukraine. Furthermore we're always promised that there won't be U.S. "boots on the ground" but as this video suggests they may already be there.

The Ukraine has many problems and I believe that U.S. involvement will only exacerbate them. The U.S. is destabilizing the world through its aggressive foreign policy.

Saturday, January 17, 2015

Macro hedge fund Everest Capital crushed by EURCHF move

I'm sad to read today on Bloomberg about Everest Capital's oldest hedge fund biting the dust over the moves in the EURCHF. Marko is a legend and has weathered some incredible storms out there. Everest is one of the longer running global macro shops out there and their founder was interviewed in one of my favorites books Inside the House of Money by Steven Drobny.

My question is what kind of leverage was Everest running to get knocked out like this? In our hedge fund we were short EURCHF in 2012 with a significant risk allocation to the trade of 5%. While we were correct on the ultimate collapse of the peg we were WAY too early. We also sadly got stopped out when the EURCHF moved up to 1.26. Risking 1-3% on a trade is the norm, 5% is maxed out when the asymmetry and conviction is off the charts - which is how we felt about the EURCHF situation.  So again I ask what kind of leverage could Everest have been running to get smoked like that? If we look at the move of EURCHF on Jan 15, 2015 it moved from 1.20 to a touch under 0.84 Let's call that 36 pts. So rough math is 3x their entire portfolio. 3x is not so scary for a single position but 3x your whole book is BIG. It would be interesting to see if any internal risk limits were violated with the sizing of this position.

Either way I don't wish to see any global macro managers blow up. Global macro is an excellent style that very much has its place in any portfolio at any time. It's disappointing to see new managers and old all struggling IMHO what is an exceptional time period for macro managers to excel.