Friday, December 18, 2015

"If You're So Smart: John Maynard Keynes and Currency Speculation in the Interwar Years"

I was reading this paper and thinking "This seems familiar".

Duh. We posted an earlier version of it back in February. I'll post again though, but this time linking to the December 1 iteration.

Professor Chambers and his pal Prof. Dimson have written the premier piece of Keynes-in-the-equities-markets scholarship, links below. This is a look at Keynes-in-the-FX-markets.

From the Social Science Research Network:

If You're So Smart: The Currency Trading Record of John Maynard Keynes
Olivier Accominotti
London School of Economics
David Chambers
Cambridge Judge Business School
This paper provides the first micro-study of the risks and returns to currency speculation during the 1920s and 1930s. Relying on archival research, we analyze in detail the trading record of one prominent currency speculator of this period: John Maynard Keynes. Our analysis reveals that John Maynard Keynes used his knowledge of macroeconomics and the international financial and political scene to speculate in foreign exchange markets. His trading strategy was based on a sophisticated analysis of macroeconomic fundamentals in contrast to the simple rules-based strategies characteristic of modern currency markets, namely, the carry trade and momentum. We find that John Maynard Keynes’s risk-adjusted returns were low compared to those on UK stocks and bonds and on the simple carry and momentum strategies. Whilst he exhibited some skill in forecasting the direction of currencies, Keynes found great difficulty in timing his trades. Overall, our findings indicate that Keynes’s economic expertise was of little benefit for speculating in currencies.

If You’re So Smart: The Currency Trading Record of John Maynard Keynes – Introduction
The interwar period was the most turbulent in the history of currency markets. The floating exchange rate era of the 1920s was marked by unprecedented foreign exchange volatility and the large depreciation of European currencies, whilst the 1930s are remembered for the successive waves of speculative attacks, which eventually brought down the gold standard system (Eichengreen, 1992). The interwar years also witnessed a major transformation in the practice of foreign exchange trading with the spread of dealings by telegraphic transfer and of the use of forward contracts. A large-scale spot and forward exchange market emerged for the first time in London. Anecdotal evidence from contemporaries suggests that currency trading became a substantial activity starting in the 1920s, as speculators sought to exploit the new profit opportunities associated with floating exchange rates (Einzig, 1937). However, whilst the literature on the causes and consequences of interwar currency instability is prolific, little is known about the risks and returns and the nature of speculating in currencies during this period....MUCH MORE
Here's a rather vicious drawdown.
Keynes was trading on 10:1 margin and by May 1920 his account was upside down by £13,125 and had a variation margin call of £7,000 which, while not enough to get his account to $0, kept his brokers from selling him out.

He raised a £5,000 personal loan and requested a £1,500 advance on the royalties from The Economic Consequences of the Peace:

At $4.80 to the £, that call was for $458,640, inflation adjusted, enough to get the great man's attention.
I'm a bit obsessive about this stuff, see also:

Keynes The Stock Market Investor
Dimson & Chambers-- "Retrospectives: John Maynard Keynes, Investment Innovator"
"Keynes the Stock Market Investor: The Inception of Institutional Equity Investing" (free download, 54 page PDF)
Keynes in the Commodities Markets
John Maynard Keynes: Money Manager (Couldn't Trade Lard to Save His Life)

Finally, a back-up version of If You're So Smart...
(40 page PDF)

HT: Value Investing World