BijaAdvisors

Seeds of Thought

@BijaSeeds

An eclectic mix of market commentary, observations and ruminations

Issue 15-6
February 11, 2015

How to Trade Macro

I dont pretend to be the only person who knows how to trade global macro. However, the comment /
question I hear more often than any other is this. Thats a really fascinating story, but how do you
trade such a big view? Truth is, almost every single phone call, presentation and conversation in
which I discuss my view of the world, ends with this very question. So, how do you convert your
understanding of the interaction between the three most powerful factors affecting the world today,
Chinese urbanization, wealth disparity and technological gains, along with their combined impact on
the global economy, into a trade that wont easily get stopped out? The answer hinges on discipline
and patience.
By identifying what matters, I mean what truly matters, the kind of stuff that wont be undone in a
flash by some errant comment from a politician, only to be retracted and reversed a day later, you
actually reduce your risk of being stopped out prematurely. When you have a solid grasp as to which
direction the fundamental factors are headed, and most importantly why, you reduce your risk of
being jerked back and forth, and your p&l along with it.
The way I trade global macro views comes down to a multi-step process:
1. Understand the world (Do not proceed until this is rock solid!)
2. Identify the direction of fundamental factors (eg inflation, employment, growth)
3. Identify the impact on assets/markets (eg commodities, sectors, equities, rates, vols..)
4. Identify the winners and losers (eg tropics vs temperate, DM vs EM, risk on/off..)
5. Identify the boundaries (eg trend-channels, high vs lows, breakouts, cheap vs rich..)
6. When all of the above 5 are in alignment, you pounce. When they are not, you wait.
I avoid the premature, unwarranted stop-losses through forward thinking structuring, but more than
anything, by being diligent about my objectivity, analysis and understanding of the environment. I get
in when markets have moved against my views and out when everyone appears to be in agreement
with them. The views remain until a trigger(s) suggest they are no longer valid. Markets vacillate
around the view. Not the other way around.

Do NOT Read This

When I moved from the sell-side to the buy-side 12 years ago, I was floored by the sheer volume of
information suddenly available to me. It was a constant flow of research reports, analysis, opinion,
trade flows and ideas flooding my inbox from sell-side firms, subscription services and internal
analysts. Original research was often repackaged, re-quoted and forwarded by numerous additional
sources.

Important disclosures appear at the back of this document

Bija Advisors

Seeds of Thought

This was quite a change from the veritable informational blackhole from which Id just arrived. It
was exhilarating to have so much knowledge at my fingertips. I mean, what an incredible competitive
advantage. I would read and read all day long, then attend meetings with visiting analysts to discuss
their findings in more detail, then follow-up meetings to get our internal analysts opinions on them.
It didn't end when I went home. The deluge of facts, figures and findings continued unabated until my
eyes opened the next morning. Literally hundreds of unopened emails would gather in my inboxes on
a daily basis. It became impossible to keep up with the deluge.
A Friday afternoon ritual developed whereby I would do a clean sweep, deleting every single
unopened email in the inbox, but that only came about after my wife and kids commented on the
ridiculousness of having almost 10,000 unopened emails on my phone. If I have even one unopened
message notification on my phone, it drives me nuts, she mocked. I had become numb to it all. One
unopened email notification would drive me crazy too, but when it is hundreds or thousands or tens
of thousands, you stop noticing. I had gone from one extreme, an extraordinarily limited information
stream to an endless flood. What I initially thought would be a competitive edge, became a logistical
nightmare, and my returns suffered.
Before, I would come upon an interesting nugget and spend hours, days even, following up on the
clue, investigating whether there was anything of value in it. I thought of myself like a detective. I
had cultivated a cadre of sources with whom I would have the occasional conversation, to get a sense
for what was happening on the streets. Wed have a casual chat about markets, movies, music, etc.
Often the time spent was fruitful, but not always. Importantly, even when it didnt produce anything
of value, it also didn't generate distractions. I had time to read books and simply sit back and think. I
was in the zone.
Then I moved to a hedge fund. The dam broke and I couldnt catch my breath. After struggling to
stay afloat for months, I made a bold decision. I crafted an email, explaining my predicament to all of
those sources of information and politely asked to be removed from every distribution list. When
important industry types visited the office, I opted not to attend the presentations. My returns came
back, my stress level went down and I saw the world clearly again.
Truth is, like Christopher Columbus discovering a land that people already inhabited, my
realization that too much information can be harmful has plenty of research to support it. In Fooled
by Randomness, Nassim Taleb analyzes the ratio of noise to performance.
Second: 1,796 parts noise to 1 part performance
Hour: 30 parts noise to 1 part performance
Month: 2.32 parts noise to 1 part performance
Year: 0.7 parts noise to 1 part performance
With this data, Taleb is talking about the impact of randomness on portfolio performance and the
damage the portfolios owner does by over monitoring it. The key conclusion is that, over a short
time increment, one observes the variability of the portfolio, not the returns. In other words, one sees
the variance, little else.
This applies to the frequency with which we observe any information, explaining why the news is full
of noise and why history is largely stripped of it.
We fear missing something of value, and so attempt to absorb it all. However, thats simply not
possible. Ironically, in attempting to gather it all, we are absorbing less and less.
Issue No. 15-6

February 11, 2015

Bija Advisors

Seeds of Thought

The reason I bring this up is that I empathize with readers who feel overwhelmed with what they are
already receiving. It was so eloquently stated by one faithful like this. I enjoy your pieces. They are
both thought provoking and more importantly fun to read. I get inundated with research both
internally and externally. I find I rarely have enough time to absorb the research I receive and
unfortunately I sometimes skim or miss your articles.
I was once in your shoes, inundated with content. Then I made the radical decision to take back
control of my inbox, and my life. For those who are strong enough to take such a bold step, I offer
one bit of advice. Dont simply draw a random line in the sand, rejecting all new sources without
bias. Treat your information portfolio like you do your investment portfolio. Analyze the contribution
of each component, not just for its individual merit, but for its contribution to the whole.
Did you know, a portfolio with 100 components that are 60% correlated offers the same
diversification as a portfolio with just 4 components that are 40% correlated? This applies to trades in
a portfolio, a team of traders at a hedge fund, a collection of funds in a portfolio and even
publications on your reading list. Want to stop skimming and start absorbing? Re-build your
information portfolio, intelligently and deliberately, with publications that deliver unique content and
improve your performance in different ways.

