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It's the economy, stupid
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It's the economy, stupid

  #31 (permalink)
Market Wizard
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Thanks Bob. First off, I did not mean to attempt relating trading and the economy. To me, as odd as it may sound, they are almost two separate subjects. I believe that the vast majority of people who are good market analysts tend to be poor traders. It's probably because the more you know, the more your views are going to be directionally-biased, and that tend to be a limiting factor for the trader which, by necessity, should stay nimble.


bobwest View Post
1. I have never once, in many decades in the markets, encountered anyone who is publishing his/her ideas who could consistently go from a view on the economy to a profitable view on the markets. It may seem very counter-intuitive, and I'm not saying that there is no relationship, I'm just saying that I have never once found a good example of someone doing it with any consistency. (I'm not talking about someone making a market call that worked out. I mean, doing it consistently, over enough of a period of time to be convincing that they knew how to do it.) And if anyone has an example of someone who is doing it, well, there are dozens, or hundreds, who are trying but are not. Who do you listen to?

4. Opinions about the economy are even more common, and more mutually contradictory, than opinions about the markets. I think some of this is because, as with market opinions, there is potential gain involved, of some sort. It may be academic prestige, it may be making money by selling advice, it may be making money by one's own trading. But money comes into the picture, often enough. That doesn't mean that those who publish their economic views necessarily have any ulterior motive, but when money can be made, it will affect a person in many ways. We're not always talking objective reasoning here.

You're absolutely right in saying that this is about having an opinion. Just like with trading, nobody can ever be sure about the direction of the economy....... unless, I would dare say, there are some obvious precipitating factors and some specific conditions that allow you a certain degree of certainty..... I'm going to refer to the story exemplified by the film The Big Short, where real-life Michael Burry was able to predict the sub-prime crash with fantastic returns for him but disastrous consequences for nearly everyone else.

Now, of course, today we know about Burry's story because he turned out to be right! Had he got it wrong probably he would not have been that famous, which compounds the issue of being opinionated about something: was he right because he deeply studied the situation? If so, put it to study a different situation, would he have been skilled enough to be similarly accurate about it? Would his capacity to analyse certain macro-economic factors have a high rate of accuracy in general? Or was he just the right man studying the right things at the right time? We can't be certain.

So I agree, there are no people in the limelight who can predict accurately most of the time where the economy is going. You can always count on the "gurus" or "experts", when predicting something and they are wrong, to have a justification behind it. Or perhaps they are "gurus" because most of the time they talk in terms generic enough that wherever markets go, they can claim they were right.


Quoting 
2. That doesn't mean it isn't possible.

I do remember last year, when Bill Gross made waves by announcing that shorting the Bund would be "the short of a lifetime", I was kind of able to profit a little bit from that, as probably the herd jumped on what an Oracle like Gross said, creating the self-fulfilling prophecy? So it may be that, sometimes, if you're prominent enough, what you say can influence certain markets.


Quoting 
5. This brings up the main point: it is very unclear that anyone knows anything at all about what they are talking about in this arena.

Unfortunately, that doesn't mean they don't talk.

And then there's this general point. I recall reading something a while ago, where a prominent economist (I don't recall who) said or wrote, with exasperation, when confronting economic opinions that he thought were too simple and uninformed, "Economics is a difficult, technical subject." In other words, this is not that easy, but everyone has their opinions....

Another deep belief I hold is, given a system sufficiently complex, it is difficult to predict how one or more of its components may affect the sytem as a whole. The more complex the system, the more varables at play, the more difficult to predict, how or when a system may perform.

Complex systems can be anything of course. In this case, a global, regional or even a country's economy can be classed as complex system, especially when its potential ramifications have those ripple effects we mentioned earlier.

So if we agree on that, we can agree that predicting where the economy is going is difficult by its own nature.

But that doesn't prevent us from having an opinion, as uninformed as that may be I remember someone describing how Italians have a passion for football (soccer for my overseas friends) by saying "Italy is a country of 60 million football coaches" because everybody has an opinion on it.

At the end of the day, I think it's more fun to talk about it and be opinionated about it, even by risking to be wrong, than not talk about it.

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  #32 (permalink)
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grausch View Post
Someone much wiser than me once said that the markets lead the economy, i.e. markets will go up while the economy still looks bad and markets will go down before the economy looks at its rosiest.

The only reliable indicator I have found are interest rates. I was still in South Africa at the time when the reserve bank started lowering interest rates in 2003 and the buy signal that triggered then led to a 3 year trade. Not sure when the US started lowering their interest rates, but 2009 also gave a pretty strong buy signal.

Conversely in 1994 Greenspan raised interest rates in the US, and while I am not sure of the market impact back then, it led to the first LTCM-type fund exploding. Per my knowledge, John Meriwether stepped in to rescue that fund and it later became LTCM.

I think you're right about interest rates and the markets. The thing is whether you can know about interest rate changes in advance. I think sometimes yes, sometimes no. That's why we always wait to see what will come out on FMOC day. And the market response to FMOC, like to every other "news" event, depends in large part on investor expectations at the time, which include whatever has been already priced into the market, and how investors are positioning themselves in advance of their expected outcomes. It can become an impossibly complex game of trying to figure out what other people are thinking or are going to think, which can go round and round.

As you said, if there is a large change in the central bank's stance toward rates, that can lead to a profound change in the market that lasts a long time. If you recognize that change when or fairly soon after it happens, it can be very good for you. Being able to know about it beforehand, due to your economic or political or whatever analysis, can be another question.

But on the general topic of taking economics into account in market decisions, and I definitely include any and all speculations about what the Fed or other central banks will or should do about rates, I have to say that the evidence is not truly there for it being a reliable tool.

Bob.

