and also here (WSJ as well).
Sunday, September 13, 2009
We never learn.
A common mistake when looking at crises and catastrophe is to look almost everywhere and at everything in the immediate vicinity of the time that the incident occured, but losing sight of the broader historical context. This common problem, a myopia, happens again and again. An example of this myopia is now on display with the current changing of the guard at Morgan Stanley. The general sentiment on the newspapers is that Mack has done "o.k.". The reason for this tepid farewell is due to Morgan Stanley derisking in the past 12 months (unlike Goldman Sachs). The fact that Mack is not applauded, but instead pitied, for choosing to derisk during the largest period of deleveraging since the Great Depression, shows that people never, ever, ever learn.
Wednesday, March 25, 2009
US Housing
Inventory levels are currently at around 12 months supply.
A more normal level is when this is down to 6-7 months.
Until then, more cuts in homebuilding is required.
Sunday, March 15, 2009
Marshallian K
I've always been struggling to find a good relationship between money supply and asset prices.
A few days ago I came across this BCA research study (GIS 090306 - Gold), where they compare Marshallian K to asset prices.
One thing to notice is how correct Marc Faber is. That rises in money supply to lead to rises in the gold price (and it appears to be quite a tight relationship). What is also interesting is how money supply does not lead to consumer inflation, merely asset inflation. I need to look more into this dynamic, maybe they are driven by the same underlying inflationary force, but consumer prices have offsetting mitigating effects (like trade, globalization, technological advancements).
However, I see a conflicting discussion of Marshallian K in Niall Ferguson's Chimerica article.
He argues that there has not been a surge in liquidity (maybe a little in the Eurozone, but for the US, Marshallian K has actually been flat from 2003 to 2007). So has there been a surge in liquidity or not? What's actually happening here? Is Niall's data incorrect, or am I not comparing the same series (maybe there are many different Marshallian K's).
I did some more Googling on Marshallian K and surprisingly found very little. I could only find a single paper on ideas.repec.org ! I did however find this little paragraph on the topic by Stephen Roach:
"My favorite gauge of the quantity dimension of liquidity is the so-called “Marshallian K” -- the difference between growth in the money supply and nominal GDP. In essence, this measures the surplus of money that is not absorbed by the real economy. Joachim Fels has constructed such a measure for the “G-5-plus” group of industrial countries -- the US, Japan, the 12-country euro area, Canada, and the UK. This measure is based on “narrow money” (i.e., M-1) -- the monetary aggregate that still has the tightest linkage to central bank policy adjustments. The trend in this version of the global Marshallian K is now ticking below the “zero threshold” for the first time since 2000 -- consistent with earlier turns in the liquidity cycle that have been associated either with recessions (1991 and 2000-01) or abrupt adjustments in financial markets (1994)."
Saturday, March 7, 2009
mental aspects of trading
i've read the thousands of websites and books pertaining to trading and trading psychology.
Accept your losses before a trade, don't trade more than 2% of your total capital, cut your losers and let your winners run etc.....
I know I only follow about 5% of this advice, but nevertheless I'm very familiar with it.
They also all stress the need for a system. I dont' really have a system, my method is not something that can be written down. In short, it's a complete mess. I have a belief that I will do better by having an "anti-system". For example, I have a statiscal prior belief that any system works well until it doesn't, and this process is Poisson. I.e. the more you use the system, the higher the chance that it will blow up against you. So my philosophy is to randomise the systems, in the belief that when the system is undergoing a period of severe underperformance, due to my randomisation I will luckily not be employing that system at that time.
I have no proof for this philosophy, and it is probably fallacious. But I like it, because I believe all systems work (momentum trading, swing trading, scalping, fundamental etc), it just depends on the time period the system is being employed.
I also believe that it is very important to take a loss. At least one 2% loss in a one month period. It's sobering, slows you down, and sharpens your mind.
For me, if there was one key to trading, it's when you've reached the level when when you make money, you feel like you've made less than you've actually made, and when you lose money, you feel like you've lost more than you've actually lost. It's when you're in this mental state that one tends to be most profitable.
