The Detma model output for 6 & 7 May are posted above. Recent strength by the USD and JPY, as a consequence of selling the carry trade, have caused the model to short AUD and CAD versus the USD (D12) and AUD and GBP versus the JPY (D6).
Detma was designed as a daily close model. The risk management and money management platforms were constructed to be able to withstand a 30 standard deviation hit on daily close to close basis. That is, based on historic correlations and volatilities of the portfolio dating from 1983, any one day's move against the portfolio would have to deviate from the average return of the portfolio by 30 standard deviations to trigger the worst drawdown scenario.
This gearing setting gave me the confidence to not worry about the intraday shenanigans that occur in markets from time to time. However once equity grows to a large enough level it is not feasible to rely on at close entry/ exit points alone. That is why the big systematic players developed 24 hour trading desks - to be able to feed the fund's liquidity into and out of the market with the smallest footprint possible.
I don't believe that 24 hour desks were developed to improve performance as such, just to allow a more efficient management of the fund's liquidity. Having said that however, it does open the fund up to extraordinary intraday movements. The impact of these will more than likely be on the negative side. Just imagine gradually adding to a position as a market is falling, or being triggered into a short at an extreme level for the day, and then having to scramble back the other way a short time later if the market is reversing strongly.
These moves normally occur in minimal liquidity situations so the fund's slippage between the signal point and the fill will be great. All of this suggests that systematic funds that were forced to trade during last Thursday's horror 30 minutes in N.Y. would have been hurt. Funds that trade intraday breakouts would have been hurt severely as well. It will be interesting to see the performance numbers that come out at the end of May.
Anyway what's next? The price action on Thursday was a clarion call. It seems that the Eurozone is answering that call with a USD 1 trillion debt package to be used to bail out Eurozone countries as and when needed. This may be a response to the sovereign debt issues in Europe but it is the wrong response. If one considers for a moment the ludicrousness of the current global financial situation, if it wasn't so alarmingly serious it would be Keystone Koppishly laughable.
Remember what happened in 2007 and 2008? The world's banking and shadow banking industry had bankrupted itself in a massively geared bet on U.S. housing that went wrong. So along come the Keystone Kops, in the guise of the world's central banks, with absolute bucket fulls of newly printed cash to either bail these greedy guys out directly or indirectly by buying the stuff that they couldn't offload to any one else.
Now these greedy guys, who by the way couldn't believe their luck, with a wink and a nod just barely managed to stop from laughing long enough to quickly lash out with some meaty bonuses for themselves. They were, and are, able to justify this because they can borrow from central banks at zero to one percent, and then lend it back to the same government that is funding their rescue at four to, well now in the case of Greece, nine plus percent. Not only that, they can also take this zero percent money, gear it up twenty or thirty times and sell Credit Default Swaps on sovereigns that will allow this to happen.
Can you believe it? They can do this knowing full well that if they get it wrong they will be bailed out by the same governments they are selling. What a lurk. It seems that this fake capitalism (profits)/ socialism (losses) has run out of normal every day suckers to bleed and is now up to the sovereigns. Let's start with the small ones first, like Greece etc and as we destroy them let's make our way up the food chain to the big Kahuna of them all, the U.S.
You can't fix a bad debt situation by borrowing more money - sorry it's a fact. So this USD 1 trillion the ECB is putting up is going to be burnt. We don't even need to talk about the trillions that Uncle Sam has greased into the system - nor the U.K.
In another masterful piece put out today by Dr Frank Shostak, he explains that all of this growth you are seeing coming out of the U.S. at the moment comes directly from the Fed:
Bretton Woods style of agreement. My suggestion - the World Outstanding Debt Cancellation Agreement or WODCA. It is going to be very painful but somehow I just suspect that 0.1% of the world's population cannot continue to feed on the other 99.9% of the world's population forever.
In the midst of all of this the Australian Government has cottoned onto the fact that the big miners are getting away with it. Yes BHP, RIO and the other hangers on have been giving it to China big time in the form of huge price rises for the minerals they dig out of Australian soil. Why have they been able to do this, well because they can. China will pay anything at the moment for the stuff they need to build their infrastructure needs. So the Australian Government figures if they can do it we can do it and says to the miners "hey guys, you're the hot team in town, we have just bailed your other corporate mates so cough up with some more dough!"
AUDUSD since .9050 last Thursday Sydney time. At the time of writing this it is trading at .9035 so it looks like I haven't missed much but of course in between many fortunes have been made and lost. From here I'm waiting for Europe to come in and maybe I'll wait another day or two to see how this new pile of debt affects the markets.
I think I need to chill anyway.
Disclosure: No positions at the moment