Category Archives: Investing

Pretty Lies

In a survey of literate financial industry professional I can more or less guarantee that the voting for McMurtry”s Lonesome Dove versus McCarthy’s Blood Meridian would fall along growth versus value ideological lines. Written in the same year, both are very, very good books, arguably the seminal achievements by each author. Only one will be read until the lights go out for good on humankind.

McMurtry’s book is a pretty lie, post-modern in the sense that its subject matter is the myth of the West rather than the history itself. The truth and accuracy, and there are considerable amounts, are woven into the myth.

Blood Meridian, on the other hand, is a poetic horror. It is devoid of heroes, building a story outwards from historical accounts of genocide. For the cynical, value-oriented reader, it also feels true.

McCarthy detractors will happily trot out numerous excerpts where his writing is almost comically overwrought. This doesn’t change my view. It is analogous to pointing out basketball games where Kobe Bryant or Larry Bird took too many shots – it doesn’t deny their greatness, just highlights its borders. In any event we’re not really here to discuss literature.

The question of the day as it applies to finance is: Is it worthwhile to know the truth?

I suspect that the eminent Steve Randy Waldman would argue that in aggregate, the benefits of investment truth are overrated. In his Why is finance so complex?, which is among my top five blog posts ever written in any field, he argues persuasively that one of the central economically-constructive tasks of the financial industry is to hide risk. Otherwise, fewer people would invest, and the entire economy would be poorer.

This notion would horrify the conventional Blood Meridian-loving value investor. What is net asset value, after all but the accounting TRUTH. What could possibly matter more?

Strict value investors almost always exist outside of the daily operations of finance. They don’t buy new issues and they don’t take pitch meetings. They are not susceptible to the “its a great story” growth stock pitches from the trade desk, so they don’t get many calls. The contact between value managers and investment banks usually takes the form of the manager asking complicated accounting questions of the analyst. As clients, since they don’t trade a lot, they are often considered more of a pain in the ass than they’re worth

They also miss out on all the fun. With rare exceptions in the severely distressed category of cigar-butt investors (Michael Price being one) there are no 10-baggers and no Laird Hamilton big wave “riding the winners” surfing episodes.

Longevity and consistency are the most obvious benefits of conservative value investing. Value funds will lose client assets during big rallies but rarely blow up. Even moderately talented value managers rarely go out of business.

But its a weird, anti-social type of victory. You are never in with the In-Crowd, not in THE GAME, with all of its incumbent go-go, chest-thumping, hand tailored suit, Master of the Universe mythology.

So who wins in this search for the truth? Is it enough to note that Lonesome Dove has outsold Blood Meridian by at least 400%?

Alligator Inc.: The S&P 500 as Swamp

Humor me for a minute and imagine the Everglades is an asset market and every living species of thing in it is an investable stock. The bugs will be our microcaps. They are easily killed so we’ll need a batch of those. If they aren’t all eaten or stepped on, some of them might live to lay eggs and we’ll have a 12,000 bagger in the portfolio.

The birds, and I had trouble with this, will be our counter-cyclical health care stocks. The birds have problems of their own, but living in the trees (Treasuries) they are less suceptible to changes in economic conditions for the ground dwellers. As long as there’s some kind of food available when they swoop down, its all good.

No one’s interested in putting money in birds or bugs, though. They want Alligator Inc. –  – the biggest, baddest, perfectly- honed-by-evolution killing machines. Every investment firm has to have an alligator analyst, and every morning one of them’s on SwampBox talking up the benefits of being unassailable at top of the food chain.

Until some mouthbreather gets bored with the Burmese Python he kept in his basement to impress his friends and lets it loose.

Burmese Pythons grow to 20 feet long and kill alligators. The guy on SwampBox isn’t worried, though. The growing python population is a blow, but alligators have proven in the past what badasses they are and it wont be a huge deal.

Hedge funds quickly get long snakes, short rodents. When the Pythons aren’t strangling alligators they’re eating rodents and the little bastards are disappearing at a rapid pace.

