Thanks, Riko. Your essays are always thought provoking. All of the asset classes I trade, equities (especially), credit, FX, energy and metals seem to underestimate the risk of renewed fighting in the Middle East (with the possibility of more countries involved) and/or the risk that Hormuz remains effectively closed. When all of the markets tell me I'm wrong, I'm probably wrong, at least on timing if not direction. When I'm wrong, I get out. Job one is to protect my capital, especially when I'm wrong. But I really don't think I'm wrong, so I'm looking a "signal" to reposition. Your essay reminds me that "underestimating the risk" has a massive asymmetrical profile.
@Victor Adair, really appreciate this. The signal problem is exactly what kept me up writing it — because in a reflexive setup, the signal and the reprice are often the same moment.
You don't get a clean warning shot.
What struck me most putting the three scenarios together was just how lopsided the distribution feels right now. Markets are treating Hormuz as a tail. If they're wrong, it doesn't drift — it gaps. Your point about protecting capital when you're wrong is well taken. I just think the harder question here is knowing what "wrong" even looks like before it's obvious.
Thanks, Riko. Your essays are always thought provoking. All of the asset classes I trade, equities (especially), credit, FX, energy and metals seem to underestimate the risk of renewed fighting in the Middle East (with the possibility of more countries involved) and/or the risk that Hormuz remains effectively closed. When all of the markets tell me I'm wrong, I'm probably wrong, at least on timing if not direction. When I'm wrong, I get out. Job one is to protect my capital, especially when I'm wrong. But I really don't think I'm wrong, so I'm looking a "signal" to reposition. Your essay reminds me that "underestimating the risk" has a massive asymmetrical profile.
@Victor Adair, really appreciate this. The signal problem is exactly what kept me up writing it — because in a reflexive setup, the signal and the reprice are often the same moment.
You don't get a clean warning shot.
What struck me most putting the three scenarios together was just how lopsided the distribution feels right now. Markets are treating Hormuz as a tail. If they're wrong, it doesn't drift — it gaps. Your point about protecting capital when you're wrong is well taken. I just think the harder question here is knowing what "wrong" even looks like before it's obvious.