A detailed new study of the chequered currency-trading record of John Maynard Keynes might make today’s overconfident currency speculators think twice.
While Keynes was one of the most famous economists in history, and his stock-picking record as an asset manager was outstanding, a forensic analysis of his personal currency trades found that his record was pedestrian by comparison.
The findings are forthcoming in the Journal of Economic History, in a study co-authored by Olivier Accominotti, Associate Professor of Economic History at the London School of Economics and Political Science, and by David Chambers, Reader in Finance and Academic Director of the Newton Centre for Endowment Asset Management at University of Cambridge Judge Business School.
“Unlike his stock investing, Keynes found currency investing a lot tougher despite the fact that he was at the centre of the world of international finance throughout the time he traded currencies,” said David Chambers of University of Cambridge Judge Business School, who has written numerous papers on Keynes. To be sure, Keynes made money from speculating in currencies in the 1920s and 1930s and his profits arose from more than pure chance. “Directionally, he called currencies more or less correctly but he really struggled with timing his trades. Hence, one main message for investors today is that if someone as economically literate and well-connected as Keynes found it difficult to time currencies, then the rest of us should think twice before believing we can do any better.”
In his currency trading, Keynes relied heavily on his own analysis of fundamental economic factors such as inflation, trade balance, capital flows and political developments.
Such “fundamentals-based” strategy differs from “technical” strategies that follow simple mechanical trading rules but seek profits by identifying market anomalies – typically through the carry trade (betting on high-interest currencies versus low-interest rate currencies) and momentum (betting on currencies which have recently appreciated versus those which have depreciated). In fact, we observe both fundamentals-based and technical trading styles among modern-day currency managers.