The retail investor will, of course,  be late on all of this. Their brokers will have stuffed them full of rat new issues after the environmental legislation went through.  The rodent analysts never show up at the office and write reports because the big checks for rodent IPOs are a thing of the past.

The pythons are eating everything that used to eat bugs, so bug investors are outperforming. Bug-eating birds are getting fat, too. Maseratis all-around for bankers in the bird and bug sectors.

No one really knows what to do with Alligator Inc., which still dominates the index. Pictures like THIS make shareholders nervous, but the expert on teevee says everything’s good, although he admits to not knowing much about snakes. The snake lady’s REALLY bullish but admits to not knowing much about alligators.

And besides, who could predict? Pythons and alligators have never co-existed in the same area before. Although the uncertainty does get some conservative managers get overweight the largely-guaranteed growth of the trees sector, awaiting new data.

I’m having a bit of fun with this, but I’m hoping it sounds familiar. Nature, for me, is the best metaphor for markets. It encompasses the teething mass of conflicting goals, constant adaption and highest stakes.

Nature also can’t be modelled very well. No alligator expert, no matter where or how long they studied, no matter how many environment-related statistics they compile, could have been ready for the Burmese Python. It is unreasonable to expect they could.

And yeah, I did notice that Apple and alligator start with the same letter.

Outsider Investor Guide to the NYT Business Section

In “Interloper Adjusts to Investing as an Outsider” I outlined a strategy for the average investor who, dutifully employed outside the financial services industry, does not have time to follow every tick of the market. Conceptually, this involved have a loose, flexible view on the future course of markets and then constantly testing this thesis against new newsflow. With this post, we’ll apply the practice to the headlines from the NYT business section.

I picked the Times because it is the most general of business news sources, thus best  reflecting the inputs of the average, non-professional investor. I currently have 35 headlines in my NYT Business section feed, dating from Saturday morning.

Stage 1: Ruthless Culling

The first task is to get the headlines down to a manageable number by ruthlessly ditching every headline with no relevance to investing portfolios. The key thing here is to remain focused – headlines may be interesting in any number of ways but if they do not represent potentially useful investment information the need to be kicked to the trash bin immediately before they become distractions. Times editors are not idiots, they will write the headlines with Mad Men skill to attract our attention. We must be cruel.

The mostly self-serving Media Circle Jerk headlines are easiest to root out, so we can ignore:

-Aristotle and Intermarkets Aim for Cheaper Political Ads (after silently cursing the possibility of more broadcast lying come election time)
-First Graduates from Advertising High
-Huffington Magazine Continues Digital Incursion
-Newspaper Work, With Buffet as Boss (This one caused initial hesitation – are media co.s like NYT finally cheap enough to consider? –  but recent market volatility has left enough cheap stock opportunities than a voyage that deep into cigar butt investing territory is likely not necessary.)

The largest category of headlines headed to the digital landfill consists of lifestyle and self-help stories disguised as business news. It is also the source of the most annoyance, the home of patronizing CEOs who have completely repressed the random circumstance and luck that led to their success, the quirky fads that are both doomed and uninvestable, and the dreaded Leadership Consultants. In this category, we get rid of:

-Corner Office: Usher’s New Look Foundation on Leadership
-When Software Grades Your Essay
-The Boss: John Thompson on His Career
-Take Breaks Regularly to Stay On Schedule
-Forceps, Camera, Action
-Wearable Gadgets Upset FA Curb s On Devices
-Verifying Ages Online Daunting Task
-Taking Advantage of Low Rates
-So You Think You can Be a Hair Braider?

Next we have political stories in business story clothing:

-Drexel Hamilton Hiring Disabled Veterans (hugely admirable, not investable)
-Executive Pay Still Climbing (exec pay rarely, if ever affects stock value)
-Letters: Why Punish the Savers?

