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The Dog That Didn’t Bark
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Ben, you wrote this: “The Truths in life are still death and taxes (and maybe compounding returns). Everything else is theatre, where honesty (with a small h) and truth (with a small t) are probably the best we can achieve” back in 2014 in “The Plays The Thing,” an ousting ET piece.
With deficits, the correlation to anything tradable has had no lasting small or large t or h for over thirty years. It just doesn’t work. And Japan has shown us that there is no absolute deficit number where we can say it will break a developed economy.
Hence, there is no historical algorithm - which is, IMHO, pretty much the only thing Wall Street sells behind every product or idea - that works even superficially: no algo, no story (narrative), no sale, no interest from Wall Street.
And this feeds into your very recent “We’re Doing it Wrong” note as deficits don’t matter because Wall Street is trying to “calculate” the future from past data, but the “when will the deficit matter” question needs a “T+1, T+2” prediction effort from a super computer.
The deficit spending as a percentage of GDP as of Q2 this year was just under -5% and a tad lower than $1 trillion in deficit. This is during a boom. I’d love a link to #45’s 2012 tweet that said any President who had a rapid 1000 point decline in the DOW should be immediately impeached.
In sum, models, like humans, make mistakes because they fail to pay attention to relevant variables or interactions. Many-model thinking overcomes the failures of attention of any one model. It will make you wise.
https://scholar.harvard.edu/files/xgabaix/files/behavioral_inattention.pdf
Is the asymmetric trade to sit on 5y/10y US Sov CDS in EUR and be patient? A patient position waiting for the market narrative to awaken? Seems like the cleanest expression
The embedded convexity and reasonably small negative carry of CDS exposure make it my personal fave for almost any long-vol trade. That said, the real juice in a CDS trade (like any negative carry trade) happens when you get the timing right. So even here, I prefer to wait until the narrative starts to develop. Will I miss the first leg of the trade working? Yes. Would this make me unemployable in fx-land? Yes. But I’ll still catch the broader market “discovering” the trade, and in my experience that’s where the best money is made.