Category Archives: Blog

Merc Stories Ch 3

The Dean Witter Govie Desk

I started as a house pit clerk in 1984 in the T-Bill pit signaling spread markets back to the Dean Witter Government Bond desk in the WTC. The team was an awesome melange of personalities and disciplines, some of whom I remain friends with to this day. The legendary Jon Eckstein, inventer of the year bill contract !, was our head. We were legit "playas" on the Street and threw cash and futures around in sizable quantities. 200 and 500 lot hits ( small now but ground breaking at the time), several basis points through the prevailing were common. We got early pings from the Fed on bill passes, matches and TTandL calls (GIK) [I remember a TT&L call that sent the market down about 15 bps in a heart beat, hilarious !] and Jon would ring down the line with calm orders into a 15 bid like, "12 trades, ok?" Meaning sell everything down to 12.

So, through the middle of 1987, the dollar was taking a beat down of serious degree. The dollar index had dropped from 124 to 96 by the Crash. As August 1987 rolled into September, the desk accumulated a steady stream of cash bonds and notes and with me, a heavy supply of this rapidly growing contract called Eurodollars. Now, keep in mind, most of these traders had NEVER owned "stuff" - we SOLD stuff - so taking huge hits and heat on long positions was not only gut wrenching but quite probably career ending. But, down went the buck and FI instruments right along.

By October, we were in lock down mode. A few big traders would come in early and ring me before the MD's could see them on the line and say things like, "K, buy 500 more Urins after the open, but don't ring back with the fill, we don't want them to see us on the line !" Order tickets were rumored to being stuffed in desk drawers. Several closed door meetings and position justifications took place. Several traders prepped me for a coming house cleaning but promised to get jobs elsewhere and come back to me. This was not well aligned with a "Stocks and Socks" vision. And then....

CRASH ! T-Bills went limit up on Friday afternoon and serious FTQ grabbing was everywhere. TEDs exploded only to collapse on Monday when Eurodollars opened on an indication of up 300 at up 400. A friend got on the line with me and bunched up all the desk's sell orders. I recall my partner on the floor and me selling huge amounts from 350 to 300 higher. Within an hour or so the market was only 10 basis points wide and we were still tearing down the majority of the position that only 36 hours earlier was hemorrhaging like the Exxon Valdez. The year was made and bonus', out of the question before, were back on the table.

In January, Witter management decided that perhaps the risks (there's that tricky word again) we were taking were not in line with the corporate structure. The operation shuttered not because we lost money, thanks to the crash, we had made a ton, because the volatility scared the bejeezus out of everyone.

The Skittles Incident

My long time partner on the TF was a living legend everyone knew as Stumpy. In a strange "small world" connection, Stumpy and I knew each other prior to working together. My college buddies and I were annual rabble rousers on the infield of the Kentucky Derby and had built a reputation and following as the guys from Cleveland who were able to get 20 to 30 gallons of Popov-laden orange juice into the infield every year. If you've ever seen the mountain of confiscated contraband at the tunnel entrance, you would understand what an achievement this was. So, it came  to pass that Stumpy  had visited our camp, randomly, in the early 80's.

Now, on the floor, we never left the desk for lunch breaks like other more mature operations. Stumpy and I would load up the security guards at Xmas and they would kind of, shall we say, look the other way- it was Chicago - while large quantities of food were smuggled to our desk. We had proudly pulled off a red/white checked table cloth Italian pasta lunch, 150 White Castle double cheese (the runner had to cab it to 2100 S Wabash), and several bean pies and Defenders from the Dan Ryan exit ramp to mention a few classics. On a daily basis, our runners looked like Tom Hulce at the Food King in Animal House, stuffed with McDonald's and pounds of candy and Hostess products. New candidates had their choices evaluated on "not held" orders and quality of fills on Hostess Strips (1 of everything). They say you better be able to defend your decisions in a Bridgewater confrontation, the same, or worse was inflicted on our teammates. An inadvertent Zero bar or passing up a Choc-o-dile could lead to weeks of torment.

So, it was Retail Sales day - the real trading day prior to the elevation of Unenjoyment Day to top volatility day.  Stumpy decides to do a candy line up (this is years before Seinfeld btw,)   of Skittles and tropical Fruit Skittles (1989 release) on the high desk between him and me. I'm not a big fan - from 7:10am right through the opening range- the 2 of us are critiquing the flavors. A few seconds before the data release, I tire of the product and FLICK a Skittle off into the distance. Some 30 feet away on the Pit is our clerk from Wisconsin, his badge was CHZ, and 7:29: 55, 56, BAM..Skittle right in the eye and out pops his contact lens. Down goes CHZ, down goes CHZ.  And boom  a huge Retail Sales report ! So, he's holding his eye and searching the floor and none of us can get an order in. Everyone is trying to sell and he can't see a thing.  I mean this is like big upward revisions, the Fed's doing early matches (GIK) and probably hiking at the next meeting type stuff. The guy is hauled up to the desk and berated by our bosses all the while trying to explain that something hit him in the eye, but they would have none of it.

