Complementary

I’m always at my weakest when I’m doing well. I play this guy at tennis down on tooting common. We’re dead equal. He complemented my shots, said I’d just won seven games in a row. I proceeded to lose the next six. Or he won them.

Nicholas Taleb said that you didn’t need to ask a trader how he was doing. You just needed to look at him.

Cerratonin in the brain – it kicks in when you win. Makes you more aggressive, more attractive to women, it makes your brain more plastic. Better able to think new thoughts and come up with more trades. More likely to tell people about your trades.

That’s what I did in yesterday’s post. In Neiderhoffer’s ‘Practical Speculation’ he said he’d never had a perfect day of speculation.

I won’t claim yesterday was the exception that proved the rule. But it felt like it – after two weeks blowing my brains out long gold, euro, copper, S&P and short bonds – constantly doubling, then getting stopped out. Bad for the soul, no doubt.

I mentioned in yesterday’s post I’d had a monster day –up 3.8% at the time of writing. Once I signed off I raise my euro, gold and treasury trades – and the monster day turned into Godzilla. By the close I was 6.5% up – around 3x my best day when I was pro.

This blog is as much about process as it is about my calls.

One of my favourite books is Cat’s cradle by Kurt Vonnegut. It talks about the process a chemist followed – creating a more efficient water molecule; ice-9. So efficient it froze at 30 degrees, not zero.

One seed molecule of this, and the world froze. Men standing like pillars of salt on the side of the road.

I think sulphur is ice-9. Sulphur’s frozen. It’s made sulphuric acid freeze. It’s made fertilizer freeze. And fertilizer’s made food freeze. As an aside, it’s also stuffing the copper market – which is sitting on three days of inventory, and a strike at Codelco.

Now processes are fascinating things. I love the logic, how a process works its way out. Whenever I make a big macro play, I’m betting on a self sustaining process to work out.

But the process always destroys itself, eventually. The trick is to look for the signs. To understand how it could self destruct. That is the Soros insight I like the best. He would only go in large when he knew how the trade would go wrong.

By about half way through yesterday, I was all in. I was at the full limit of my trading risk. In the cold light, it was not a perfect trading day – I bought one unit of palladium, when I should have bought a unit of silver. And I didn’t sell my remaining gilts out of my unleveraged portfolio, even though I knew I should.

The other trades were pretty cool though. I added another unit of risk to my treasury short – taking it to 150% of the portfolio. I added a unit of gold, moving to 80% long. I doubled my copper – going to 45%. I added to my long euro, going to 60%. And I put on a 30% position long EUR/JPY. I bought some German mid-cap, taking the equity indices position to 35%, to add to the 80% long in my unlevered portfolio.

When you add that to my base equity, that takes my overall leverage to 490%, which is nosebleed territory. It’s safe to say that if my old risk manager saw this he’d either have a nosebleed, or he’d try to give me one.

But I have a very different view of risk that what he does. He didn’t want me to buy commodities for the macro fund back then, because he was worried that they would get delivered. He had no problems with buying bonds at those levels though.

I think the big risk is that we’re going into 1999, but for commodities rather than tech. Valuations on the resources stocks, and prices for the commodities themselves might go so far, with so much momentum, that no-one will be able to bring themselves to buy them. Until they have to, to stop the bleeding. And my view is that the commodity action will crowd out all other trades. Ultimately including equities. My pilot fish on that trade is Wal-Mart – when that breaks lower I’m taking off the long equity bet.

So how could my call self destruct. It comes from the process. There is an interesting connotation in the word – it is also the name of a Beelzebub cult started out of my old school in the 60’s. The process, like ice-9, only leads to trouble. The trouble for me comes when inflation expectations accelerate. Not now, but sometime.

As long as Asian currencies rise, and Middle Eastern and Asian infrastructure spending builds, I’ll try to stick with the big picture call.

My current favourite trading book is Steinberger’s ‘The psychology of trading’. What I took out of that book is that trading is a bit like learning skiing – something I did for the first time this Easter. You have to do the opposite of what comes natural – leaning down hill gives you more control. But all you want to do is to lean backwards. In trading you have to gear into your winning positions and then let them run. It doesn’t feel natural at all. But the sun’s out on the mountain, I’m fully loaded, and I’m going out to lunch. Try to quell the butterflies in my stomach.