I'm saying this because I used to be the opposite. I was gleeful when I made 10k on a 50k margin (1:5 gain:loss ratio) and I didn't feel so bad when I lost money. I'm trying to say that you should 'game' your psychology, to percieves your trading reality and experience as worse than they truly are. You're better off if after winning 10k you've felt that you've won only 6k instead of feeling like you've won the actual 10k.
So this ad-hoc haphazard approach serves me well until I hit a few speed bumps. A speed bump is not a loss (I expect those and am well aware that my execution is relatively mediocre). No, a speed bump is when you're philosophy gets roughed around a bit.
For example, everyone knows that correlations work until they don't work anymore. We saw during the early periods of the subprime crisis (late 2007) that USDJPY and USDCHF were strongly correlated. But then this broke down, and USDCHF tracked the USDEUR, and USDJPY became the inverse of the S&P500. So breakdowns of correlations are not new to me.
What really throws me off is when the market is internally inconsistent. For example, I lost money last week when I was hoping for the yen to rally against the dollar as risk aversion rose. It didn't, the correlation failed, and I'm ok with that. What bothers me was when there was noise about the state of the US financial system, and both US Treasuries, the Dollar and Gold all rallied. This made no sense, and was evidence of internal inconsistencies. Gold was not rallying on inflation fears (we are surrounded by evidence of deflation) so it could only be rallying on fears on the quality of the Fiat US dollar. But if this was true, why was the USD and US treasuries rising? It's the complete opposite behaviour!
This instances really throw me off. Are there underlying stories? Is it a short term anomaly, and will reality restore itself and either gold or US dollar assets fall?
I guess why these instances throw me off is because I derive almost all my information from prices across markets. So when this happens, these internal inconsistencies, I am not getting much information from the market.
When I see such things, I develop my own fanciful theories (which are probably almost entirely wrong). For example, to explain the gold/USD anomolay, I put it down to inter-temporal mismatches in pricing. The dollar is stong for short term reasons, and gold is strong for medium- to long-term reasons. People want to buy dollars now to get in line for repatriation of dollar portfolio flows. So it's a short term technical reason for buying USD. If you were in the spot USD cash market, would you care about what might happen a year or two from now, or get in line and play along with the real flows that are occurring right now.
Gold however, is not a real asset (no one buys it for anything. It is pure sentiment). There is no 'flow' element to gold (and hence why there is no real 'market' for gold. Supply and demand are meaningless concepts when it comes to gold). So anyone who is in the gold market and fears the current expansion in the Federal Reserve BS leading to eventual inflation could buy gold essentially as a call option on eventual currency debasement. With lease rates so low, this is a call option that is relatively cheap, and has almost infinite maturity.
Wednesday, March 4, 2009
Interest on Reserves
I was just randomly wondering what the point and implications of this was today. Here are some links:
(off topic, but i also remember reading somewhere about forcing privately owned banks to hold government bonds. I forgot the reasons why. I also wonder what this does for money supply (if CB buys the bonds the money supply increases. If a private investor does, it contracts (or is neutral if the government spends what is borrowed). So what's the story when a privately owned bank buys the bonds?
Copper
CFTC shows that specs are heavily short. I wonder if this recent rally is for real, or merely some weak shorts getting out. This Bloomberg article quotes GFMS saying that Cu price will average $3000 this year. That's $1.36 per pound. I'm short from 1.60 to 1.40, stop at 220.
I must be more careful in the future going big into an already heavily crowded spec position. I got hurt last week with the USDJPY short unwind, and I'm getting hurt now with copper. In both instances I joined then the trade when the specs were in record short positions.
Monday, March 2, 2009
Markets move quicker than you think
One thing I've learned is that when the market realises whats up, it gets to where it needs to be quickly. People seem to think that the market will take a while to digest whats going, maybe bounce around a bit, and only then head to where it needs to be.
This view is completely and utterly wrong.
