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How To Game A Rigged Market
Authored by Charles Gave via Evergreen Gavekal,
Markets are on alert in a week that could see more great insights from the gods of central banking on high. Investors seem a little spooked with the MSCI emerging markets index off 4% in the last eight trading days, while currency volatility has picked up as the US dollar has strengthened. And yet despite these minor ructions, there remains a deeper sense of calm. It is the sort of quiescence born of insiders’ knowledge that the nature of financial markets has changed, and in a way that favors them.
In the past, money sat at the center of the economic system. When money was created, it moved slowly through the real economy toward the fringes where assets were located. Too much money caused a bull market; too little and we got the reverse. Now asset prices sit at the center of the system and money is relegated to the periphery. Every right-minded person knows the main role of a central bank is to create sufficient money to stop asset prices going down, because if this can be achieved then a little of that elixir may just flow into the real economy and create growth.
Indeed, talk to a central banker, preferably a retired one, and they will admit that they have one long term goal which is to stop asset prices from going down the following week. This is because so much debt is linked to these assets that should prices start to fall then the mother of all margin calls would materialize. Most central bankers have read Irving Fisher’s great 1934 tome The Debt Deflation Theory of Great Depressions and they don’t want something similar starting on their watch.
To achieve the desired results, central banks have bought bucket loads of government bonds, on the simple idea that if the anchor rate was pulled down, then all rates would follow including the discount rate used to value long-dated assets, and thus the value of the said assets would go up. In the case of equities, the particular traits of investors in these markets has meant that central bankers could play a more indirect role.
Today, most money managers can be described as having five core beliefs, or at least operating principles:
(i) it is not certain that central banks can control asset prices forever and it could end in tears;
(ii) I am one of the few investors smart enough to understand this;
(iii) most other money managers are dumb enough (especially the indexers) to believe that central banks really can control asset prices;
(iv) so despite being very smart, and knowing better, I have to keep buying shares, but
(v) because I am very smart, I will see ahead of the others when the time is right to get out, and in any case I have some very good risk control systems which will kick in and prevent me suffering too huge a loss.
The astute reader will have recognized a sophisticated version of the prisoner’s dilemma taken from game theory; i.e., the system continues to work so long as nobody breaks the rules. However, to escape the dilemma in good shape, it is necessary to be the first one to break the rules.
The implicit reasoning in this assumption is that if the investor cannot be first out then they can at least be second or third.
However, such a stance rests upon two key assumptions that are less than rock solid.
- The money manager in question has the insight or the algorithms to get out of the market in good time, and this early warning system will be different from the system used by rivals. We saw this proposition tested in 1987 and the results were not pretty. When the sell notices all kick in at the same time, there will be no exit.
- Markets will remain open and will be tradable. I recall that in October 1987 that the Hong Kong stock market simply closed its doors for four days and when it did re-open prices were not the same.
In short, it may make sense to stay invested, but we have reached a point where protection against an untidy denouement to the present market phase should be built into the construction of a portfolio. It is not enough to rely on a protection that will be executed in response to price signals.
In constructing what Nassim Taleb would call a “non-fragile” portfolio my simple recommendation would be to remain long US bonds and short-dated dim sum bonds. Those wanting to maintain an equity component to the portfolio should stick with Asian and US shares.
It should be noted that a 50/50 portfolio of long-dated US treasuries and short-dated dim sum bonds has outperformed the S&P 500 since November 2013 by a solid 4%, and with much lower volatility. When a very defensive portfolio starts to outperform the best stock market in the world, it is seldom good news.
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I thought you were gonna say, read ZH and do the opposite.
Why, in heavens name, would any rational thinking human being take their good, hard-earned capital and try and risk it on bad investments where it can go POOF* and it's gone... It is beyond me...
Just keep on stacking for goodness sake, you'll be rewarded for your perserverence.
My only bad investments the past 5 years have been those not exposed to equities. When I have tried to outsmart the dumb money, I have been the fool...
This may turn out to be an interesting turn of events...
http://thehill.com/blogs/floor-action/house/218047-house-passes-bill-to-...
It will die in the Senate.
The game is more sophisticated than the 'prisoner's dilemma'. Anyone who attempts to be a 'first mover' gets shot.
It discourages the others.
"A strange game. The only winning move is not to play. How about a nice game of chess?"
What happens when Joshua meets Dr Strangelove?
