Read time: 2 min

FX Concepts’ Bob Savage: The Philosophical Trader

Currency funds suffered from the low volatility that
defined 2012, but FX Concepts? new Chief Strategist Bob Savage is cautiously
optimistic that 2013?s start can be sustained as hot spots around the globe
promise to keep things interesting. P&L?s Julie Ros sat down with Savage
for a macro view of the markets, and a micro view of FX Concepts.
   


JulieRos:HowisTrack.combeingintegratedintoFXConcepts?

RobertSavage:Itsawhollyownedsubsidiary;itsstilla standaloneproduct.Weretakingwhatwevelearnedandare applyingittoFXConceptssownproduct.Wearetryingtosee whattechnologyandideascanhelpthemandviceversa.Thats thefirstmove.Thesecondmoveisfromapersonnellevel.Ive takenonalargerroleatFXConceptsastheirchiefstrategist.
Theroleofachiefstrategistatafundisnotaboutrunning models,itsaboutreallyguidingthebusinessforward.Sothats ultimatelymyvision,and[FXConceptsCEOandfounder]John Taylorsvision,whicharebeingmeldedtogethertocreatea visionofwhatFXConceptsisgoingtolooklikeoverthenext fiveto10yearsandwhatthegameplanisforustogetthere.I wanttogrowFXConceptsto$10billionundermanagementin FXandotherassetsclasses–someinfixedincome,somein indicesandequitiesandsomeincommodities.Sowhenpeople thinkaboutFXConcepts,itsnotjustanorganisationthatlooks throughtheFXlens,butthatlensisausefuloneforlookingat theworldofavailable,tradable,liquidproducts.Ifwevelearned anythinginthelastfiveyearsitsthatbymebeingpigeonholed
intoFXonlyandwhenFXhas4%actualisedvol,yourreturns
aregoingtobedisappointing,soyouvegottohavesomethingin placetosustainthat.

 

JR:Anynewproductsinthepipeline?

RS:WevehadanewproductoverlastsixmonthscalledPure BetaPlus,whichiseffectivelyariskparitytradethathas, unlikeourcompetitors,averysubstantialFXcomponent.So wehavebonds,FX,commoditiesandbroadindices,butwere onlytradingliquid,positivecarryvolweightedcomponents– so25%goesintocommodities,25%oftheriskgoesintoeach oftheseareas.Thatmeansyoumightactuallyhaveaverysmall amountofcommoditiesindollartermsbecausetheyremore volatile.Italsomightmeanthatyouactuallyhavealarger percentageofbonds,becausetheyrelessvolatile,butovertime thatwillchange,andweharvestthevolatilityofthemarketonadailybasis.Soasthingsmoveupanddown,wearere- weightingaccordingly.  Itstartedlastyearandwasonarunway for19%return,whichgetspeopleexcited,butIthinkitshows thatyoucantakeanFXlensandreallygetabroaderperspectiveonothermarkets.ThatswhatFXConceptsisall about.Notthatweregoingtoloseourcentralmissionor centralideaofour31-yearhistoryoftradingFX,weregoing tobethebestthatwecaninthosemodels.Buteverybody knowsthem–trend,carry,meanreversion,vol,wedothemall andwereinthetopthreepercentileinDBSelectlastyearand madea1%return.Thatsjustnotgoingtobeexcitingtoall investors,althoughsomearegoingtoseethroughthatandsay ‘Theseguysareexpertsinthisandwereup1%whenthe averagefundwasdown4-5%.

 

JR:SinceyoujoinedFXConcepts,whathasbeenthe majorchange?

RS:Havingdonethisbefore,youvegottolearnaboutwhatyou havefirst,sotherehaventbeenanymajorchanges.I’mnotabig advocateofrushingintochangeaculturethatIrespectand

knowhasbeenaroundalongtime.Ihavebeenspendingthelast fewmonthsreallylearningwhatthestrengthsoftheorganisation
areandhowtogetthemostoutofit.OnethingI’mdoingistryingtotakethelessonsthatweve learnedoverlastthreeyearsaboutriskmanagementandhelp optimisethatandmakeitmuchmorealgorithmic,andcomeup withawayoftyingmoreeconometricfundamentalideasinto theirprocess.ThatswhatJohnhasalwaysdone.Hesavery thoughtful,cyclicallyattunedleaderandI’mtryingtotakemy fundamentalunderstandingofhowthemarketsworkandapply thattomodelsandhelpthemthinkthroughwhichsetofmodels mayperformbetteroverothersincertaincircumstances.Thats notsoeasytodo.