Too Obscure:

-Japan Reaches tax Deal That Could Help Shrink Debt
-The Quiet Giant of consumer Database Mining
-Hearst Plans to Bring Back Elle Accessories Second Chance

Stage 2: Interesting, but Reading the Headline is Enough

At this point we’ve whittled 35 stories down to 16. The next category are the articles where the headline tells us all we need to know:

-Greece Pro-Bailout Party Wins Election
-Broken [Institutional} Trust is Hard to Mend*
-European Leaders Present Plan to Quell Crisis
-Markets Signal Initial Relief At Greek Election Results
-China Stifles Debate on Economic Change

The most common response to constituents is either “Duh” or “Not New but thanks for the reminder”

Stage 3: “Make a Note to Request a Research Report on That Next Month” 

-Journey to the Center of the Video Game Universe (“Wait a minute, didn’t I read that COD:MW3 made more money, and quicker, than Avatar?”)
-Digital Radio Royalties Start to Add Up
-Apple Enters Mobile Map World, Stepping Up Rivalry With Google (“I could care less about Mobile Maps, but there does seem to be evidence of Google stumbling lately”)

Stage 4: Argh, I’m going to have to open up and scan these

-Economic Reports for the Week of June 18, 2012
-Treasury Auctions Set for This Week
-Worried Banks in Europe Resist a Fiscal Union

Stage 5: Clear Your Head, Grab a Coffee, Read Carefully and Take Notes

Stages 1 through 4 were designed to get us here, to the stories that most matter, where either invested assets are at stake, or where opportunity could potentially lie:

-Euro May Have a Painful Path, Whatever Greece Decides (“I am tired of getting blindsided by European headlines, maybe this story will tell me what to look for”)
-Investors Relief Confronts Net Euro Crisis (See above)
-Mergers of European Mobile Carriers Expected to Grow (“Oh, really? Please tell me more about who is yielding 9%, is reasonably financially healthy and is most likely to be taken out, kthx”)**
-Why European Stocks May Be Ripe For long-Term Gains (“Wow, look at those yields. They all can’t be going out of business”)

There you have it, Interloper’s tour of today’s NYT Business section for fellow Outsider investors. It is general purpose, and I’m fully aware that many will have specific interests that will result in significant changes. Hopefully though, I’ve succeeded in providing a rough, if much longer than I intended, template that will assist investors in navigating the financial news fire hose.

*I personally read more or less every word Professor Cowen publishes, but put the piece in this category in keeping with the exercise’s constraints.

** Disclosure: I am recently long a European telco

Routine Ground Balls and the Traits of Real Market Professionals

I played baseball for 14 seasons over 15 years and was competent enough to get scouting attention at a younger age. I had one great coach, “Skid”, who, although every second sentence he uttered would now get him arrested under hate speech statutes, also frequently provided baseball-related thoughts that carried well into everyday life. One of his tenets, usually brought up by someone getting cocky was that, “you could have season tickets in the front row at Yankee Stadium and still never understand how good those guys are”. This statement has multiple implications but I’ll focus on the one in particular that has most informed my trading and investing.

Almost everyone on my team had, at one point in a game or practice, made a play remarkable enough to be featured as a play of the night on SportsCenter . They just happen as a function of instinct and circumstance. Even though a selected few of them had the physical tools necessary – speed, arm strength, etc –  no one was consistent enough at routine plays to ever challenge for a major league spot. The point Skid was making was that major league players were virtual machines, never making a mistake on routine ground balls and making difficult plays look mundane. (If you’ve ever wondered why most Major League middle infielders are Latin American, remember that most of them grew up in shithole barrios where playing fields were more or less parking lots with rocks and random chucks of concrete. When they get to the pool table surfaces of the big time they find ground balls, no matter how much spin’s on them or how hard they’ve been hit, comically easy).

The average fan, then, believes that Major League players are determined by diving, flashy plays when nothing could be further from the truth. In addition to having hands that move like compressed lightning at the plate (something that can’t be taught unfortunately), it is machine-like reliability and mental discipline that separates the talented from the true pro.