1) Post TARP > all Wall Street strategists said that after TARP was announced, there would be a bottom for the market, and the market should stabilise and maybe even rally. Because, even though in the long run stocks will go down, short term there is support. The market was not so damn (and thankfully i didnt follow their advice and go long, i was modestly short). TARP was announced on Oct 14 2008. SPX was at 1000. On Nov 20, SPX hit 750. Market was not fooled.
2) Commodities trade > I was short copper way too early and got burnt. Then it brok $3.00/lb, and I thought I could take my time to get into a short. Before I knew it, copper had plunged to $2.00. Once the market knows where it needs to be, it doesnt wait to get there.
3) End of 2008 Santa Rally > Technically this did occur. It was lower in degree than expected (SPX topped out at 940) and it happened on miniscule volume, but at least it happened. But everyone was expecting great things from this Santa Rally, but it firstly happened late (only after Christmas) and was exceptionally brief (downtrend resumed about 5 days later). The market is not dumb and will not hover above the level where it needs to be.
4) Break below Dow 7000 / SPX 700 > In Jan09, most market professionals were expecting a rally in the first few months in the year, and then weakness towards the middle of the year (I have no idea where they get these dumb ideas from). Yet again, the market was itching to test the Nov 20 lows. It was obvious. So why should the market rally upwards, and then wait a few months before testing the lows? Anyways, I was thankfully decently short up until 780, but expected a bit of a bounce where I could reload my shorts. I fell into the trap that the other market professionals got into earlier. I thought the market would take its time to get where it needs to be. So even though I was utterly convinced in Jan09 that the SPX would hit 700 by April, I hardly rode this trade down because I thought the market will take things slowly. So I missed the move from 780 to 700, and I'm aggressively long at 700 and nervous (are we going to hit 650 this week)? I'm hoping that ADP on Wed is better than expected, so we get some relief before NFP.
Long story short. The market moves quicker than you think.
Market Sentimentalism
I find it amusing that financial media always get dewey-eyed and nostalgiac when a part of the financial landscape passes on. Over and over again. For such savage, brutal capitalists to be so sentimental speaks volumes about the actual amount of cold 'rationality' in the market. Here is the WSJs lament on the passing of AMEX.
52wk JSE lows
SAPPI 1700
BIDVEST 7731
INVLTD 2860
STANBANK 6070
NEDCOR 7051
ANGLO 13550
AFROX 1613
RICHEMONT 1250
DATATEC 1211
IMPERIAL 4162
BARWORLD 2952
Mondi
Come off a lot and is starting to look attractive.
Don't think the discount to book value means much when there is so much overcapacity right now (what use is the book value of a mill if there are too many mills in the world? Doubt they'd be able to realise book value on that equipment in this market).
As Deutche mentions via newratings.com the dividend seems unlikely to be maintained for the next two years due to weak cash generation. The high dividend yield was the main reason I was attracted to the stock.
MNP traded at R17.80 today, 40% down from when I bought in in December (and when I thought it was screamingly cheap). I don't think one needs much of a turnaround in the environment to get this share back to R40.00. So the question is whether I should buy today or wait a bit?
I'm waiting....
Sunday, March 1, 2009
weekend reading
Prechter - S&P to trough at 450
BBerg - On Tobin's current relevance: “It’s not part of what anybody has taught graduate students since the 1960s,” Cochrane said. “They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.” To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the stimulative effect, Cochrane said. It also will do nothing to unlock frozen credit, he said. -How does this argument hold up when most of the purchases of USTs are by foreigners (which seems to me to be the actual truth)? Does this crowding-out argument make sense in the multinational framework?
TimDuy - When will the Fed move to overtly inflationary policies? "For Bernanke and Geithner, there are no bad assets. Only misunderstood assets."
