ask Dcifrths...well, anything...about finance/mkts/ports that is.

[Victor]

i wanna invest like 50k so i dont dump it to schnieds and all those other luckboxes. where should i put it?

[kimchi]

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If you thought you were the best (pure/skilled/technological/whatever) trader in the world with $10B AUM, but could only trade in one market, what would you trade?

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It's more a question of what market could you trade as B$10, especially on margin, will take you over the limits for many futures contracts. Even if it didn't, you'd have huge liquidity problems shifting that much in and out of a market.

You'd probably only be able to trade currencies - and only the more liquid markets such as cable or USD/EURO. Currencies are the world's biggest market.

[DcifrThs]

[ QUOTE ]
Barron,

I'm in college and have read that interviews will often ask about particular stocks or how the economy is "doing" in general. The former seems pretty easy to research and understand, but how do you concisely explain the state of the entire economy? Pick a few major recent events and their effects? Talk about market direction and interest rates?

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Good question. It’s very tough because there is so much to talk about. They want to see how you structure your answer, what you think is important, and how it all links together.

here's how i'd tackle that question given today's economy. EDIT AFTER WRITING: I’ve noticed I drolled on there for a good long time and talked about a ton. This is my complete view of what we see in the mkts today. I’m sure I missed some stuff and maybe concentrated on unimportant things but I laid it out as if I were the interviewee (and I will be while I hunt for a job). Please don’t just take these comments to the interview w/o understanding them as that will hurt you if asked to elaborate on anything.

So, please ask me to elaborate on anything you think I’ve messed up or missed etc. etc.



Interviewer: "so what do you think of the economy today? where is it going in the future? and why?"

Me: "well first off, I’d like to break the “economy” into asset classes and countries.

Taking global equities first, we have seen a sharp run up in stock prices worldwide. Growth has been strong and globally synchronized. For the first time ever, all OECD countries are growing simultaneously. Globalization has appeared to link the economies of the world structurally. Chinese growth has obviously been a massive driver and demand from that country does not appear to be slowing. Even if efforts to slow the economy by the govt pan out, a growth rate of 8% is still likely.

A few things have kept equity prices up. First and foremost is the massive # and amt of deals we’ve seen and continue to see. Leveraged buy outs, share buy backs, mergers, acquisitions, and the like all push ever higher on global equity prices. China may also be moving towards a bubble as the # of new accounts to buy equities has shot up at insane rates. Private equity firms are also flushed with cash. All this cash is tied to the next point, fixed income.

Global rates are very low and credit spreads are squeezed tight as a drum. These low rates, when compared to equity yields, make borrowing to purchase companies via cash & debt very attractive. We see this from corporate bond spreads and the deals being done mentioned above. Global capacity utilization at this point in the cycle would usually be getting strained and margins feeling some compression. The globalization though has flooded the world with cheap labor which has kept margins fat and capacity lower than typical at this point of the business cycle.

Emerging market debt spreads above risk free rates have also come in a great deal. At least part, if not all, of this is legitimate. Developing economies have changed the way they handle a booming commodity mkt (and thus a very large income stream for commodity exporters). Typically, those countries would actually be running current account deficits by importing a ton and financing those imports with money that would love to invest in their country given how it's doing. But this time, we see those countries running a current account surplus. This is because they are growing and using the export money to invest in their own country (and around the world, thus running a capital account deficit). Overall this is great, but spreads can’t get much tighter. Further, some commodity exporters are running CA deficits & borrowing funds from around the world to consume. This is troubling since a shock there, even if triggered by that country’s economic situation alone, would likely reverberate across emerging mkts and widen spreads.

As a result of everything above (high liquidity, high growth, global demand), commodity prices are high as well. China demands a great deal of them as does Japan, the US, & Europe.

Moving on to China. Last week (week of may 14th), they finally acknowledged that good 'ol fashioned central bank tightening is really what is needed to slow the economy down. In order to do that, they have to let their currency appreciate vs. the dollar and uncouple their monetary policy from the US (i.e. while the currency is pegged, they can’t raise rates). Otherwise, domestic inflation will rise making the peg worthless (competitiveness will fall as domestic prices rise regardless of the Yuan's level vs. trading partners). This will also help push global rates up as their massive ($1.2 TRILLION) reserves of US bonds will stop accumulating and the US 10yr rates will start to move up.

This slow loosening of the peg is a step in the right direction, but more is needed. China is accumulating a CA surplus far faster than it is allowing its currency to rise. It will need to purchase ever more US dollars (and thus US bonds) to keep its currency in line. So the Yuan is highly pressured to appreciate vs. the dollar.

In terms of currencies, the Yen is also near record lows (121 as of may 18th). Given the low yields in Japan, this has caused a re-appearance of the carry trade, most notably to the US & Australia. These unhedged flows are self defeating in a way and can cause a global risk aversion shock if/when it finally snaps (self defeating b/c selling yen to buy AUD/USDs assets puts more downward pressure on the Yen which makes investment in Japan even more attractive. Eventually, those fundamental economic flows will dwarf the carry trade flows causing those invested in it to repatriate at ever worse prices).