Know nothing about money (or more correctly fail to see what you know is wrong) and you can't help but write a senseless article about it.
"Know nothing about money (or more correctly fail to see what you know is wrong) and you can't help but write a senseless article about it."
Behold readers! The very epitomy of the pot calling the kettle black.
Charles Gave is an ass. Wrote some disgraceful apologia for fraudulent US finance in the noughts (you know 'savings glut', western brains are worth more than eastern brawn, that sort of drivel), I'm sure he's done the same in this more recent and egregious cycle to end all cycles.
have to say, anyone that can scalp this market, deserves every freaking penny they make
er... keep.
wanna see how sick the market real is at the edges. look at EEH .
The first movers out of the market are long gone.
Id like to see BABA price at $125, taking all ipo buyers by surprise, and then open at 75 for the first trade.
Who else would enjoy that show?
http://www.kitco.com/news/2014-09-17/New-Silver-Fix-Still-Irks-This-Mini...
Game it simply: Invest in YOURSELF and STARVE THE BEAST.
I won't bother reading the Fed, or reading the article, but lemme guess and see if I'm psychic:
"Worry. Verbal head-fakes, but Moar Easy Money. Stay the Course. Keep grazing, keep putting on the pounds and the wool."
What do I win?
Anyone with half a brain is out of this shit show.
Anyone still trading is risking being Corzined, forget about the little numbers on the screens, they're just going to fucking steal it outright. And you'll have no recourse.
The conservative responsible savers of the past, specially the retired, get f**ked again and the banks get rich - bring out the pitch forks!
Yellin' wants to make sure the poor are building their retirement assets!
Every year many professional firemen are convicted of arson.
The time to panic is before the Titanic leaves the harbour .
Got land, garden, food, bullets, equipment, bandaids, etc but what does someone do with the 300k that should have earned 4% for retirement income do? Risk it all in equities? Bonds with the economy heading off the cliff? under the mattress? gold to sell at the pawn shop (yuk)?
gold...that was easy...It hasn't gone much below 1200 in years. 1200 is the level below which the little people buy it up.
It can be kept low..but not too low. There has to e enough physical in the market place to keep the market place looking real.
I'm a big fan of the Permanent Portfolio which is 25% long bonds, 25% cash or short term bonds, 25% stocks and 25% gold (preferrably physical) (not to be confused with the PRPFX fund). The assets are uncorrelated in the long term so the portfolio in sum does better than the parts. It has matched or beat any traditional stock/bond mix over the last 40 years with less than half the volatility. Also it does exceptionally well during the downturns - with only three negative return years since 1973, the worst of those being -4%.
Its also brain-dead easy to manage using ETFs/Mutual funds - totally passive except for an occasional rebalancing.
OK, i'll take the bait.
References, or other documents?
Here's one long term chart on the Permanent Portfolio. You can set up an easy 25%-25%-25%-25% portfolio with something as simple as SHY, TLT, GLD, and SPY, and then rebalance either yearly or within a band:
http://www.crawlingroad.com/blog/2008/12/22/permanent-portfolio-historic...
Harry Browne developed the permanent portfolio in his book Failsafe Investing: http://en.wikipedia.org/wiki/Fail-Safe_Investing and it has held up very well over the years, delivering good returns with low volatility. You can check performance via backtest against other mixes such as a 60/40 bond portfolio here:
http://www.peaktotrough.com/hbpp.cgi
Honestly: years ago was the time to do that, and I'd have held some bank stocks too, Canadian banks.
US banks are too unstable over-all & now, so many years have gone by, the whole thing could slide any time.
Many people work hard for their money and even harder to save a bit of it but are lulled into complacency when it comes to protecting it. One of the saddest thing to witness is someone who has worked so hard loose all their money when an investment turns south. This reminds me of the story about how many people describe going bankrupt, slowly at first then quickly at the end.
This market has far exceeded the upside expectations of many bulls while the economy has languished and in many respects failed to regain all the ground lost since 2007. The question I put forth below is, are we reaching the turning point?
http://brucewilds.blogspot.com/2014/09/the-turning-point-may-be-soon-upo...
The Central Planners can't admit the "fragile recovery" is phoney, but they may need the QE back. Retail is all in. House just voted to arm al-CIA-da's little bro ISIS. Maybe nearing time to use the US-backed jihadists as an excuse to reset the stock market and get more QE?
Hello, Professor. Would you like to play a game?
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