JUSTINE UNDERHILL: Welcome to How I Got My Start in Finance. This week, John Taylor of Taylor Global Vision sit down with Dave Floyd of Aspen Trading to share how he began his career trading in forex markets, and how that led him to develop his unique perspective on cycles.
DAVID FLOYD: You and I trade the FX markets which is, even though it's the largest asset class in the world, it's the one that people don't pay as much attention to. Love you to give us a little bit of a background on in your career. How did you get started, how did you evolve, how did you get your hedge fund up to $14 billion, and how are you doing with your newsletter currently.
JOHN TAYLOR: Yeah, it's been a long, long way. I guess I got into foreign exchange because I went to school in Switzerland. And I was a mathematical nut or something. And so I learned which was this one, which was that one, and how did they work, and why the fuck did this one go up or down, and why were they there. And so it just kept going. I never left. And I ended up starting a school- turning it into a college from a high school. And that meant I was the only guy who knew anything about money, so I got to do that as well.
And then when I went to graduate school and studied European Political Science, I got dragged into the empirical stuff, which meant I did an awful lot of poll work and statistical stuff. And it was really easy to compare one country against another, blah, blah, blah, and do this and that. And I didn't have any money. And stock markets looked expensive, and foreign exchange- geez, you come up with a buck or two, and they gave you 10 more, 20 more to play with. So I became a rich guy by doing that. And it got bigger and bigger. And now, I wish I did some equities. It might have been easier.
DAVID FLOYD: Going back to your early days, I think it was with JP Morgan- was that one of the banks that you worked with, or was it-
JOHN TAYLOR: No, Chemical and Citibank.
DAVID FLOYD: Chemical and Citibank. Now obviously, back then, you're not doing obviously the electronic trading. But what was different back then in terms of the way the currency markets worked? Obviously, they were fulfilling the same purpose. There's the speculation. There's the governments, the central banks that are involved. But contrast that with where we were then and bring us forward to where we are now. How has that all evolved?
Because obviously, the currency markets nowadays are a completely different beast. But I would really like to how that evolved. How you got into the actual managing of the currency market, and getting the hedge fund up and running. You're doing currency overlay programs. I'd love to hear a lot about that.
JOHN TAYLOR: Oh, it was really a raucous experience. And just like you saw in a couple of movies back then. And actually, a lot more raucous than the movies had. And all of a sudden, in 1974, Reuters came out, and there were numbers on the screen. And you didn't depend on getting the number for it and screaming out what the price was and then at this level, blah, blah, blah.
So it was very weird. It was full of holes and therefore, you could drive through it, and trade this or trade that and screw this guy against that guy. It was a wonderful experience. Chicago was a bit like that. I spent a little time out in Chicago with the IMM. I found out that if you had a good elbow, and you could push hard, you did better business. Push the guy off his spot, and you were there.
DAVID FLOYD: Exactly. It was more about flow of information, who you knew. Basically, how boisterous you could be. It wasn't necessarily on being the smartest guy in the room- not that trading is usually about that. But even less so back then.
JOHN TAYLOR: When I started in 1971, even before the dollar went up, I actually made $20 betting against the gold standard holding. That was my first successful trade. That was before I actually went to the trading room. But when I was there, I went into trading room, there was not one person in that whole trading room that had a college degree. None of us, except for me. And we were mostly from Brooklyn. New York Bank. It was not like, oh Jesus, guy from Zurich, and this one from England. No, we were all from Brooklyn.
DAVID FLOYD: Street smart, basically. Street smart. So trading on behalf of the bank presumably, were you guys considered prop traders at that point, or were you actually just filling orders?
JOHN TAYLOR: We were basically filling orders. But it was sloppy. You're filling orders, somebody comes in and orders this or whatever, and you got some guy in Zurich who's got some more money. So you do it, and you have a mismatched trade. And then you had to cover the mismatch.
DAVID FLOYD: How you got started in the business, how I got started. I got started as a sales trader as well. And you're not really trading per se, at that time. You're filling orders, and you're being compensated very nicely for that. Naturally, we fast forward, times change. You've moved on in your career. Your big thing in terms of forecasting markets has a lot to do with cycles.
