Member Guest Pieces, Conference Presentations, and Other Contributions
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A critical component of DG Research is contribution from members themselves. Although some originally believed that top managers would want to keep their best trade ideas to themselves, the opposite has actually been the case. Many managers, especially the more erudite ones, like to share their ideas, claiming that additional insights and commentary from other smart guys and gals (SGs) lends a certain rigor to their thought process. SGs can test themselves through written guest pieces, published conversations with Andres, or presenting a Favorite Trade at one of the Drobny Global Conferences (perhaps the most challenging format of all!).
There was also fear about group trading and idea replication, which was also proved wrong. First, we discovered that SGs will often disagree on basic issues. That’s what makes a market, after all! Some of the most heated debates at Drobny Global Conferences were the most instructive (Guest Research – Invisible Hands Chapter 2). And even if SGs agree on the basic premise behind a trade, they will typically express the idea in very different ways because they each have instruments with which they are most comfortable. Some are bond or FX specialists, others prefer the equity or commodity space. They will also typically have different time frames and different risk tolerance. Some will hedge, others will not. There are a wide variety of ways to express a macro idea in liquid financial markets.
The DG dialogue seeks to capture this very diversity of view and approach, rather than any consensus or unanimity. The result is the financial markets equivalent of a graduate seminar, where SGs work on different theses but share them with each other in the hope of broadening their understanding and honing their skills. And the result has been very successful, with contributions over the last decade reading like a history of financial markets during that time period. But actually its a pre-history! Some SGs have asked that their contributions remain anonymous, and we always respect that. Others include contributions from notables such as Thiel, Leitner, Burbank, Ferguson, Hendry, Anderson, Dooley, Touradji, Thomas. And, whether notable or not, whether they come from novice SGs or veterans, they all share one thing in common: a desire to deepen their knowledge of the world around them and to find good trade ideas to express in their own unique ways. It’s a constant dialogue, and a constant growth process. And it’s fun!
A History of the Past Decade in Global Macro
It all started in 2002. At the first ever Drobny Conference in April of that year, one forward-looking SG suggested selling US equities and buying junk bonds, especially EMG bonds (Conference Review – Santa Monica 2002). Both legs of the trade performed, with the latter representing the start of a powerful trend in convergence between EMG and developed market bonds. Equities kept going down for another year before a genuine recovery emerged. Another panelist made the case for buying China (Conference Review – Santa Monica 2002).
Many SG’s also caught some of the powerful trends that emerged in the 2003-2007 period, several of which were early bubble trades. Favorite trade suggestions at the Spring 2003 Conference included buying US homebuilder stocks and Icelandic index-linked housing bonds (Conference Review – April 2003). A very clever way to short bonds while still earning positive carry was also suggested, catching a big backup in interest rates a month or two later (Conference Review – Santa Monica 2003). The idea of buying Asian vs US equities was presented in a guest piece later that year (Guest Research – 10/14/03).
The 2004-2006 period featured trades that exploited supply constraints in commodities, capitalizing on the emerging commodity price boom. The spring 2004 Conference included proposals to buy sugar and gain exposure to forward oil (by buying cheap, high-cost tar sands companies). Both commodities had lagged the price boom, and rising global demand combined with tight supply led to a sharp price increase in the following two years (Conference Review – Santa Monica 2004). During the Fall 2004 Conference, the oil idea resurfaced as a proposal to buy oil service stocks denominated in Russian rubles (Conference Review – Barcelona 2004). And, one SG pursued the strong Asia theme again with a guest piece entitled, “The Sino-Pessimists are Simply Wrong” (Guest Research – 07/22/04). In 2006, an SG made the case for buying grains, which had not participated in the commodity boom (Guest Research – 07/25/06) at that point, but would begin a powerful catch-up process soon thereafter.
Towards the end of that period, fears of bursting economic and financial bubbles emerged in the thoughts of the membership. In late 2005, one SG wrote about “The Paradox of Diminishing Risk in a Dangerous World” (Guest Research – 07/05/05). Another, who had flagged the Icelandic property trade a few years back, warned of “Icelandic Krona Danger” (Guest Research – 02/08/06). Members were also warned in 2006 that the upside to risk assets was not unlimited: “Trees Don’t Grow to the Sky” (Guest Research – 03/20/06). And, that things were changing in Europe and had gone from “….Convergence to Divergence” (Guest Research – 06/05/07). Although these arguments were early, admittedly, they captured the sense that things had already gone too far.