Krugman - the problem with the neoclassicals: "The other group decided that since they couldn’t come up with a rigorous microfoundation for price stickiness, there must not be any price stickiness: recessions are the result of adverse technological shocks, not demand shocks"
Friday, February 27, 2009
Freud, Masturbation, Gambling
"In a haunting novel about gambling, Dostoyevski's hero reaches his hand out to gain caresses from older seductresses prior to making a series of losing bets at the gambling table. Freud's take on Dostoyevski's antihero is that the 'vice' of masturbation is replaced later in life by addiction to gambling. The mixed feelings of passion for playing the game and guilt for being impassioned with the game are the equivalent to a childhood compulsion to masturbate. Edmund Bergler, an American student of Freud, extends this theory to say that gambling replaces the feeling of guilt from a boy's Oedipal longing for his mother. For an adult gambler, losing becomes "self-punishment" for early transgressions. In a desire to rectify these transgression, the gambler then wants to lose."
-Victor Niederhoffer The Education of a Speculator (pp. 181-182)
New 12m JSE lows today
BARWORLD 3019
AFROX 1780
NEDCOR 7250
EQSTRA 540
BIDVEST 8051
INVLTD 2965
MONDIPLCP 1829
DATATEC 1220
SAPPI 1853
INVPLC 2730
RICHEMONT 1310
ANGLO 13755
Thursday, February 26, 2009
economic history
need to read more into these events:
Top 10 Financial Crises
10. The Panic of 1907: The fourth so-called ”panic” in 34 years.
9. The Mexican Peso Crisis 1994 aka “The December Mistake” Punta !
8. Argentine economic crisis - 1999 If you have no money, is it a good idea to print more?
7. German hyperinflation - 1918-24 If you have to print a 1,000-billion Mark note, you probably have too much inflation.
6. Souk Al-Manakh - 1982 Try not to use post dated to buy stocks
5. Black Monday - 1987 Can we call a 23% drop in a single day a black swan?
4. Russian financial crisis - 1998 devaluation of the ruble and cancellation of debt is never good for a local stock market.
3. East Asian financial crisis - 1997 aka the Asian Contagion
2. Black Tuesday - 1929 — Really? One day, and not the entire Great Depression?
1. 1973 Oil Crisis — Big energy increases cause recessions
9. The Mexican Peso Crisis 1994 aka “The December Mistake” Punta !
8. Argentine economic crisis - 1999 If you have no money, is it a good idea to print more?
7. German hyperinflation - 1918-24 If you have to print a 1,000-billion Mark note, you probably have too much inflation.
6. Souk Al-Manakh - 1982 Try not to use post dated to buy stocks
5. Black Monday - 1987 Can we call a 23% drop in a single day a black swan?
4. Russian financial crisis - 1998 devaluation of the ruble and cancellation of debt is never good for a local stock market.
3. East Asian financial crisis - 1997 aka the Asian Contagion
2. Black Tuesday - 1929 — Really? One day, and not the entire Great Depression?
1. 1973 Oil Crisis — Big energy increases cause recessions
Saturday, February 21, 2009
GFITS
"The S+P 500 cash is now 24 points away from the 741 Nov low. Recall that the violated
two month range below 800 "measures" down to 730. Also be aware that ANY sub-741
trade will start to create massive bullish momentum & breadth divergences, as Oct and Nov
saw peak downside momentum, breadth etc. Yes, our primary bear market targets are 650-625
from the 2009 Outlook. However, we will be getting MORE bullish as the market weakens, as LT
risk/reward stays quite bullish into 2010-2011. We WERE quite bearish in early January, as the
market was keyed to top amid 950-1000 (944 was it on Jan 6), and then drop to new bear market
lows, via our 2009 S+P 500 "Roadmap" (shown again below from Nov 21....we're in wave 5 down now)."
two month range below 800 "measures" down to 730. Also be aware that ANY sub-741
trade will start to create massive bullish momentum & breadth divergences, as Oct and Nov
saw peak downside momentum, breadth etc. Yes, our primary bear market targets are 650-625
from the 2009 Outlook. However, we will be getting MORE bullish as the market weakens, as LT
risk/reward stays quite bullish into 2010-2011. We WERE quite bearish in early January, as the
market was keyed to top amid 950-1000 (944 was it on Jan 6), and then drop to new bear market
lows, via our 2009 S+P 500 "Roadmap" (shown again below from Nov 21....we're in wave 5 down now)."
