The Seeker is the Quidditch player whose objective is to spot and catch the Golden Snitch. For those of you who aren’t familiar with Quidditch, it is a ball game played on flying brooms. Each team has one Seeker and catching that flying Snitch ain’t easy, it is fast and difficult to see. Harry Potter was a Seeker. I am a Seeker and I suspect people who find these newsletters interesting are Seekers too. Seekers enjoy much of the glory but they are also the most attacked. In short Seekers are Hero’s looking to win based on merit.
In this letter I would like to try and explore how a trader would trade interest rates from an Existentialist (Seeker) versus a Phenomenologist point of view.
As a backdrop to my analysis was the recent sell off in the bond market sparked in late September when the Bank of England first hinted that it could lift interest rates before the end of the year to keep a lid on inflation. This spread further with hawkish moves from the Australian and Canadian central banks.
The tumult in the bond market has caused many well known hedge funds to suffer major drawdowns. Rokos Capital lost 18% in October. Crispin Odey lost nearly 50% in October alone, in fairness to him he remains 59% up for the year despite the loss. There are many other fund managers licking their wounds. This got me thinking.
What became very clear to me is that you get 2 types of traders/investors.
You get the Phenomenologists who look at the markets as they are. They see in their consciousness a structure in which Central Banks and Government support low interest rates and with this lens pursue a strategy that capitalises on the status quo. I would also classify trend followers as phenomenologists.
I recall many instances where phenomenologists made a fortune simply by sticking with the status quo, without asking too many questions. Invariably those stuck in one dimensional thinking landed up losing it all. Think of September 1992 when Soros and others broke the Bank of England catching all those thinking the BOE had their back on the wrong foot. Think of LTCM in 1998 and their belief that Russia would never default on their government bonds. Think of the Swiss National Bank unexpectedly withdrawing its peg of 1.20 francs per euro in 2015 and the huge casualties in the retail FX industry.
I would like to contrast this with a more Existential approach. There is typically an angst with this approach, it requires one to question the meaning behind what exists.
In the case of a low interest rate environment with excessive money being pumped into the economy the phenomenologists take advantage of the situation, whereas the existentialists (seekers) worry about when rates will be forced to climb due to inflationary pressure.
Just like the rest of the financial community I have been talking inflation. More recently I have been starting to question whether global inflation has the legs with parts of China in lockdown and its economy slowing down significantly over the past few months as reflected in many commodity prices and manufacturing output.
Let me propose a Seekers Guide to Future Interest Rates.
If I look at the US current account deficit at -3.1% and its forecast government expenditure in the trillions you know one thing. It is in the governments interests to borrow money as cheaply as possible. This means that the “plunge protection team” are probably going to do everything and I mean everything to keep a lid on interest rates. In 1969 Milton Friedman proposed in a thought experiment the idea of dropping money from helicopters. Ben Bernanke in 2002 suggested the use of helicopter money to avoid deflation. We have more recently experienced the modern equivalent with Modern Monetary Theory.
In summary this Seeker is saying that Central Bankers and Government will make the occasional hawkish statements but it will be best to judge their actions. I suspect there is way too much at stake to act responsibly as they need to fund their budget deficits with debt. Borrowing massive amounts at high interest rates is going to crowd out their spending. I foresee some wicked debt overhang which itself will slow down the economy.
I really don’t know who is in the drivers seat for the full journey. Just because we are experiencing inflation and rising bond yields at the moment does not tell us enough about the future. As an Existentialist / Seeker I remain full of angst. I see Bitcoin and to a lesser extent Gold long term proving a more robust store of wealth than buying 10yr bond at 1.5%.