A decade or so ago, I wrote some modestly successful papers about the design of lotteries and the rationality or otherwise of buying lottery tickets. Having come to the conclusion that buying lottery tickets was (or at least could be) rational, it struck me that, apart from raffles and the odd birthday present, I’d never actually had a ticket in a proper lottery. So I went down to the newsagent on the assumption that I could hand over my money and get a chance at untold wealth. Instead I was confronted with a bizarrely complex lotto form (this was before scratchies, I think). I looked at it and decided it was too much trouble, and I would try to make my fortune the old-fashioned way[1].
Now I’m in a similar position. I’ve told the world the long-term US interest rate has to rise and, correspondingly, the price of US Treasury notes has to fall. Given that I don’t know when this will happen, I’m not willing to risk the unbounded losses of a short position. But I’d at least be willing to consider a modest flutter in put options, if the transactions costs weren’t too high and the settlement date were far enough in the future. However, although I’ve written plenty of papers about the properties of derivatives, the risks they pose to the world financial system and so on, I don’t know where or how to buy them, or what the costs are. The Sydney Futures Exchange seems to consider them too exotic. Any suggestions on easy ways to join George Soros and Warren Buffett will be greateful appreciated.
fn1. That is, as all Australian readers will know without being told, through real estate speculation.
John Quiggin 
You can always buy some puts on an Australian company that derives its income in US dollars, or have their markets in the US. CSL comes to mind.
Short some US T notes, and cap your exposure by buying physical US T notes.
Your specifications seem a little too restrictive to be ever able to take postion I think. My understanding is the type of contract that you are interested in (option expiry > 2 years) is pretty illiquid, even the futures contract that would underlie it are fairly illiquid.
Therefore huge spreads especially for a private punter taking on minimum contract size. You could just keep rolling a small short dated put position instead. I would think that you can probably find a broker in Oz who will have membership on CBOT or somewhere and can do it, but I don’t know where I’ve never tried it myself.
Howver my suggestion is find someone who disagrees with you and you trust then offer them a private bet.
No, no, no. The traditional way to get rich is to marry it, inherit it, or steal it. Land speculation is merely a proxy for these, possibly in combination.
I’d be careful about publiclly wriing articles in the FR and then seeking to profit from their predictions. doesnt look good.
I had the same problem the first time I went to the TAB.
Giles, given that the global financial market hangs upon my every word, I fully expected publication of my piece to lead to an instant run on T-bonds, and so held off my own Soros-style raid until the market was fully informed.
But now that the prediction is public, I can’t see that there is any ethical problem.
OTOH, I think Steve is right. There doesn’t seem to be a financial instrument that meets my need.
JQ,
Can you clarify the expiry date on your proposed trade? That is, by when do you expect the US T-Note to fall? Also, are you targeting the 10-year note?
John, there are plenty of prediction markets like Hedgestreet and Intrade that offer small contracts that would let you put your money where your mouth is, with well defined risks.
But from the point of view of a buy and hold investor rather than speculator, higher yields are not all bad. Afterall, you are the one getting the higher yield. As with stocks, you should look at total returns, not just the capital gain.
Fyodor, I’m targeting 10-year US T-notes and T-bonds and I expect the rate to exceed 5 per cent sometime in the next two years. I’d be willing to take a punt on 6 per cent or more at reasonable odds.
Stephen, I’m not following. If I hold existing T-notes, an increase in yield on new notes or in the secondary market represents a pure capital loss, with no change in my flow of income. Thanks for the market tips, I’ll look into them.
From a quick perusal Intrade looks the perfect place for easy short-term flutters (eg bets settled at end 2005). You can probably work out a longer term bet rolling over some of Hedgestreet’s little derivatives, but I think you might have to do some serious maths (no probs for Prof Quiggin, a bit of a barrier to most of us though).
Sorry JQ, Steve Edney was right: two years is too long for over-the-counter options. You could get a derivatives broker to customise one for you, but you’d get legged on the pricing. Let me explain why.
The bottom line is that two years of option value is incredibly expensive. This in itself may provide some insight into your position: it’s relatively easy to call bond yields up over a long-term period, as the combination of volatility and time will produce spikes and drops in yield. As the saying goes, even a broken watch tells the correct time twice a day.
Looking back over the last 10 or so years there were plenty of occasions where the 10-year US treasury bond yields rose or fell by in excess of 150 basis points within a two year period. It’s even more if you stretch the period to three years. You’re asking your counterparty in such a trade to take a very big risk betting against you, and they will require substantial compensation for taking that risk. Putting it another way, you haven’t made as big/risky a call as you think. It’s much harder to call the direction of yields in a shorter-time frame.
Those two sites are interesting, but there still doesn’t seem to be any contract that lets you take a long dated short position. Unsuprisingly like the large exchanges there isn’t really a market for it. Longer term IR risk is generally managed through either the treasuries themselves or OTC derivatives like swaps.
Fyodor, I had in mind a European put option (a bet that the price will be lower in two years time, rather than at some time in the life of the option). That ought to lower the volatility cost a little bit. And I’d be willing to go to more than 150 basis points over that term. Still, it doesn’t sound as if there is a practical solution, other than to reduce my exposure to $US securities as far as possible, which I did some time ago.
John,
I apppreciate that there is now no public issue, but ex post, if you make a packet, people may hold it against you.
It was just a small point. But thats what markets in finance and credibility feed on.
Giles,
I don’t understand your point. JQ has publicly stated an investment proposition. If he backs his own judgement and profits from it, why should anyone hold it against him?
