Stupid is as Stupid Does

This week an article in the Wall Street Journal went viral in the FX world as it hit a raw nerve with traders everywhere. “The market isn’t wrong, it is just stupid!,” it announced, noting that,”More and more, those who are paid to play–seasoned veteran institutional foreign-exchange traders–are becoming disenchanted with a market that appears to them to be broken.


The new age of currency wars with many governments attempting to keep their domestic currencies weak in an attempt to export their way out of slow growth has clamped down foreign-exchange movements and severely limited traders’ opportunities to make money.”

While I somewhat sympathized with the plight of the bank traders, my first reaction was, “Stupid is as stupid does.” The signature line from Forrest Gump -- a great movie that taught humility and showed that intelligent people could often do remarkably dumb things.

When you look at the FX market over decade long horizon or longer you see that currencies always go through periods of high and low volatility. Today’s low vol market is just a natural result of the high vol of the past. The markets aren’t stupid -- vol is just mean reverting and furthermore, the range bound trade is far less a function of central bank interference and much the result of market uncertainty. The reason why there are no trends in FX is because G10 economies seem to be a crossroads between doomsday and recovery, with many participants fearing that the Great Recession, much like the Great Depression will have a second act.

In the meantime this may be cold comfort to traders who are being stopped out left and right, but it is also a message that markets are not supposed to provide constant uninterrupted profits. Sometimes the best that you can do is just break even. However, those traders that can contain their losses and keep their capital intact will no doubt be rewarded when the next big move comes along.

Boris Schlossberg

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