 

JR:Andithasn’tbeenaneasytimeinthemarketseither… RS:Forallfunds,thishasbeenadifficultthreeyearssowere tryingtolivewithinourmeansandmaketherightlong-term
investmentsforgrowth,andintheshortterm,keepthingsas tightaspossible.

 

JR:Whatarethemostinterestingeventsonthehorizon thisyear?

RS:ThefocushasshiftedfromEuropeanbreakups,totheUS debtdowngrade,toJapanandtheyendebasement,andthen therestheinsipientglobalstallspeedgrowthproblem,which begsthequestionofwhatisthecorrectbalanceofgovernment andprivatesectorinvolvementinalmosteveryaspectofthe economy?WhenyoulookatplaceslikeEurope,therearedoubts aroundwhetherMerkelisreallygoingtohavenoproblem gettingre-elected;isItalyreallygoingtohaveaclearcutmajorityinleadingitandsustainingitsfiscalausteritymeasures;isSpaingoingtobeabletogrowastargetedenoughtomeetitsfiscalneeds?TheanswerstothosequestionsbringyoubacktoEuropeasarisk.Butthistime,unlikethepasttwoyearswheneverybodysaidGreeceandSpainjusthavetoleavetheeuro,werenowinasituationinwhichGermanyisnolongerabletoholdupthewholeenterprise.SotheeuroactuallybecomesamuchmoreimportanttoolfordrivingflowsinandoutofEurope.TheresbeenatremendousamountofbottompickingforEuropeanequities,andIthinktheresbeenalargescale reinvestmentintosomeoftheperipherybondmarkets.Assoon asthatplaysoutandwegetgrowthdoubtsagain,youcouldsee anotheroutflowofEuropeiftheydisappointonthegrowth recoveryfront. TheargumentsIveseenforEuropere-growingrestreallyonthe USandChina.Thebiggestargumentyouhearforgrowth
comingbackinEuropehasbeenthatithasbeensobadthatit hasgottogetbetter,butIdontfindthatpersuasive.Ialsothink thatthewaytheperipheryofEuropehandlesthis,howthe outsiders–theUKandhowittriestorenegotiatetermswiththe EU,theSwedes,Norwegians,SwitzerlandandhowPolandand HungaryandsatellitestatesliketheUkraine–areallgoingto interrelate.WhatstheroleofSerbiatoEuropeandhowisit goingtobepartofthisunionisaquestionthatbecomesmore complicated.WhileitwasoncegoingtobethatallofEurope wouldbetradingeurosonedayasonebighappymarket,itsno longerthatwayandattheheartofityouvestillnotdealtwith thebankingcrisis.Fromaneconomicsperspective,Ilookat Europeandthink,youhaveacreditcrisis,youhavenotresolved it,theresabankingcrisisbehindthisandtheresnoshadow bankingwayaroundit.
Chinahasashadowbankingsystemthathasallowedittogrow at7.5%–Idontthinkitssustainableandthinkthebiggest riskforChinarevolvesaroundthatshadowbankingsystem lookingstrangelylikeoursdidin2007.Whenbanksarefullup, theshadowbankingsystemtakesthecreditjobintowandthen itblowsupandyoureleftwithapileofbadloans.Europehas neverdealtwiththosebadloansandthedayofreckoningfor banksisstilltocome–theeurogrouphasyettocomeupwith apan-Europeansolutionthatsbelievabletoinvestorsandthat istheproblemwithEurope.Itspainfullysadtoseeandit becomeslessandlessimportanttoinvestorsovertime,andit putsmorepressureonplaceslikeLatinAmericaandAfrica. TherealproblemforEuropeisthatitoperatesasaunionof convenienceandwithoutaunifiedTreasury,unifiedbanking systemandaforeignpolicy,yourepronetowhatsgoingonin NorthAfrica.NorthAfricaasaproblemtoEuropeandtheUSis clearlyontherise.Ifwelearnedanythingaboutwhatsgoingon inMali,itsthattheentireregionsexportstoEuropefornatural gas,energyandoilareatriskandthepoliticalstabilitymany thoughtwouldcomeoutofan ArabSpringrevolutionjustsmacks ofwhathappenedtoRussia.Thatregionbeingdestabilisedisa hugeriskandtheUSpullingoutoftheMiddleEastleaves

