Much has been made of market calls. Littering this thread like rubbish are demands for explanations to why this and why that. Holding hands with these demands stand comments that amount to nothing more than derogatory character assassination. There is also the smell of fear.
My response doesn’t hope to answer or assuage any of that. I am responding because I am responding. Make what you will of that. My perspective is my perspective. It needs no justification to any but my own financial account, an account that showed great losses in its early life circa 1995.
So how to add to the sum of knowledge, then? What can I possibly write that can be of any use to anyone? Perhaps I could start and end with a truism: emotions rule markets. Wow, what a revelation. But how you measure emotion, if you agree emotion rules markets, is therefore important.
I use a lens that acts as a microscope for the close-in work, and a telescope for long range forecasting. The lens is the lens. It has to be appreciated for what it is, a lens. It is not the market. It allows me to observe the market, focusing on what the herd’s emotions indicate as the next probable move - up or down. But that’s a critical word, probable, for nothing is certain in this realm. Which is why one must appreciate that a lens, be it one whose roots are of a fundamental or technical nature, requires more of a person than mere possession.
More ‘than just a lens’ comes in the form of a trading plan, and guts.
You need to know when to trade or you might as well just throw darts at a board. For what it’s worth, my trading plan has a lens that demands action in three instances, and three instances alone.
The trading plan itself can be broken down to three parts as well. Only three? Why not. Good things are simple things. There’s no need to rely on four or five or 15 or 22 parts. Just three will do; a market tool (the lens), money management and a psychological approach to complete the trio.
Money management isn’t difficult to describe. It’s a plan or system for containing losses (and letting profits run) through effective management of actions, limits on capital application and stop loss positions.
What I see through my lens is not always interpreted correctly for the time frame being worked on. If the market tool says buy for the medium term, the short term may prove that to have been a ‘not yet, sucker’ signal. That’s not to say the market tool was wrong, only more complex than my interpretation of the lens indicated. If the immediate movement has gone against you, there is an urgent need for an objective price at which interpretation is absolutely wrong. That’s money management. That’s also when you get out.
MM tells you never to risk more than a specific figure on any position. This may be as low as 2% of your capital on hand, which may limit access to many, many leveraged markets. So suck eggs from the sideline. Or get a job with Goldman Sachs. Meanwhile, limiting access to a market is not the big deal. Ensuring an ability to stop losses immediately when interpretation of what the lens indicates proves to be wrong is. Hence the need for a maximum of 2% capital application to a position.
Bit too esoteric? Hey, I’m doing the best I can here. Moving right along: An individual should not hold onto a position to ‘prove’ he or she is right. That would be counter productive. But, oddly enough, it’s not uncommon, which leads me to the psychological approach, the last but by far not the least of three pillars supporting success.
Why buy real estate? Why trade leveraged instruments? Why save money in a low interest bearing deposit account? We do these things for a reason. What that reason is bears investigation. If you’re doing it for accolades from the digital reproduction of thoughts (hailing from anonymous sources, of course) in a chat-room like this, you definitely need to know that is the reason for your decision to enter your specified market.
You need to know for one reason, and one reason alone, which is to limit losses. When do you exit or enter or hold onto a position? When a well liked contributor on PPRuNe says so? If your psychological reasons for trading, saving money or buying real estate are based on approval of a chat room audience, that chat room audience’s approval will guide you into ruin. Fast. So good luck. Market Wizards, by Marty Schwartz, is a frightening account of how destructive an untamed psychological approach can be if not fully understood.
On the other hand if you know you’re in it to make money and not to brag about it to friends, colleagues or digital reproductions of thoughts (hailing from anonymous sources, of course) in a chat-room like this, the only thing that matters is cutting out of a position should it be unprofitable. This you would do for the psychological reasons underpinning the trade, that being to make money, not hot air.
So there are three pillars: market tool, money management and psychological approach.
Of the USD, there is a very high probability in the medium term that a major reversal in trend has occurred. The sideways movement of the past year, of which most are aware of only one part, the down part, appears complete. The last leg took a long time to play out.
It confused a lot of people, me included. It tried many a person’s patience and savaged perhaps more wallets, but the probability is that the bottom is in on the USD. If that is correct, my lens allows for a multi-year Dollar bull to surge out of the pen.
But I am asked WHY the Dollar rally. Here’s what may be a clearer answer than the above slightly cryptic one. It comes in the form of one word: securitization.
In 1999, normal banking blended with investment banking. What started out in the good ol’ USA quickly went viral, global. The reason is not in any way complex. It’s because Wall Street wasn’t making enough money, bound as they were by the straight jacket of regulator-imposed capital ratios, by borrowing short and lending long, that is, regular banking.