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  #33 (permalink)
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xplorer View Post
Thanks Bob. First off, I did not mean to attempt relating trading and the economy. To me, as odd as it may sound, they are almost two separate subjects.
...
So if we agree on that, we can agree that predicting where the economy is going is difficult by its own nature.

But that doesn't prevent us from having an opinion, as uninformed as that may be I remember someone describing how Italians have a passion for football (soccer for my overseas friends) by saying "Italy is a country of 60 million football coaches" because everybody has an opinion on it.

At the end of the day, I think it's more fun to talk about it and be opinionated about it, even by risking to be wrong, than not talk about it.

Ha! I guess I should have gone back and re-read your original post first. (I read it a day or two ago when you first posted it.) I was just drawn to this thread because of another post (hi, @Blash ) and was tempted to kick in for a few cents.

But I was not really aiming at your post, or @Blash's or anyone else's, so much as responding to the thread title, "It's the economy, stupid". I don't really think it's the economy, at least before the fact, at least in the markets.

I do pretty much agree with what you wrote just now.

Bob.

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  #34 (permalink)
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bobwest View Post
Ha! I guess I should have gone back and re-read your original post first. (I read it a day or two ago when you first posted it.) I was just drawn to this thread because of another post (hi, @Blash ) and was tempted to kick in for a few cents.

But I was not really aiming at your post, or @Blash's or anyone else's, so much as responding to the thread title, "It's the economy, stupid". I don't really think it's the economy, at least before the fact, at least in the markets.

I do pretty much agree with what you wrote just now.

Bob.

No problem Bob. I did not take your comments as criticism in the slightest. After all, what's a forum's use if not to share views. In fact, I believe we enrich ourselves when views differ. (Stephen Covey fan here.)

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  #35 (permalink)
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About unconventional monetary policy and negative interest rates

Further to posting the article about IMF, here is another FT article from today, that talks about negative interest rates.

In the article, a quote by Mark Carney, (which put it way better than I could) whom "argues that while this might be an attractive option for individual countries to boost activity, if adopted by the world as a whole it is a “zero sum game” and would essentially export excess saving and transport demand weakness elsewhere."

In another section of the article: "A cheaper currency remains an important tool for central banks in sparking domestic demand. Lowering the value of the currency should raise inflation by increasing the cost of imports.". According to that last quote, it follows that if multiple regions attempt to devalue their own currency as part of QE the effect will be diminished.


Going back to my earlier question, are monetary policies able to help only up to a point, and thus, is a recession simply part of an inevitable supercycle?

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  #36 (permalink)
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bobwest View Post
I think you're right about interest rates and the markets. The thing is whether you can know about interest rate changes in advance. I think sometimes yes, sometimes no. That's why we always wait to see what will come out on FMOC day. And the market response to FMOC, like to every other "news" event, depends in large part on investor expectations at the time, which include whatever has been already priced into the market, and how investors are positioning themselves in advance of their expected outcomes. It can become an impossibly complex game of trying to figure out what other people are thinking or are going to think, which can go round and round.

As you said, if there is a large change in the central bank's stance toward rates, that can lead to a profound change in the market that lasts a long time. If you recognize that change when or fairly soon after it happens, it can be very good for you. Being able to know about it beforehand, due to your economic or political or whatever analysis, can be another question.

But on the general topic of taking economics into account in market decisions, and I definitely include any and all speculations about what the Fed or other central banks will or should do about rates, I have to say that the evidence is not truly there for it being a reliable tool.

Bob.

Very well-thought out post Bob. I have bolded 2 bits of your post, and have somewhat differing thoughts on them below:
  1. To me it is largely irrelevant what the markets do on any individual FMOC day. However, if the Fed announces an interest rate decrease after markets have been languishing in bear market territory for a while and rates are higher than the current historical norm, then it should peak anyone's interest. If markets then break out to the upside of their most recent consolidation, it could represent an excellent opportunity to catch a long-term trend.
  2. The easiest way to try and judge whether or not things are changing is to just see what the Fed does or does not do. A decrease in rates may not lead to further decreases, but the opportunity to catch that potential long-term trend should outweigh the loss taken when being wrong. Granted, one should also consider the conditions I mentioned above. If these are not present, then odds of getting a big winner decrease substantially.

It should the idea is to catch a massive long-term move will little risk to the initial capital base. In such an instance, missing the initial upswing could be problematic since volatility will increase once more money comes back into the market. Thus, for the trade to work one needs to enter at the first opportunity. It should also be noted that trying to short the market when rates start rising represents a much larger risk as markets tend to be very volatile around that time.


xplorer View Post
Going back to my earlier question, are monetary policies able to help only up to a point, and thus, is a recession simply part of an inevitable supercycle?

Have monetary policies really helped at all up to now? Yes, markets are up, but savers are heavily penalised and borrowers are rewarded. Sounds like taking on debt is even more encouraged than prior to 2008. Could be another bubble in the making...

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  #37 (permalink)
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grausch View Post
  1. To me it is largely irrelevant what the markets do on any individual FMOC day. However, if the Fed announces an interest rate decrease after markets have been languishing in bear market territory for a while and rates are higher than the current historical norm, then it should peak anyone's interest. If markets then break out to the upside of their most recent consolidation, it could represent an excellent opportunity to catch a long-term trend.
  2. The easiest way to try and judge whether or not things are changing is to just see what the Fed does or does not do. A decrease in rates may not lead to further decreases, but the opportunity to catch that potential long-term trend should outweigh the loss taken when being wrong. Granted, one should also consider the conditions I mentioned above. If these are not present, then odds of getting a big winner decrease substantially.

I take you to be saying that a change in the large-scale interest rate regime (policy environment, etc.) is what is important, and I think that is right, at least as a general rule.

Bob.

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