The dollar is also very weak vs. the Euro and the Pound. This weakness, however, is warranted as the US needs to borrow ever greater amounts in order to keep financing the massive CA deficit. The figures are truly staggering and an even weaker dollar is possible so long as imports remain as high as they have been in the recent past (we’ve had some good news on this front in the past few weeks, but not enough).

In terms of the domestic economy, we saw some weak growth #s in the first quarter and a slight reduction in the inflation rate, which is still outside the fed’s “comfort zone.” The mkts are still pricing in cuts though and given the consumer confidence we’ve seen and the Chinese apparent yielding to US trade concerns (rate hike & peg movement), that/those cut/cuts isn’t looking too likely. A realization of no cuts int eh future may also put a damper on equity prices. The housing issue we have seen hasn’t dampened consumer confidence but has put a dent in growth as we saw from Q1 estimate. Overall though, the economy looks good and inflation is still a touch high. I’d think the next rate move will be a hike, not a cut. Especially since the slack in the global economy felt as a result of global low wages is reducing and wage pressures may rear their ugly head sooner than expected.

Finally, to give us all that warm fuzzy feeling the global economy has exhibited, we have very low mkt volatility. Any one of those de-stabilizing things mentioned above can cause this to spike as it did in February. A rise in risk aversion will hurt global asset prices across the board (save the US treasuries & gold, which has done well due to high liquidity).

So, to wrap up, the major themes we have going on are

1) syncronized global growth as a result of highly correlated business cycles.
2) low rates/high liquidity
3) high commodity prices
4) strong emerging mkt growth that doesn't look panic/currency devaluation prone.
5) a carry trade that has a potential to destabilize the lowly volatile environment.
6) weak and weakening US dollar
7) strong US economy w/ a touch of inflationary pressure
8) unbelievably low volatility

In the future, I'd look for a global pull back in equities and US assets as risk premia adjust from their currently tightly squeezed position as the last leg of the cycle finally starts to come into full swing. I’d be long volatility as we are strained as it is and there are many points from which a scare could emanate.

hope this helps.
Barron

[dp13368]

Superb post on where we are today.

[DcifrThs]

[ QUOTE ]
i wanna invest like 50k so i dont dump it to schnieds and all those other luckboxes. where should i put it?

[/ QUOTE ]

in my pocket. transfer to me on stars [img]/images/graemlins/smile.gif[/img] ... i'll dump it to them for you lol.

seriously, id think about whether this is retirement money, active management money (not recommended), or short term savings.

i'd lean towards simply making a nest egg for yourself by adding this to your retirement type account to the extent you could.

i would create an equity heavy passive portfolio for the loonnnnggg term. it would probably come out to:

30% global equities (F*CKING HEDGED)
30% global developed aggregate bonds (also hedged, but for some reason asset managers always hedge bond allocations but not equities)
15% developing world bonds (hedged)
15% global inflation linked bonds (hedged)
5% commodities
5% global real estate (hedged)

this may not look "equity heavy" but in risk space it comes out that way (i.e. equities are the dominant investment in when st.devs and correlations are taken into acct)

also, this is just off the top of my head. it is probably not optimal. but i'd bet it's pretty darn close and way better than what anybody will tell you if you go to any type of typical wealth manager. this is a good way to get a ton of bang for your buck. i'd this portfolio probably has about a .4-.5 sharpe ratio vs. the .3 or so for your typical passive portfolio that is like 60% equities/30%bonds/10% other (comm. real estate etc.).

if you can find funds that are cost effective and leverage the IL bonds & aggregate bonds for you, then you are even better off!! using intelligent leverage to bring everything to the same risk level as equities would probably push the portfolio sharpe ratio up to .6-.7. that is as high as you can likely get by utilizing the vastly underpriced correlations & leverage.

DISCLAIMER: this is just advice from some kid. do not construe this as official investment advice. this disclaimer goes for everything i say in this thread. i am hereby releasing myself of all liabilities should you concentrate on short term results and come to my door demanding me compensate you. sorry, no dice.

i'd want to rebalance that monthly.

OH YEAH FOLKS. i forgot to mention in my portfolio construction posts the importance of rebalancing. gotta do it!!!! otherwise, your most volatile assets may dominate your portfolio at the exact times when you don't want them to while at the same time removing exposure from your diversifying assets. HUGE folks HUGE!

hope this helps,
Barron

[DcifrThs]

[ QUOTE ]
Barron,

Where do you feel "knowledge accumulation" is more efficient - entry level at hedge fund or reading everything you can get your hands on at home + occasionally seeking out smart people to discuss / learn? I ask this b.c. I am beginning to see a parallel with the entry level job as a more advanced+focused extension of college, which is a highly inferior learning mechanism b.c. there are too many stupid demands and distractions for optimal learning(i.e. GPA, people who love to contagiously waste time, and classes on English literature).