Hindsight is 20/40
Anchorman Brian Williams reputation has been taking a beating for his recount of an episode in his
life that occurred 12 years ago. Over the years, his telling of the story has evolved from his being in a
helicopter that was downed by a sandstorm in Iraq to one which was forced down by RPG and AK-47
fire. Critics find it laughable that Williams could simply have misremembered the facts. As Gary
Levin, of USA Today put it, Im not sure if Id have been in a helicopter thatd been shot down, that
I would not be able to remember that.
Truth is, our brains are relational databases with each memory being filed away in relation to the
others. Thats why a smell can instantly bring you back to a moment in your childhood or a particular
combination of visual stimuli can trigger a sense of deja vu. It also means that as new memories are
stored with similar facts associated, they will attach to older memories in our brains. With each
retelling of the story, Brians memory of the event is literally evolving. It began as soon as he landed
on that fateful day. Surely the soldiers will have sat around discussing it amongst themselves, and
with Williams. No doubt the testosterone was flowing, with old war stories being told and
comparisons made. Later, a military report about the incident with additional details will have
influenced his recollection, and so on. Over a 12 year span, it is not only possible, but highly likely
that in Williams mind, the version he is telling today is as vivid and accurate as the one he actually
experienced that day.
Many studies have proven that eyewitnesses are actually very poor sources of factual information.
We are affected by so much more than we think. When we read a report, pour over data, chat with an
analyst, visit a country, we truly believe we are being objective. We read more, gather more data,
speak to more people and travel to more places, all in the hopes of gaining greater insight, but the
truth is, we are only capable of focusing on and critically thinking about so much. At some point, the
additional information becomes fodder for confirmation bias. Our thought process develops
momentum, becoming highly sensitized to and zeroing in on the bits and pieces that confirm our
beliefs along the way. We skim.

Issue No. 15-6

February 11, 2015

Bija Advisors

Seeds of Thought

Again, when we try to be on top of everything, afraid of missing even the most minute detail, often
we wind up missing what matters. Below is an excerpt from the book, The Power of Habit by
Charles Duhigg, which illustrates the point beautifully. Dozens of studies had investigated why it is
that some people are better eyewitnesses than others.
Researchers theorized that some people simply have better memories, or that a crime that occurs in a
familiar place is easier to recall. But those theories didnt test out people with strong and weak
memories, or more and less familiarity with the scene of a crime, were equally liable to misremember
what took place.
The psychologist at the University of Western Ontario took a different approach. She wondered if
researchers were making a mistake by focusing on what questioners and witnesses had said, rather
than how they were saying it. She suspected there were subtle cues that were influencing the
questioning process. But when she watched videotape after videotape of witness interviews, looking
for these cues, she couldnt see anything. There was so much activity in each interview all the
facial expressions, the different ways the questions were posed, the fluctuating emotions that she
couldnt detect any patterns.
So she came up with an idea: She made a list of a few elements she would focus on the
questioners tone, the facial expressions of the witness, and how close the witness and the questioner
were sitting to each other. Then she removed any information that would distract her from those
elements. She turned down the volume on the television so instead of hearing words, all she could
detect was the tone of the questioners voice. She taped a sheet of paper over the questioners face, so
all she could see was the witnesses expressions. She held a tape measure to the screen to measure
their distance from each other.
And once she started studying these specific elements, patterns leapt out. She saw that witnesses who
misremembered facts usually were questioned by cops who used a gentle, friendly tone. When
witnesses smiled more, or sat closer to the person asking the questions, they were more likely to
misremember.
In other words, when environmental cues said we are friends a gentle tone, a smiling face the
witnesses were more likely to misremember what had occurred. Perhaps it was because,
subconsciously, those friendship cues triggered a habit to please the questioner. (Isnt it possible then
that David Lettermans famously goofy smile affected Williams recollection?)
But the importance of this experiment is that those same tapes had been watched by dozens of other
researchers. Lots of smart people had seen the same patterns, but no one had recognized them before.
Because there was too much information in each tape to see a subtle cue.
Once the psychologist decided to focus on only three categories of behavior, however, and eliminate
the extraneous information, the patterns leapt out. As professional pattern seekers, perhaps there are
lessons to be learned from these seemingly unrelated findings.
In publishing research, Bija Advisors LLC is not soliciting any action based upon it. Bija Advisors LLCs publications contain material based upon
publicly available information, obtained from sources that we consider reliable. However, Bija Advisors LLC does not represent that it is accurate and it
should not be relied on as such. Opinions expressed are current opinions as of the date appearing on Bija Advisors LLCs publications only. All forecasts
and statements about the future, even if presented as fact, should be treated as judgments, and neither Bija Advisors LLC nor its partners can be held
responsible for any failure of those judgments to prove accurate. It should be assumed that, from time to time, Bija Advisors LLC and its partners will
hold investments in securities and other positions, in equity, bond, currency and commodities markets, from which they will benefit if the forecasts and
judgments about the future presented in this document do prove to be accurate. Bija Advisors LLC is not liable for any loss or damage resulting from the
use of its product.

Issue No. 15-6

February 11, 2015