Is Pr Q drunk or sober?
In a recent comment 13/1/2005 @ 1:47 pm I gently teased Pr Q’s chronic bearishmess by suggesting that he should put (ha, ha) his practical money on his theoretical mouth:
“https://johnquiggin.com/index.php?p=2133#comment-13024”>in a testy reply on 13/1/2005 @ 2:24 pm, hotly insisted that betting on his theories was a mugs game becasue the markets temporal unpredictability was greater than his supply of risk capital:
Then, in the space of one post, Pr Q dramaticly changed his tune and now nonchalantly solicits nifty financial advice from the sleazier quarters of his commentary facility in order to clean up from the coming US fiduciary crisis. It is a startling turn around for a conservative and morally censorious Left wing academic to suddenly plunge into the market to engage in lowrolling jiggery pokery with the predators and parasites that he formerly disdained.
Obviously my innocent jape has touched a sensitive nerve. I would not dare to teach my eco-pedagogic grandmother how to such financial eggs but I will offer a word of advice: the reccomendations he receives, insitutional mechanics asise, will likely already be public knowledge and factored into prices, subject to reflexive self-correction or part of an elaborate scam to sting unsuspecting GF’s.
So I hereby disclaim all responsibility for the consequences and wish him, as always, the best of luck.
One of your loopier efforts, Jack, notable for both gratuitous offence AND a total absence of material contribution. Well done! Now, be a good boy and go back to chewing your crayons – the adults are talking.
Fyodor — 14/1/2005 @ 1:14 pm provides some slap-stick relief from all this high-powered financial talk and unintentionally proves my point:
this comments facilities public discussion of financial finagling was my “material contribution” to this discsussion since public get-rich-quick schemes, by definition, will fail. If the schemes were valid then by the time joe citizen in the public got wind of them all opportunities for gain would have been exploited.
In financial markets “the adults” (ie those in the loop) never talk in public (“money talks, b.s. walks…” etc) about their schemes before taking action. If they did “the children” (ie those out of the loop) would find out and the opportunity for making a killing (“like taking candy…” etc) would disappear.
BTW It is revealing that Fydor equates “adulthood” with the appropriation of unearned income by pixil-shuffling. It figures that a fellow traveller of the cultural Wets also likes to dabble in the markets with the financial Drys. A solipsistic philosophy, where the virtual controls the actual, underlys actions taken by both the cultural and financial prongs of our po-mo progressives.
Whilst I’m working out the meaning of Jack’s latest post, I’ll share with you all my discovery, after some years of intellectually stimulating but fiscally unrewarding research, that it is impossible to predict the winners of horse races, except in rare cases which are insufficiently frequent, and the return on investment insufficiently large, to compensate for the unpredictability of the great majority of cases. This is a useful thing to know at this time on a Friday afternoon.
Jack,
JQ is taking a view and wanting to have a bet on a market that has not moved how he thinks it must. ie. He has a different view than the market is taking currently. The high powered financial talk us sleazers were giving was the equivalent of telling him how and where to fill out his TAB form, or more precisely that there is probably nothing easily available to make the bet he wants to take.
Because a single participant takes a different view on publically availble information neither means that he is wrong nor that the market will move to the “right” price or has already. If he keeps getting it right maybe someone will listen but I don’t reckon either JQ’s blog or the Fin Review holds terribly much sway over the big offshore players in the US treasury market.
Lottery tickets?
I liked the British comedy where one of the newspaper writers called it the “moron tax”.
By the way, our family pays it’s moron tax on occasions as well.
Yep, taxes on gambling generally tax stupidity, especially where the risk-neutral expected return is well under 1. As stupidity often causes great grief for others it should be discouraged; think of it as a Pigovian tax.
Note though that economic growth ensures that financial markets generally have an expected return >1 for participants – I’m not implying this gamble is stupid at all.
John, I realize it’s not as clean as buying a put on the U.S. dollar, but you could act on your currency forecast by loading up on the iBoxx Liquid Corporate Treasuries exchange-traded fund that trades on the London Stock Exchange. This ETF holds an array of euro-denominated corporate bonds. Assuming the U.S. dollar does fade, the euro will rise and you stand to make a nice currency gain. Alternatively, if the markets inexplicably continue to ignore your recent forecast and the greenback sails merrily along for several more years, you still stand to collect a reasonable yield from the fund.
Bertie, does a fall in the US dollar imply a rise in the Euro vs. the A$?
Tom, I’m afraid I’m stunningly stupid about the Aussie dollar situation. For what it’s worth, I think the ideal way to play the current situation is to have a U.S. dollar brokerage account (such things are common in Canada, from where I’m writing) and arrange things so you’re borrowing in U.S. cash to buy the iBoxx Liquid Corporates. This winds up costing you the slight difference between the interest rate on your margin loan and the yield on the Liquid Corporates, but the upside, of course, is that if the U.S. dollar does fall the value of your loan plummets while the value of your asset climbs. I imagine this would nearly certainly produce profits in Australian dollar terms—the only way it wouldn’t would be if the Aussie buck goes on a monumental tear of its own versus the Euro, which seems unlikely given Australia’s current account deficit.
My apologies by the way. For unfathomable reasons I referred to the iBoxx fund in my previous post as the Liquid Corporate Treasuries. More proof that I shouldn’t attempt typing after a bottle of Barolo. The actual name, of course, is the iBoxx Liquid Corporates.
You should probably talk to your neighbour Steve – he plays options and might have some insight. I think he is back from the beach.