Assume you have financial flexibility from poker that the pay from any job is irrelevant, as well as enough $$$ to start a small personal fund when the "knowledge accumulation" has hit a desired level -- and then make back any losses through poker. The stop would be pretty tight the first time [img]/images/graemlins/wink.gif[/img]

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without my former employer's training, i would be light years from where i am today. my love of this stuff wouldn't be where it is and i can't thank them enough. i wish everybody could get the training i got. i am still unbelievably far from where i want to be but this first step has helped a ton.

i would recommend an entry level analyst job wherever you could get one. hedge fund, research shop, bank etc.

steer clear of investment banks that will peg you in a hole and that will be your label for life (this is hearsay from friends in IBDs of bulge brackets and boutique banks).

i vote for job!!! training is invaluable. i could never have gotten this far on my own. the next steps i feel like i can get to as a result of the base i have, but i still need more training and want to get it on my next job.

also, you should be reading everything you can get your hands on anyways. it all links together and is all important. ECONOMIST ECONOMIST ECONOMIST. that magazine is so underpriced it is sick. i want to lock in that rate for the next lifetime.

Barron

[DcifrThs]

[ QUOTE ]
Superb post on where we are today.

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thanks, i aim to please and the time it took to write it was well worth it. forced me to outline my thoughts.

through this forum's feedback i'd like to improve it though so help me out.

thanks again for your compliment.

Barron

[Scorpion Man]

[ QUOTE ]
[ QUOTE ]
Superb post on where we are today.

[/ QUOTE ]

thanks, i aim to please and the time it took to write it was well worth it. forced me to outline my thoughts.

through this forum's feedback i'd like to improve it though so help me out.

thanks again for your compliment.

Barron

[/ QUOTE ]

I don't have the data in front of me, but careful on #8 "unbelievably low volatility". I don't think that's actually true if you look further back then the last 10 or 20 years (can't remember which).

Also...are you talking about implied or realized vol?

If I recollect correctly, we are at what was a normal vol for a long time if you go back far enough. Late 90s was abnormal vol.

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Superb post on where we are today.

[/ QUOTE ]

thanks, i aim to please and the time it took to write it was well worth it. forced me to outline my thoughts.

through this forum's feedback i'd like to improve it though so help me out.

thanks again for your compliment.

Barron

[/ QUOTE ]

I don't have the data in front of me, but careful on #8 "unbelievably low volatility". I don't think that's actually true if you look further back then the last 10 or 20 years (can't remember which).

Also...are you talking about implied or realized vol?

If I recollect correctly, we are at what was a normal vol for a long time if you go back far enough. Late 90s was abnormal vol.

[/ QUOTE ]

awesome. this is what i need. it is now redded out in the word document.

i meant implied volatility.

i will look this up at bloomberg terminal tomorrow.

more critiques pls!! feedback from you, sniper, pig etc. are appreciated (just as feedback from everyone else is as well, but just to get you guys involved!)

thanks,
Barron

EDIT: PS- do you have data on volatility going back farther than i'd get from bb?

[APXG]

[ QUOTE ]
[ QUOTE ]
Barron,

Where do you feel "knowledge accumulation" is more efficient - entry level at hedge fund or reading everything you can get your hands on at home + occasionally seeking out smart people to discuss / learn? I ask this b.c. I am beginning to see a parallel with the entry level job as a more advanced+focused extension of college, which is a highly inferior learning mechanism b.c. there are too many stupid demands and distractions for optimal learning(i.e. GPA, people who love to contagiously waste time, and classes on English literature).

Assume you have financial flexibility from poker that the pay from any job is irrelevant, as well as enough $$$ to start a small personal fund when the "knowledge accumulation" has hit a desired level -- and then make back any losses through poker. The stop would be pretty tight the first time [img]/images/graemlins/wink.gif[/img]

[/ QUOTE ]

without my former employer's training, i would be light years from where i am today. my love of this stuff wouldn't be where it is and i can't thank them enough. i wish everybody could get the training i got. i am still unbelievably far from where i want to be but this first step has helped a ton.

i would recommend an entry level analyst job wherever you could get one. hedge fund, research shop, bank etc.

steer clear of investment banks that will peg you in a hole and that will be your label for life (this is hearsay from friends in IBDs of bulge brackets and boutique banks).

i vote for job!!! training is invaluable. i could never have gotten this far on my own. the next steps i feel like i can get to as a result of the base i have, but i still need more training and want to get it on my next job.

also, you should be reading everything you can get your hands on anyways. it all links together and is all important. ECONOMIST ECONOMIST ECONOMIST. that magazine is so underpriced it is sick. i want to lock in that rate for the next lifetime.

Barron

[/ QUOTE ]

Economist is very much on target, I agree. Once a week + online is not enough for me - luckily there are decades of back issues which I would argue are even more valuable than current ones if your goal is learning as opposed to currently managing money.

Another question: What are some specific things you learned in the training that make you value it so strongly? How does it relate in terms of strength to an analogy of learning poker with or without 2+2 and/or the help an already accomplished player?