Europevulnerable.ItsagreatchanceforChinatocomeinand haveamuchbiggerrolethereandIexpectthattohappen.
SoforEurope,ithastodealwiththefactthattheLong-TermRepoProgramme(LTRO)isgoingtobealittlebitunbalanced. IntheLTRP,bankscanborrowuptothreeyearsfor1%andgive cigarwrappersandvodkabottlesascollateral.Itsclearnowthat theyneed$2trillion,whichwastheirversionofQE–theydidit inaverybankcentricway,whichisdangeroustothebalance sheetofECB,becauseitwasleftholdingcigarwrappersand vodkabottlesascollateral.TherealproblemforEurope
therefore,ishavingalotofbackbookpositioningthathasnot moved.EverybondfundabletogetaccesstoUSpaperinthe distresseddebtareadidso,noneofitcamefromEuropeand thatstheproblem,becausetheyvegottogetridofthat.Thats mybiggestworry.

 

JR:LookingatAsia,isJapanamajorproblemfortheregion? RS:Japanisaproblemfortradeandforre-nationalisingthe politicsofthatregion.CountrieslikeThailandandthe PhilippinesaregoingtobeforcedtochoosebetweenChinaand Japan,andKoreaisbeingtornapartaswell,sothecurrency destabilisationisjustasymptomofbiggerproblemsofalliances andtheremovalofUSleadership.Basically,theimplicit guaranteethattheUSwasgoingtobethearbiterofallthings tradeandleadershipintheregionhavefallendown;itsnot crediblefortheUStosaytoTaiwanweregoingtoprotectyouif Chinaisgoingtoinvade,notthattheywouldbecausetheyve alreadyeffectivelymadeplansthatTaiwanwillbelikeHong KongandtheTaiwanesearebeginningtobelievethat.

 

JR:Whataretheimplicationsfortheregionofthatslow encroachment?

RS:ItwillcometoaheadinplaceslikeMyanmar.Thequestion becomes,whoisreallygoingtobenefitfromthoseuntapped resources?WhatsreallygoingtohappeninNorthKoreawhenit beginstobecomelikeEasternGermany?Whosgoingtobeon thewinningsideofthat?

 

JR:WhatthemesareyoutrackinginLatinAmerica?

RS:Thecurrencywarsisstillatheme,becausethemoneyis flowingintotheregionduetoitsdemographic,economicand exportmixofcommoditiesandothercheapgoods.Sothe Americasareinagreatposition.Thesenationsarealsolargely politicallystable–therehasntbeenanyrealpoliticaluproar,and evenifthereisuproar,suchasinVenezuela,itsnotnecessarily baduproar.Thequestioniswhattodowiththisinflowof

money:doyoujustinterveneandbuildupacurrencyfund;do youlowerrates;ordoyouputupBrazilian-likewalls?Allof thesecanleadtounintended,insipient,inflationaryrisk.

 

JR:DoyouthinkLatinAmericaisontheedgeofan inflationaryspike?

RS:Yes,andwhetherthecentralbanksareuptothetaskof respondingtoitisthebigquestion.Also,whetherthereis enoughinter-regionaltradebetweenBrazilandMexicoas a goalposttogettingoffthedependencyofbeingonthedollaror eurooryenrollercoaster.Thereisalsothequestionofwhethera currencyunioninLatinAmericawouldhelprespondtothe inflowandwhethertheresaneedforsupra-regionalleadership.

 

JR:Istheregion’sdependencyoncommoditiesariskin2013? RS:  IfweseeChinasimplyneedlessandifwefindthatcertain ofChinastradingpartnershaveoverbuiltcapacitytodeliver thesecommoditiestoChina,thereisaquestionaboutwhatthat meansfortheregion.Itremainstobeseeniftheregioncan thrivewithBrazilbeinglacklustre.

 

JR:SoChina’sperformancewillbekey?