And what I find interesting about that is, again, not many people talk about cycles. You hear it a lot, but I frankly don't have all the details. I'd be really curious how you are using cycle- or let's say, how you've used cycles to do your forecasting in the FX markets. But you also look at the other major asset classes as well. So I'd like to touch on that a little bit.
JOHN TAYLOR: I worked for a guy named George Herrdum. And George was a cycle guy. And he used to say stuff that I just couldn't believe. And so I was the guy on the other side executing the trades. And I was saying, oh my God, look at this, look at that. And he figured that out. And so he taught me. His family owned Nixdorf Computers, and they'd send him to Chicago to try to open up a market there. And so he got hung up in Chicago, and started this study, what was going on.
And so I learned about cycles from him, and he threatened to kill me if I told anybody and all this kind of stuff. Which actually was wonderful, because he threatened to kill me, I was surrounded with legal stuff. And so when I went out on my own, I was protected by all the legal thing I've signed with George, saying I wouldn't say this, or I wouldn't say that. So I didn't.
But he couldn't stop my mind. So I kept going. Why are these cycles there, or why do they work? And when I was in graduate school studying my empirical political science, I did a thing on- I was at University of North Carolina at Chapel Hill. And that's where Lou Harris was set up. And we used to be cynical bastards, like all young kids, and say, oh, here's a poll, and it says this and that. And let's control for this factor, and show how it says exactly the opposite.
So I was set up to do this kind of stuff. And when I came into George Herrdum's place, and he was protecting all of this stuff like mad. It's got to be worth something or he wouldn't be protecting it. So I put that together with what I knew, and I came up with my own stuff. And I knew a guy from Princeton who was involved in off- track betting, which New York was setting up. And his job was to make it so that nobody in Buffalo could screw the system in Brooklyn or wherever else, all the different parts of the state.
So he had a lot of really interesting stuff on odd- protecting, and the randomness and lack of randomness of certain things. And so I put that together with my cycles, and then next thing you knew, I was forecasting the Canadian dollar.
DAVID FLOYD: Let me try to get a little bit more details there. In terms of the cycles, define how do you define a cycle, what exactly is it? And without having to divulge anything per se, how are these things formulated? How do they work?
JOHN TAYLOR: I couldn't be more simple after doing this for so long. I look at a cycle, it's, hey, that's a cycle. It's got a low here, and a low there, and a high there, or whatever. And if it's too weird, one of my rules is keep it simple in a way. If it doesn't come out, don't try to make the play. Wait for the play to come to you. And with cycles, every time- I ran a company that had like 60 employees. About 10 of them were doing research. And I would hire these guys, and they'd come with all these degrees out of some school.
And some of them were real stars and have gone on to do other things. I go, use my nonlinear stuff, which is what the cycles were, and everybody failed. The only way they could do it was by looking at the cycles, and saying, God, there are too many cycles in this thing. Don't trade it.
DAVID FLOYD: Paralysis by analysis.
JOHN TAYLOR: So I'm going to do that. And yeah, that was good. But what was great about that was I got to be the CIO and say, well, here's what your stuff says. But if I throw the cycles in there, you're not going to be able to make that trade, it's not going to work. You've got to wait 'til the right time. And so basically, we looked at the market, the first thing we start off with I don't give a damn about the price. I didn't say the F word there.
But I really don't give a fuck about the price. I want to know what the timing is. Where am I, what happens next year? Which tells me what happened before and what's likely to happen next. And price, so what?
What we look for obviously is a low should be lower than- the rule says it should be lower than anything five days before or five days after. That's what our little system goes through and finds things to sort through, and so I'm not looking at 10,000 things, I'm looking at 300. It sorts out the ones that say, there's a little dip, and there's a little whatever.
And then I go from there, basically smoothing and yada, yada, accounting, and stuff. In a way, I'm a card counter. I used to be embarrassed flying in airplanes with a chart book, and I'm counting 1, 2, 3, 4, 5, 6, 7, 8- how stupid is that guy? That guy knows when this market is going to turn.
JUSTINE UNDERHILL: From his keen interest in math that grew during his time in Switzerland, John Taylor was obsessed with discovering what made foreign exchange markets tick. Relentlessly seeking answers to his questions on markets and cycles, he learned to simplify his process as a trader.
For Real Vision, I'm Justine Underhill.