Inside the House of Money

Top hedge fund traders on profiting in the global markets

Book by Steven Drobny

Article and Review by GlobalMacroForex

As the bible of Global Macro, this book has interviews with some of the top legendary fund managers in the business, as well a complete and thorough background on the changing landscape of Global Macro.  On top of all of that, it gives an excellent brief summary of the major macro events leading up to the interviews.  My brief summary article will only mention one or two of the many points of each interview.

Let’s jump right in…

Prop Trader

Christian Siva-Jothy

Goldman Sachs, London

Christian Siva-Jothy made money on the terrorist attacks of September 11th by being quick to go long Eurodollar futures.  He was already on the exchange floor and knew the cultural impact of a terrorist attack would be much larger than for the UK because the attack was the first major one on US soil.  (He was surprised by how long it took other market participants to hop on trade also.)

“Markets can be unbelievable slow to respond to events that there is no script for.”

When asked about mistakes and what he learned from them, he recalls a bad GBP/JPY trade.

 “Confidence is a very, very dangerous thing.  Simply because you’ve had a good run doesn’t mean it will continue.  In fact, once you’ve had a good run, you’re at your most dangerous.”

Overall Siva-Jothy’s advice is to never short gamma and to avoid selling options because the markets can take a quick reversal and things can just move faster.  With that in mind, he is bull fixed income because it’s like a synthetic long gamma in that if there’s sudden major problems in the world, fixed income rallies.

The Treasurer

 Dr. John Porter

Barclays Capital, London

Dr. John Porter’s background is in psychology and trades rates for Barclays Bank.  This puts him in a unique position to study not only the economics of the markets but also the mindset of the traders behind it.  His focus is on the front end of the yield curve, specifically the 1-year forward rate, which follows central bank action closely.

“The yield curve is 90% explained by the direction of interest rates.  If you have on a curve steepener, you basically think the bonds are going to rally, and if you have on a curve flattener, you think the market is going to sell off.”

Because of his position at Barclays, if a bond trade works against him, Porter can actually hold it until maturity to avoid losses.  This ability to avoid mark to market losses greatly improves his ability to manage risk.  However, overall he prefers to not short volatility.

“A Famous trader once said, “If you can’t sleep at night, that means your positions are too big.”

The Dot-Commer

Peter Thiel

Clarium Capital

Peter Thiel, co-founder of Paypal, gave this interview in 2006 and predicted the popping of the US housing bubble.  Unfortunately, Thel says he couldn’t put the trade on earlier because the prices were skyrocketing.  He points out for every trade, he relies on non-price indicators.  For example, when shorting equities, his team tracks volatility and various sentiment indicators for optimism/pessimism in the market.

When asked about a trade he loved, Thel brought up oil because of rising Chinese demand.  He had noticed supply was shrinking, and there was the talk of peak oil.  Thiel argues that the OPEC quota system incentivized oil production nations to overstate their reserves so that they got allocated a higher quota.  Therefore, he believes the supply shortage of oil combined with Chinese demand sent the price of oil significantly up.

Rather than buy crude contracts outright, Thiel instead created a “synthetic call” on oil by buying equities in Canadian oil sands companies, which convert tar into oil.  What he liked about this trade was that these equities were trading at such low multiples but as the highest cost producers, their value would sky-rocket once oil passed a certain threshold.  As the cash flows surged, he’d make more on the upside, but for less downside risk as the low margin was already priced into the equity.

The Floor Trader

Yra Harris

Praxis Trading, Chicago

This trader likes to get right on the market floor and observe it first hand.  Harris sees some of the mistakes that rookies make, such as the “prayer trade” where they hope to break even.  He advises traders to never trade to break even; there’s an opportunity in everything.  If you just lost a lot of money, see if you can profit from this new big move.  He is always observing large movements of capital.

“Global macro is the matrix.  It’s my mental picture of how money flows around the world, the flow of funds on a global basis seeking out the highest risk-adjusted return.  Money is always moving somewhere, whether it’s from oil to currencies to metals or to stocks.  I follow it.”

Harris’ matrix doesn’t give him exact technical levels, but provides more of a directional bias.  He gives an example of his matrix working in 1999 when Brazil devalued their currency.  He knew soybeans were sold in USD so farmers would be getting paid in more Brazilian reals.   This would lead them to plant even more than usual, so Harris quickly sold soybeans and made a killing.

The Pioneer

Jim Rogers

New York

Jim Rogers says markets are always wrong.

“Whenever something is at a long-term high and everybody is wildly enthusiastic, it is time to go the other way.”

He says markets have these big 20-year trends that are wrong as they progress.  That’s when the trend gets ready to reverse.  He points out bull markets make people go hysterical.

They say, “Gosh, what has happened for the past five years is going to go on forever.”

The Commodity Specialist

Dwight Anderson

Ospraie Management

Mr. Anderson focuses on the cold hard facts of the trade.

“Just show me the economics; I don’t care about the sentiment.”

He finds the gossip and media to be distracting and tries to focus strictly on the supply and demand. 

Anderson gives the example of visiting Siberian mines to see the supply side of Palladium.  His firm had predicted a drastically short supply, but the price wasn’t budging despite consistent demand.  He believed in the fundamentals of the trade and stuck it out.  Eventually, Palladium’s price rocketed up, and Anderson was proven right.

The Stock Operator

Scott Bessent

Bessent Capital

Scott Bessent says the key is to catch a paradigm shift.  He points out how the US Dollar used to trade based on the current account back in the late 1970s into 1980s.  But then when Federal Reserve chairman Paul Volcker hiked interest rates, the market shifted its focus to interest rates, and the dollar moved with rates.  Bessent argues there’s a good chance going forward that the market will refocus on the current account.

“Catching a paradigm shift is where you make a lot of money because everyone is still focusing on what mattered.”

Besides having the typical contrarian view of doing the opposite of what everyone else has on, Bessent also says,

“Sometimes best times to trade are when everyone thinks it’s a good idea but nobody has it on.”

Conclusion

This is one of my favorite trading books and a definite must-have for anyone who loves Global Macro.  Author Steven Drobny has captured some of the sharpest minds in the business, and it’s captivating to hear their “war stories.”  In this short summary article, I’ve reviewed just a tiny fraction of the content in the book and didn’t even cover half of the interviews.  You can hear first hand about shorting the British pound for Soros’ fund from the head of Soros’ London office or about Jim Rogers’ views of the future of the USD.  In addition, there’s even an interview with an actual central banker on trading.