RS:Chinatargeted7-7.5%,soeveryonesexcitedaboutabounce inChinesedemand.But,iftheauthoritiesaretellingyoutheyre happywith7.5%,thatsaproblem,becausethatmeansyoucould have7%.CountrieslikeBrazilhavebuiltouttheirexportmachine forironore,oilandfoodforan8-9%Chinesegrowthrate.Ifits reallygoingtobe6.5-7%overthenextfiveyears,thatsa problem.Youcouldalsothrowintheotherpart,whichisthat increasingly,peopleareconcernedaboutglobalwarmingand
whatitmeansfortheirexportbase.Isthereariskthatthese weatherconditionswereseeingintheregionarepermanentand ifso,whatdoesthatmeanintermsofwhothewinnersandlosers are?Also,dotheyhaveanyrealenvironmentalprogrammes? BrazilclearcuttheAmazonandnow,theabilityforthemto sustaintheiragriculturalpredominanceisactuallylimitedbecause theydonthaveanysustainablepoliciesinplace.Isthatalesson fortherestoftheregion?Itisparticularlyinplaceslike GuatemalaandHonduras,whichincidentally,iswheremostof ourfoodcomesfrom.
 Theseguysarenotnecessarilyfollowing anybettersetsofrulesforsustainableagriculturaloutput.

 

JR:Tenyearsago,LatinAmericamainlyfacedEurope,but nowitlargelyfacesAsia.IsthereachanceforEuropeto regainitsposition?

RS:TherecouldbeanopportunityforgrowthinLatinandSouth Americainre-facingEurope,buttheregionasawholeisvery mixedonhowitfacesEurope.Forexample,the

Argentina/Repsolfiascorepresentsanationalistmentalitythat canbeanimpedimenttonewcapitalflowsandbelievability.

 

JR:Igetthesensethatalotoftheworldisgoingnationalistic. WhatisyourviewontheverydividedUSCongress?

RS:Thebeliefinthecommonwealth–asopposedtoprivate wealth–hasbeenlost.Wehavesuchgreatnationaltraditions

andthingsweshouldbeproudof;namely,thatwecanpeaceably
haveanelectionandgiveapersonthereinseveryfouryearsand celebrateasacountrythatdemocracyworks.Butwhats
happenedinlast16yearsisthatwearenolongerparticipatingin thethingsthatmakeusgreatasanation.

 

JR:Whataretheimplications?

RS:Weonlybelieveinthenationwhenthepoliciessuitus.Thats reallyunhealthy,selfishthinkingthatlosesthegreatergood;which goesbacktothecommonwealthideal.Therearethingsthatwe needasacountrythatallofusbenefitfrom–themilitaryis obviouslyoneofthoseandinfrastructuresuchashighways,ports, trains,helpusall.InfrastructureissomethingLatinAmericahas

noproblemthinkingaboutandputtingmoneyinto.Asforthe infrastructureintheUS,weneed$3-4trillionjusttosustainthe roadsandbridges.Anyonewholiveshereseesit.Itsobvious.

 

JR:Arethereanybrightspots?

RS:TheUSremainsaveryvibrantanddynamiceconomyand despitetheworstpoliticalstalematesanddebtproblems,were
growingandwerecomingoutofit.Whilewemaystillseesome cyclicaldownturns,ourhousingmarketisclearlyinrecovery
mode,ourabilitytogrowisbecomingmorecleartopeopleandI dontreallythinkthepoliticswillgetinthewayoftheFeds programfromworking.Atworstwemuddlethrough,atbest,we growat3%overthenexttwotothreeyearhorizon,sotheUS

hasgotalotofthingsgoingforit.Nottheleastofwhichis energyindependenceonthehorizonandaclearcuttechnological
edge.Wereveryquickadoptersofnewtechnology,andremain willinganddynamictoconfrontourproblemsanddealwith

themasneeded.

 

JR:Anythingpositivefortheyearahead?

RS:IfIhadathemefor2013,itsabouttheregionalisationoftheworldandhowyoucouldinvestonaregionbyregionbasisanddowell.Theregionof2013thatseemsbestpositionedisthe Americas,secondis Asia–dividedintoNorth/South.Wecould seeJapansurpriseusabitifitcomesoutofitsrecessionandthe devaluationoftheyen,whileChinacoulddisappointalittle. Europeremainstheweakestlink,butitsjustlessimportant.The surprisecouldbethatItaly,Spain,Greece,PortugalandIreland havetakenenoughmedicineandactuallystabiliseandgrow
betterthantherestofEurozone,butthatsabouta30%chance. WhileEuropeanbanksarepullingbacktheirroles

internationally,theresroomforUSbankstoreallyhavea resurgence–especiallyin Asia.SoUSbanksaregoingto becomemoreimportant.

