“I’ve learned many things from him [Soros], but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” – Stanley Druckenmiller
FX Trading – Does any of this sound familiar?
I read with interest the decision by Stanley Druckenmiller to close his global macro hedge fund. The guy was good—very good. He quietly went about his business of thinking about how the world works and positioning in front of capital flows—in or out—and got it right most of the time. It is easier said than done and, in his remarks describing why he was ending it, it was clear he spent much time working and not so much playing precisely because this stuff isn’t easy; and to be as good as he was for so many years … it’s more than luck. It is hard work being open to what the market is really telling us. But a deep understanding of global capital flow from the top down seems the key to his success. We try to mimic that here as it relates to currencies.
I share that to share this: Last Saturday I visited my outlaws—mother-in-law and father-in- law. Yes, the aforementioned gold bug father-in-law. Despite my jabs at his bug status, my father-in-law is a seasoned and savvy investor who has seen most of this stuff before. He said to me last Saturday: “I get a kick out of these fund managers who show up on CNBC or Bloomberg and tell us they are really long-term bulls, but short-term we are a bit concerned and blah…blah…blah…”, in effect constantly hedging themselves so they can be right both ways. Nothing new there if you’ve watched these guys; but what is funny, is that I tuned into CNBC yesterday afternoon, for some unknown reason, and they had emerging market analysts telling us how much they loved emerging markets … cash flow, P/E’s, growth, China … the usual stuff. But the funny part was one of them said exactly—I mean exactly— what my father in law said on Saturday.
Okay, now to the point. What is interesting about the emerging market analysts is they actually believe it is their bottom-up analysis and deep insights into balance sheets and annual reports and stuff like that which makes them successful. And I guess that has to be part of the shtick. I am sure Druckenmiller never saw it that way. He likely understood clearly that emerging market investment was about the liquidity flow model, plain and simple.
S&P 500 Index (black) versus Emerging Market Index (red) Weekly: It would be easier to find Waldo than it would to finding the decoupling in the series below.
…..read pages 2-4 HERE