Perhaps the most amazing of all was the warning by one SG during the summer of 2006, presciently entitled: “The Crash of 2008” (Guest Research – 06/26/06)! The same SG followed up in April 2007 with another warning, this time about the growing importance of the shadow banking system: “Who Controls Liquidity?” (Guest Research – 04/04/07). Another SG proposed at the Spring 2008 Conference, as the financial and economic storm was starting to unfold, a killer trade that offered cheap exposure to FX volatility by exploiting an anomaly in the USD/CHF volatility curve. Another suggested the more straightforward idea of buying Fed Funds futures contracts (Conference Review – Santa Monica 2008) to gain exposure to potential Fed rate cuts towards the end of the year. These were powerful trade ideas that proved big winners.
As the full force of the storm struck in the autumn of 2008, some of the members were on the hunt again to buy assets at discounted prices. Nice and early. The Fall Conference in 2008 included several trades based on the notion that balance sheet compression and the liquidity squeeze during the storm had pushed up yields on many fixed income assets inappropriately, especially since overnight rates had come tumbling down. This combination produced some fixed income bargains, and trade suggestions included buying US TIPs, short-dated agency bonds, and preferred US bank stocks accompanied by puts on common stock (Conference Review – Budapest 2008), all of which proved great trades. Common stocks fell some 50% in the intervening months while the preferreds held up much better and offered almost a 10% yield. Another really nice catch.
Then, as stimulus measures were passed in country after country and stock markets bottomed, several members at the Spring 2009 Conference began looking to buy cheap stocks and commodities again. One SG suggested Brazilian equities, while another pushed for dividend swaps in the US, Europe and Japan, and yet another recommended buying bull spreads in many commodities (Conference Review – Santa Monica 2009). At the Fall 2009 Conference, another panelist argued the case for selling long-dated equity volatility (Conference Review – London 2009).
Things became a bit more esoteric in 2010, and more troubling. One SG protested vehemently against the increasingly popular Reinhart and Rogoff thesis about financial crashes, sovereign debt crises, and the need for austerity. This SG taught all of us that currency constrained countries, like those in the Euro area, do indeed face a financing constraint due to high sovereign debt loads. But, this does not apply to freely floating fiat currency countries, who have the ability to self fund (Views from the Trading Floor- 02/25/10). The implication was that euro area peripheral bond yields should rise, but fiat currency sovereign bond yields should surprise to the downside. That proved a fabulous spread trade. Soon after, another warned that austerity policies were coming largely due to political developments (Guest Research – 03/08/10).
The commodity price bubble was still in play in 2010, with the idea of buying palladium on any dips suggested in that summer (Conference Review – Hong Kong 2010). It almost doubled in price by the end of the year. And, two SGs separately made the case for buying physical gold, suggesting that a looming shortage of the physical could soon produce severe disruptions in the growing paper gold market (Conference Review – Santa Monica 2010 | Guest Research – 05/03/10). But, by 2011, several SG’s saw a looming end to the commodity bull market in part due to an anticipated slowdown in China. One wrote a Guest Piece late in the year explaining why, after several years as a gold bull, he had turned bearish (Nov 8, 2011).
Another noted that price targets on many currencies and commodities had been reached, setting the stage for a potential correction, which, if sustained, could produce a steep unwind in many risk assets. His preferred trade was to simply sell the Aussie dollar against the USD (Conference Review – New York 2011).
The idea of regime change for EMG equities and the commodities developed further in 2012 and into 2013. One SG made the case simply for buying US equities (Conference Review- Geneva 2012 ) while another went a step further and argued for a long SPX – short EMG equities trade based on the combined US recovery vs China and EMG slowdown themes (Conference Review – Santa Monica 2013). And, the idea that the US recovery would begin to impact US rate policy also surfaced in the Spring of 2013 with the trade suggestion of buying the US equity risk premium, nicely before any talk of FED tapering emerged (Conference Review – Santa Monica 2013 ).