 

JR:GivenyourviewsonLatinAmerica,whatareyourviewson thefutureoftheNDFmarket?

RS:Dodd-FrankreallychangesthewayFXworksforsome instruments.IfNDFsaregoingtoberegulatedandneedtogo tocentralclearing,thatmeanstransparencyaboutwhat volumesarereallygoingthrough.FXisthemostopaque marketaboutvolumeandthemosttransparentaboutprice.As soonasyoumarrythetwo,itbecomesalittlebitmoreequity- likesoalotofbusinessmodelsinFXarestartingtoshiftfrom fixedincome-likeideaswherepricediscoverymatterstoOTC marketstoexchangemodelmarkets,whereaccessisprovided forafee.Ifyouaddupalloftheprimebrokersbusiness,all thenewagencyFXbrokers,alltheexchanges,aswellasthe algosbeingprovidedbybanks,addinretail,andyouretalking about45%ofthemarket.

 

JR:DoyouseetheflowinNDFsincreasing?

RS:Yes,becauseitisbusinessthathastobedone.

 

JR:SoyouarebullishonEM?

RS:Yes,IthinkgrowthinFXrestswithEM.Ifyoulookatthe revenuestreamsatbanks,halfofthemoneyin2011camefrom EM,and2012lookslikeitcouldbe55%.Volumeswill continuetogoup.Theresgoingtobemargincompression,but somebanksaregoingtospecialisesowellseepocketsof

banksdoreallywellinKoreaandBrazil,andothersinsay, Indonesianrupiah.

 

JR:Whataboutoptions?

RS:Optionsareabitmoreofaproblem.Optionsusers traditionallyhavebeencorporatesandhedgefunds,thenabit ofthesovereignwealthcrowd.Buttheideathatacorporate needstouseanobjectthatsexpensiveasopposedtousinga forwardthatisprobablyunregulatedinalotofcurrenciesis goingtobeaproblem,orafuture.Theneedforoptionsinthe FXmarketisnotgrowing,itsstable.Optionsdeskscouldbe replacedbystructureddesks,whereyoupayforthestructure. Theoptionsmarketmaybecomemoreadeptatbeingonthe futuresmarket.Yourenotgoingtohaveanexactmatch,but

enoughliquiditywillbetherethatyoufeellikeyourecovered. Thatsahugeshift.Reinventioniskey–innovationand adaptingtothenewworld.

 

JR:Whatabouttheelectronificationofthismarket?

RS:Ithinkthishasyettobeseentoitsfullextent.Itwillbe twoorthreeyearsbeforeyougetthekindoftransparency thatyouwouldexpectfromtheEBS-likemodel.Currently, therearescreensthatshowyouwherepriceis,butyoudont knowwhereittraded.Soon,itsgoingtobecompletely clean.

 

JR:WhataboutG10?

RS:Intermsofspot,wereatabsolutezeroofspreads.The surpriseforFXisthat,inthepictureIpaintedofallthese problems,nonearethatmaterialandweprobablygrowat3-4% peryearforthenextfiveyears.ButifFXgrowsat10-15%per year,nobodyhasthecapacityinplacetohandlean$8

trillion/daymarket.Thatstherealrisk.Worldtrade,whichdrives
allassetflows,justneedstogoupandFXwillfollow.The electronificationoffixedincomebringsmorevolume,which begetsmorevolumeforFX.

Thatsaid,wereinforverytumultuoustimes.Theresbeena 30%cyclicalbullruninbonds–fromtheglorydaysof RonaldReaganin1981at18%–downto1.4%lastsummer. Whatsthenextmove?WhathappenstoFXinthemidstof thatisasignificantopportunityoverthenextfiveyearsasthe marketforbondsbottomsout.Fiveyearsfromnow,were goingup,andthatsvolatilityintoFX,soI’mveryoptimistic aboutbeinginthisbusinessoverthelongerhaul.Rightnow, notsofun,butsobeit.

Paul Gogliormella

Share This

Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on reddit
Reddit

Related Posts in