Monday, February 16, 2009
Sunday, February 15, 2009
weekend reading
Clive Crook - Barro correspondence, some talk of multipliers
NYT - "Fed officials estimated that the median family was 3.2 percent poorer as of October 2008 than it was at the end of 2004"
Economist - Relevance of Fisher today: "He explained how changing velocity and prices could cause real interest rates to deviate from nominal ones. In this way, monetary forces could produce booms and busts, although they had no long-run effect on output"
VOXEU - Have social security reforms shifted too much risk to individuals? - I really think that this is an underreported issue. I remember reading a while back that the most evil thing Nixon did was to demolish the gold standard, thereby creating the inflationary paradigm. After that moment, the purchasing power of money would never be protected, and one could never save simply and hope that the value of that money would be maintained. It meant that the average, common man would now have no other choice but to become a gambler, to play risk assets in the hope that they would rise at least in line with inflation. We can see this theft engineered by the Fed even today, with Bernanke trying to hyperinflate so that people have NO OTHER CHOICE BUT TO INVEST IN RISK ASSETS! He doesnt want people to pay down debt and be conservative, and to keep money in the bank and government bonds. No, he wants to force people to take on risks. This is why the FED is evil, it forces the conservative to be risk takers. So this is bad enough, and then you read about social security reform as well, that over and above the common citizen needing to assume risk, he has the added uncertainty that his social insurance might be gone soon. Governments say 'they cant afford it". This relentless attack on ordinary citizens is breathtaking, and I cant believe how few people talk about it.
Sunday, February 8, 2009
COSATU and Economics
I came across the 'Socialism from Below" newsletter yesterday.
What I found most interesting was the piece on COSATU who planned to march against 'high food prices' on the 7th July 2008. Yes, read it on page 2.
To refresh your memory, COSATU also (1) vociferously called the SARB to cut interest rates sharply to help the economy and (2) have asked for above CPIX wage raises. Both of these demands are blatantly inflationary.
And then they decide to protest against high prices.
Links
Weekend Reading:
Mankiw's preferred stimulus (similar to debates of Keynes and his suggestion to drop payroll taxes)
Saturday, February 7, 2009
great unwind
Brad Delong has an interesting post on money velocity:
What I find most fascinating of this graph, is how much velocity of money increased from 1987 to 1997. It really is an aggressive increase. So it seems that any unwind that takes place in the next few months, is not just an unwind of what happened in the last few years, but of what has happened since 1987. So it seems that this velocity slowdown will be much bigger than we initially suspect.
What I find most fascinating of this graph, is how much velocity of money increased from 1987 to 1997. It really is an aggressive increase. So it seems that any unwind that takes place in the next few months, is not just an unwind of what happened in the last few years, but of what has happened since 1987. So it seems that this velocity slowdown will be much bigger than we initially suspect.
Friday, February 6, 2009
so the NFP comes out terribly and the market rallies like crazy.
surely no one believes that there is legs in this rally, so why do they buy?
maybe its smart traders (big prop desks?) who know that there are many people short who know that equities should fundamentally weaken, but are weak hands so will close quickly once trades turn against them.
I doubt dumb money will have so much buying power to bust up so strongly on a day like this. Whoever is making this move is big, and probably knows what they are doing (i.e. not dumb).
I feel stupid for being on the wrong side of this trade, but i'm not a weak hand!
i'm gonna hate them if they push SPX to 1100 tho....
UPDATE: Silly me, I overlooked the fact that 'bad = good". The worse the NFP was, the more likely the stimulus plan will pass.
UPDATE: Silly me, I overlooked the fact that 'bad = good". The worse the NFP was, the more likely the stimulus plan will pass.
Subscribe to:
Posts (Atom)