Needless to say, Stumpy and I just did our best to not bust out laughing. That was the most expensive Skittle ever, and until now, only 2 of us knew.

Merc Stories

Inspired by Comedians Riding in Cars Getting Coffee, the following posts are old yarns from the glory days.

Episode 1 - The World Bank Debacle

We did a fair amount of business for the World Bank in that they were a LIBOR minus borrower and could ramp up some simple rolls in Eurodollar futures. My boss, a notorious mad man, that made Jordan Balfort look like a piker, had been "missing" from the floor on a multi-week bender, calling in every few days only to sign off with, "You haven't heard from me."

During his absence, the pit configuration "rolled." To explain, as the near by contract got close to expiry, the volume in the second option would over take it and the contracts would change places in the pit. Upon returning to the floor, the right fine gentleman took his spot next to me on the desk and quickly hit the direct to the WB to jaw bone up his attendance. The MD obliged by telling BSS (I will use 2001 Space Odyssey encryption of his acronym out of respect) to sell 650 some odd spreads. Now, in Eurodollars, when you sell a spread you always sell the more forward contract and buy the deferred, regardless of price. Without missing a beat BSS began blasting 100 lots in the front of the pit and grabbing 2nd option - not realizing that while he was over-indulging for 3 weeks the stations had shifted.

I was busy with my usual cumbersome Swaps non-sense but a few "hundy" into the barrage, looked down at his order and banged my hand on the desk and pointed the correct position of the months. From there, all hell broke loose. Rather than just go to the spread market and square up the proper position, he stormed down to the pit and grabbed our filling broker - fortunately a good friend - by the neck and started shouting "Get me out, get me out" in a fashion only Mortimer Duke could appreciate.

Returning to the desk, under the shocked and trying not to laugh faces of all around, he then demanded that the rest of us, "Help him trade our way out of this !" And proceeded to throw every nearby desk object at our heads. Now let's be clear, there was a few thousand dollars down the tube here but a scratch not a flesh wound by execution standards, not for long. A flurry of stupid 50 lots later we were scratching and half-ticking a giant mess. What should have been $2500.00 in damage quickly spiraled to roughly $15,000.0!!

Once the position was flat and the dust had settled, he bolted across the street to our office with a very Trumpian explanation to the Head Honcho of what went down. That is, it was a big mistake by the World Bank trader and us, not him. Another long absent bender followed, eventually leading to his removal from the firm. Good Times.

Tomorrow- The Infamous Skittle Incident



Strangeways Here We Come

Stop me if you think you've heard this one before:

I've got this thorn in my side about the short end in a coma and heaven knows I'm miserable now.

The EDZ18 has fallen 63 bps since Sept and the EDZ19 has dropped 70. The decline has moved the relationship from 13 to 18+.  Large on a percentage basis but still way too close for my liking. The EDZ21 back into 2019 is pancaked into 11.

The overall success (so far) of walking back the ZIRP has led many to suggest, rightfully so, that Janet (Sheila) take a bow. The ash heap of naysayers and bubblers has grown deep with the bones of the pedestrian populist fringe. Still, the somnambulist dirge higher in forward STIR is making me uncomfortable about the New Year. Under "normal" circumstances, the 33bps between the 2nd and 6th gyro would be closer to 150 by now. Careers were made buying the out narrow relationships and letting roll into wider near-bys.

Other developed country curves remain far more twisted and upside down  than ours. That is a fact that only increases tolerance of the uncomfortable not acceptance. Discussions of the US yield curve have focused too far along the Ts while everyone's perfect math keeps the color coded Eurodollars in line. I'd keep an eye on 'em and remember its not the level - its the relationship between.

All rights to Johnny Marr.

Trouble with the Curve

Here we are a few hikes and a few holds down the "Exit" ramp and yield curve tourism is swinging into peak season. Having spent many now non-retrievable hours of my life lead timing and lagging various arcs of said curve into and out of the major economic events of my past life; I present a quick ditty for your dining and dancing pleasure.

I have learned that most curve tourism is focused on the easily digestible slope of the T-curve, a canary with little coal mine exit door location prowess. A small sample of the points from the last mistake and today:

2006 March, May, June FF - 4.75, 5.0, 5.25 (rapid eh?#GIK)

Model Equil FF Rate for same months - 3.95, 4.25, 4.47

That's approx 75bps of stringency the way I look at things and of course a year later the Fed was hacking the rate from 4.75 to 4.25 just as quickly - but far too late.