The corollaries to trading and investing are clear. The media will be happy to feed us SportsCenter-like highlights of big trades. The story of the real pros, the constant, consistent grinding out of profits informed by decades of practice no matter what kind of bad hops the market generates will remain less newsworthy. Given the choice, like baseball scouts the market will reward participants that make fewer errors, not those that generate the flashiest, unrepeatable trades.

Why Intuition Can be Better Than Analysis

There is an investing Rule of Thumb formerly used by prominent strategists called “The Law of 20” (sometimes 22) that assumed over time that the combined market PE ratio and primary interest rate would return to a sum of 20. The Fed having put its foot on the neck of rates since 2008, any investor depending too heavily on this rule is out of business. VaR was viewed as gospel in terms of measuring credit risk after being tested by brilliant minds with exponentially more grounding in statistics and applied math than I have. Energy traders, as recently as the early 2000s, made huge bets based on US gasoline consumption until Chinese imports became the dominant determinant of oil prices. The rule in each case is that things change, and  the practice of reducing market strategy to individual indicators or relationships is, no matter how well back tested, subject to a likely-painful best-before date.

The impetus for these thoughts is a recent post by economist Nick Rowe emphasizing the non-linearity of economic forecasting, a thought which I am extending to asset markets. Rowe writes (read the whole thing though):

students really really wanted a linear story of the monetary transmission mechanism. And when I gave them a linear story they thought they understood it. They didn’t. They misunderstood it. They misunderstood it just as badly as a student who thinks “an increase in supply causes a decrease in price causes an increase in demand causes an increase in quantity” misunderstands demand and supply.

My students were like the people from the concrete steppes. The people from the concrete steppes want a linear story of the monetary policy transmission mechanism. Sorry, but you can’t have it. If you think you understand monetary policy through a linear story, you don’t understand it. The true story is non-linear. There is simultaneous causation, so endogenous variables are co-determined in equilibrium. Expectations matter, so the story has flashforwards and flashbacks, where the future affects the present. Those expectations are self-referential, because the characters in the story know the author who works at the central bank, and can anticipate the future plot he plans to write, which affects their actions today. That means a loosening of monetary policy could mean that interest rates rise, not fall. You cannot reason from an interest rate change (Scott Sumner), because interest rates are endogenous variables.

What professor Rowe is suggesting is that every relationship is subject to its context and that reductive analysis into tidy equations, while psychologically satisfying, often results in a weaker understanding of economic conditions. Deeper understanding, according to this theory, is derived using holistic, “whole picture” thinking. Easy to say, but what does this actually mean?

A practitioner of scientific, Rationalist thought will, when faced with a complicated system, immediately begin dissecting and organizing into component parts and this process encompasses the majority of market and economic research. Balance sheets are “broken down”, multi-trillion economies are encompassed by five letters, C+I+G +(X-M). A holistic view would have no real starting point beyond observing the entire system as it functions, which doesn’t seem like productive work at all, certainly nothing worth paying someone who isn’t Jane Goodall for.

As it turns out, however, our brains are doing a ton of calculations and analysis that it doesn’t bother telling us about, as neuroscientist David Eagleman describes in his book Incognito (a Kedrosky suggestion I’m currently reading, slowly).The author’s general view is that our conscious minds, far from running the show, don’t have security clearance for much of what our brain does. The depiction of vision was particularly fascinating. Researchers initially could not figure out why the process of walking down the street used up so much brainpower, in particular the areas associated with memory. Experiments uncovered that the conscious mind was barely functioning during mundane visual tasks, what was actually occurring was that our subconscious was busily comparing visual stimulus to expectations (born of memory) and only alerting our conscious selves when something surprising happened. This explains the “zoned out” feeling during long drives where time seems to have disappeared – our conscious brains were shut down because our subconscious didn’t see anything worth alerting us about.

Taken together, professor Rowe’s post and Eagleman’s research have fascinating potential implications for investors. Situations where the intuition of an experienced trader, drawing on subconscious calculations based on memory that we usually term “intuition”, could trump the data-driven analysis of an Ivy League economics professor are easily envisioned.