So, with some tricky footwork, main street banks thwarted capital ratios via the creation of the shadow banking system. Australian banks are exposed. The big-four hope to fool everyone into thinking they’re not exposed, but they bought into CDS’, CDO’s and all the other exotic instruments created at the beginning of this decade (we’re not done with the decade until the end of 2010 by the way).
At any rate, the shadow banking system has not shrunk since the big rally in equities circa March 2009. On the contrary, the system has gone further underground and, indeed, grown exponentially. Which is to say that of the 60 trillion plus, yes, that’s trillion, dollars in credit default swaps and collateralized debt obligations created by the former Lehman Brothers and the current Morgan Stanley, Goldman Sachs et al market wizards, none of it has been cleared. NONE of it.
De-leveraging is now the operative word.
Martin Wolf (FT), Bill Gross (PIMCO) and yes Ambrose Evans-Pritchard have been blowing on that trumpet for some time. Few listen. Those who hate the tune attempt to belittle and discredit those that hear the music and fear it. Wolf, Gross, EP are referred to as pessimists. And here’s the irony of it all. They are learned, studied, immensely well read and connected individuals with pedigree! They are anything but pessimists. They’re realists, critical analysts who have not allowed their critical faculties to just tune out because the herd says we’re done with that annoying retraction of ever-upward growth.
The tune will play. As it does, the instrument demanded in return for assets requiring selling off are not apples, woodchips, pens, trinkets, promises, IOU’s or even a fine piece of ass. The instrument will be dollars, for the world’s massive overhang of debt is denominated in USD. It is for this reason, this FUNDAMENTAL reason, for the Dollar rally.
Don’t be fooled. While the US Fed has been busy buying Treasuries and printing money via quantitative easing, the amounts they’ve come up with have not come anywhere near the overhang of debt out there. What’s a few trillion to what is a minimum of $60 trillion in debt? You need to really think about those figures. As for me spruiking the USD, all I can say is tell him he’s dreamin’. That’s so ridiculous it’s laughable.
But if you need objective proof of that, go to the library and hire the tome that is William Greider’s ‘Secrets of the Temple – How the Federal Reserve Works’. Or buy the book. Far from being a Dan Brown look-alike, Greider is a consummate professional leading you through history, and reality, of meetings and the results of actions by the Fed to try and control the direction of their currency, the USD.
To wit, no amount of money is enough if going against a market as big as the currencies market. No matter if you are the Fed, the Bank of Japan, the ECB or have four Pratt and Whitney’s at your disposal: if the market decides the Euro will cave, the Euro will do just that. If the market decides the Dollar will rally, the Dollar will do just that.
Which makes Thomas L Friedman so ridiculous when he asks in today’s IHT if China is “the next Enron”. There he is, giving advice to James Chanos that you should ‘never short a country with $2 trillion dollars in reserves’. He failed to mention the daily, that’s daily not monthly, amount changing hands in the Forex market is in excess of that whopping reserve. Or that he is not John Chanos.
If I’m going to drop names, I might as well end by dropping another. Jaron Lanier is a digital pioneer. He too comes with pedigree. Lanier is the guy that coined the phrase ‘virtual reality’. I think that qualifies him, somewhat, to speak of the Web. So here’s the thing: he wonders “if the Web’s structure and ideology are fostering nasty group dynamics and mediocre collaborations”. I wonder about that, too. I wonder about the application of such to PPRuNe. In Lanier’s new book ‘You Are Not a Gadget’ he blames the Web’s drive-by anonymity for fostering vicious pack behavior on blogs, forums and social networks.
I read most of that in one of those paper’s you find yourself reading. The writer is a New Yorker, John Tierney. Look him up. He’s not bad. The article reminded me of this thread, and how a mere OPINION of mine on the likely direction of the USD led to manifestations of pure hatred in private messages from someone I don’t know, have never heard of or spoken to, and yet thinks he has the RIGHT to send vitriolic bile my way, your way, any way, because of my temerity to dare post a one-liner here, in the most hallowed sanctuary that is PPRuNe, indicating the likely movement of the USD.
The bottom is in, at any rate. The lens I use indicated 74 on the Dollar Index. The market stopped dead at 74.2 and has rallied ever since. The likely direction is short term sideways, medium term up (way up) and long term down (way down). Whatever.
If your (active) interest is real estate, bonds, equities or securities, it can only be but patently obvious that the terrain is not always friendly. If you are yet to dip your toe in the waters of finance, do say carefully. And good luck with your learning. Don’t be put off by the mosquitoes that need swatting every now and then, or by the rather long time it takes to truly understand the meaning and essential value in the strength of having three very solid pillars to your trading foundation.
Buy dollars, sell China (medium term, not long term).
With respect to Gnads.
Last edited by 4PW's; 14th Jan 2010 at 08:25.