For reference the 5 yr T yield was between 4.95 and 5.10 over the time frame.

and this is quite jocular -

Presently, you could say the FF rate is 1.37 (right down the middle of the corridor) and the model determined equilibrium rate is 1.44.  Conservatively on the bright side of neutral but fold in a fairly aggressive tax cut and an historically low unemployment rate, and it actually tilts toward a tad "easy" still.

Having trouble with the curve? You're looking in the wrong place.


The New Face of Losses

Yesterday, buried on the back page of the B Section of the WSJ, there was a big dose of graphic eye candy under the heading : The New Face of Treasury Auctions. I highly suggest you give a lookie-loo.

Under the rose colored analysis - "Today, domestic bondholders account for greater than half of the more than $14T in marketable debt outstanding." Less than 15% of T purchases were by foreign investors, down from nearly 43% ! Yay Baby Boomers amiright? Um, NO.

For the 25 years prior to 2009, when the US citizen was less than interested in bonds and bond funds, real yields were higher and inflation was in the strong phase of a 30 year decline. The Street is less involved in Uncle Sam's IOUs than any time since modern financial deregulation. Secured lending is replacing LIBOR wholesale funding as trillions of notional  back month Gyros slowly melt off the expiry. All Bond desks to Janus.

As we have stated on this blog many times before, a seminal moment in markets is a page turn in a history book but years when unfolding. Deemed "Certificates of Confiscation" in the 80's at 5+% real yield and coveted by the public now, Bonds remain our favorite disdain. The WSJ may think its swell that John and Jane Boomer are plowing more money than ever into bond funds but we see it as the necessary action of the end.

Remember the Bond Trader's mantra : There are no bad bonds, just bad bond buyers.

The Structure of Scientific Revolutions – Redux

Living in the Age of Pre-conditioned Paradigm Fail

First, from Kuhn:

Chronologically, Kuhn distinguishes between various phases.

Phase 1- It exists only once and is the pre-paradigm phase, in which there is no consensus on any particular theory. This phase is characterized by several incompatible and incomplete theories. Consequently, most scientific inquiry takes the form of lengthy books, as there is no common body of facts that may be taken for granted. If the actors in the pre-paradigm community eventually gravitate to one of these conceptual frameworks and ultimately to a widespread consensus on the appropriate choice of methodsterminology and on the kinds of experiment that are likely to contribute to increased insights.[10]

Phase 2- Normal science begins, in which puzzles are solved within the context of the dominant paradigm. As long as there is consensus within the discipline, normal science continues. Over time, progress in normal science may reveal anomalies, facts that are difficult to explain within the context of the existing paradigm.[11] While usually these anomalies are resolved, in some cases they may accumulate to the point where normal science becomes difficult and where weaknesses in the old paradigm are revealed.[12]

Phase 3- If the paradigm proves chronically unable to account for anomalies, the community enters a crisis period. Crises are often resolved within the context of normal science. However, after significant efforts of normal science within a paradigm fail, science may enter the next phase.[13]

Phase 4- Paradigm shift, or scientific revolution, is the phase in which the underlying assumptions of the field are reexamined and a new paradigm is established.[14]

Phase 5- Post-Revolution, the new paradigm's dominance is established and so scientists return to normal science, solving puzzles within the new paradigm.[15]

Following the chronology from Reagan to Obama, our government (and thus aiding the learning curve of others) realized its utility expanded in the anomalies outlined above. In other words, policy implementation accelerated under 'crisis management.' This idea was then twisted by the out of power party (the Democrats) into a guidebook cloaked as a critique called The Shock Doctrine by Naomi Klein. Hence, institutions perpetuate a Phase 3 state, exiting the established paradigm but never solidifying the new.

The last year has brought the idea of living in the Paradigm Fail to clearer focus. Policies are cast aside for the casting not necessarily the replacing. The Fed has seen its policy implementation morph under the same Paradigm Fail Phase. The policy debate remains stuck on the actions taken over the last 8 years and now, their unwinding. Little discussion emerges on what the post- unwind structure will look like, nor what its guiding principles would be. Reloading before the next crisis appears to be a thought.

The next crisis will not require the same remedy. The series of events from 1983 to present that define the Age of Paradigm Fail did result in enormous and sometimes radical policy implementation in Monetary, Geo-political and Social arenas.

Kuhn did not see societies getting stuck in or between Phases.

A science may go through these cycles repeatedly, though Kuhn notes that it is a good thing for science that such shifts do not occur often or easily.

"A good thing?" That's a value judgement. The revolution is the status quo. The VIX is the anomaly and the screaming proof of getting stuck in a failed paradigm. When fear and chaos are the normality, their "gage" is calibrated too low.