I used to read a lot of fiction while in my early teens. Science fiction, detective novels murder mysteries and whodunits. I also used to make codes. I did crosswords, and puzzles. Little did I think how all these embryonic skills would come back to be used later in life as a trader of financial markets!
Often I’ve heard conspiracy theories, realistic theories, post facto explanations for all the strange things that happen in the markets. The more you learn the less you think you know! That’s because, among other things learned, one learns one’s limitations. Trading losses ( and gains) are a pretty clear lesson, or verdict of the skills applied to trades.
So, in a way, everyone is (inside their head) trying to solve the puzzle which is the blank prices yet to be filled in on the right hand side of the charts of whatever asset their money is currently riding on.
What do we need to solve puzzles? Can these particular puzzles ever be solved?
The efficient market theory says no, it can’t be solved. The semi efficient market theory is a little bit more flexible, and sorts market participants into layers of success, often related to their access to superior information. So the ones with the best information make money, those below them make less, and the success and information dissemination cascade downwards until the unfortunates at the bottom lose heavily and finance the winnings of those above them.
So if you don’t happen to have a big research department working away for you, is successful trading possible? Some say yes, others say no, and the successful traders ignore both and trade to earn their living.
So there seems to be a few alternatives available to the outsider to this business. Learn to trade, or find someone who can trade and follow their advice, or give your money to someone to trade and manage for you. It sounds so easy, but it isn’t really.
First the results of the investment fund management industry are in nominal terms. Let me explain. If you put your money in the Dow stocks X years ago you would have X times Y rate of return today, right? Wrong! For the obvious reason that Wall St. never remembers that for the duration your money was invested, the currency itself was probably going down in value as the government and bankers create money which then competes with yours and devalues it’s purchasing power.
So after allowing for inflation, and deducting the real inflation rate from your final investment value that Dow real rate of return doesn’t look quite so hot. Is that all? No. The managers were deducting their fees too. Then the taxman wants his slice of the action, your action. All these costs get paid from your gains, if you have any.
The next problem that tends to be detected in this effort to solve the market mystery, is the access to information. Boy is this a big can of worms! Let’s just say that it slowly dawns that there is information, late information, wrong information, and misleading information. Some information is outright lies, but done in such a finessed way as to be legal. And it isn’t all neatly labelled and sorted out for your convenience!
By the time a trading neophyte has figured this out, losses have mounted. The cost of a trading education is revised to a higher price, and either the beginner leaves the arena, or gets stuck in with renewed determination, and cynicism.
Cynicism can run riot, and go to extremes after this point. This is a sad outcome because the trader then will not accept bad information with good reason, but he or she also refuses to accept good information either. Like that cat that sat on a hot tin roof on a sunny day. It never sat on a hot tin roof again, but it wouldn’t sit on a cold one either. Sad but true, and very limiting when applied to people.
Another variant of the wrong application of information filtering by the trader is where he or she holds fast to a fixed idea, and refuses to modify or renew the thesis when new information emerges from the fog. Consequently I still read from certain sources about imminent hyperinflation and gold going to the moon, and as a result I must downweight the credibility of all information from those sources. While the hyperinflationists receive a downgrade on my inner credibility scale, this also applies to the hyper deflationists, who have a lower profile but emerge in increased numbers around the time of stock and precious metal price lows. Stagflation is all around us. It's visible everywhere, deflation in real (inflation adjusted) returns and real incomes, at the same time inflation in costs.
For the moment it’s about managing asset holdings during inflation of financial assets, but during deflationary times. The people in charge pulsate their liquidity (money creation) and talk in riddles to camouflage and mislead their intentions so their pals can avail of earlier accurate information (see semi efficient market above), and that’s the true nature of the game.
There are a few reliable life rafts one can cling onto in this turbulent investment sea with it’s unseen dangers. The people in charge are required to trade for themselves if they wish to gain advantage from high or low prices. Though they will obscure their holdings as best they can. Insiders also continue to trade in their specialty company or industry, and build up visible longs and shorts. And the investors lower down the ladder get herded into bad positions as they follow bad information, or just make mistakes typical of learners, or lack of knowledge. The COT and large fund position disclosures are a help in this regard.
However the days we live in are times during which the liquidity trap has grown to gigantic proportions as it is operated by a cabal of politico-banker-central bank-passive regulators. So simple leverage itself has become a good indicator, which leads, or forecasts if you prefer, events. Look at retail investor margins and borrowings.
There are alternate kinds of leverage in the precious metals extraction area. Takeovers and buyouts of miners are one, and have begun to occur. Stock issues, hedging arrangements and other similar financial engineering help to provide a murky glimpse forwards in time to where the news has not yet been written.
And of course the masses move like a flock of sheep, to and fro, shaking the market as they do so. But their movement is often caused by a sheepdog who works for the shepherd. So good old contrarianism still works, however, as always, the trader must take great care to not go contrary too soon.
Before I finish I’ll mention a type of contrarianism which can be productive. This is the practise of taking notice of the places from which false or bad information emanates. These are the controlled sources of news, who work for the inner circle. They need to sell their longs (or shorts) to someone else when the time is ripe, so how can they do that unless they prepare sales brochures and schemes and easy purchase facilities? For an inner circle member it’s really just like a sales campaign for cars, student loans, holidays, or cans of beans or anything else. Product must be actively sold before going stale. Therefore there must be a marketing and sales department to their business. These are often covert and operating under well known names with better than deserved reputations. That’s sales, isn’t it?
So the trader takes notice of who these particular sources are, and quietly trades contrary to the marketing campaign of the inner circle. It’s simple really. No need to shout it from the rooftops that they are manipulators, (why get labelled?). Just avail yourself of the marketing budget which has been provided for you free of charge by those who like to run things for their benefit.
It’s so simple but for a plethora of reasons it’s extremely difficult to do.
And because the pieces of the puzzle are regularly changed for new ones,which must be figured out afresh - it will never ever be "easy".
As a parting gift, here is a short story or novella by Isaac Asimov, which involves all of the above. Lack of information, partial knowledge, conspiracy, efforts to mislead about intent, mistakes along the way, inventiveness to deal with problems, repeating patterns of social sentiment, some voices calling for apocalypse, a ticking clock, the big big puzzle, and the simple truth which was there all the time hidden from sight, just waiting to be seen in all its breathtaking grandeur.
It’s called “Nightfall” : https://www.astro.sunysb.edu/fwalter/AST389/TEXTS/Nightfall.htm
(Later Edit to add link) : Audio download of mp3 is here: https://www.audiobooks.org/bookDesc.php?id=nightfall
Not a trading story as such, but many of the same issues are involved and it’s a nice fiction by Asimov back in 1941, when he was (in my opinion) at one of the peaks in his career.
Have a nice weekend everybody.