This is a blog post and I am over-simplifying. Intuition alone will never be sufficient for investing success. Professor Rowe’s thoughts, for example, are the outgrowth of decades of rational calculation and entirely conscious “Thinking Slow” (in Kahneman terms) effort, underscoring the idiocy of suggesting disbanding the rigorous study of economics departments in favor of everyone just trading and “feeling their way around”.  The financial crisis did, however, uncover embarrassing weaknesses in previously-revered methods of financial modeling and economic forecasting. The pervasiveness of this failure casts understandable doubt on the entire reductionist process by which the theories were derived, leaving both room for new methods of thought and a new respect for the intuition of traders.


The Flaws in My Character are the Flaws in My Trading

I’ve done some things I’m not proud of during my unemployed walk in the desert, unseemly things for an allegedly mature, married man in his mid-40s. Video games, one called Dark Souls in particular, began as a distraction from alcoholic temptation (the most seductive of time-wasting options for obsessives) and became the cause of extended, hand-cramping fugue states of extended concentration. The resulting guilt from this adolescent fixation was exacerbated by the games added “feature” of showing the number of hours played with each developed character. I decline to provide those numbers.

I’m not an idiot and there’s no way I’m going to prescribe a couple hundred hours of virtual swordplay, but the point remains that the game did teach me a valuable investing lesson – that the primary weakness in my character was also the weakness in my investing.

To understand how this happened it is important to note that Dark Souls is an intentionally, soul-crushingly difficult game, even for long-term gaming enthusiasts which I am not. The more difficult sections of the game (check HERE if interested –NSFW voiceover language) are more or less impossible to get through without the help of online videos and other forms of help. Even then, you can expect these sections to take anywhere from 25-50 attempts before success.

Every time I had trouble and went for YouTube help, the issue was impatience. The fact that I should have known this, impatience having been an Achilles Heel since gestation, shows a remarkable lack of introspection, an embarrassing blind spot in self-analysis. It is telling, though, that it took hours upon hours of frustration to realize what should have been obvious – I actually needed to be bludgeoned over the head again and again to learn the lesson. The psychological effort we expend to avoid recognizing our faults is incredible.

I took a vague swipe at a market outlook for 2012 in November’s “Cop Logic” and despite the Q1 rally; the environment is broadly what I expected. (I am not patting myself on the back here, any more than if I had doubled down on 11 and got hit with a face card – you play probabilities knowing anything can happen). The second that Chinese markets started falling and Spanish bond yields hit 2012 highs, I was tempted to jump in on the long side as a contrarian rather than let things play out. In a hubris-enriched attempt to get three months ahead of the market again, I would have made a highly costly, impatient, stupid decision. I checked up, realizing my investing tragic flaw was apparent.

Video games are a shameful waste of time, at least to the extent I was involved over the winter. My point in documenting the experience is to suggest that the most destructive tendencies of traders are likely apparent elsewhere in their lives, and that unsuccessful trades can offer a window into personality limitations that we all broadly share. Moreover, accepting and confronting these weaknesses is intensely counter-intuitive and our own subconscious will have us squirming away from uncomfortable conclusions.  It is not necessary to fruitlessly commit to a video game using the tagline “Prepare to Die”, but a closer examination of our tendencies outside of the financial world could provide useful, corrective guidance on trading and investment styles.

Losing Money with Metaphors

Freud’s psychiatric conclusions have largely been discredited but he rightly maintains praise for understanding the central role of metaphor and narrative in human thought. Professor Cowen HERE, is only the latest to build on this theme although importantly, he concentrates on the negative, blinding aspects of the tendency. Nowhere is this more clear than in the “stories” that surround investments.

Choosing a metaphor presupposes a conclusion. For instance, there’s no way to hear “the Chinese economy is a bubble” without unconsciously associating the country’s outlook with fragility and inevitable disappearance of a soap bubble. If we describe China’s GDP as similar to a hot air balloon on the other hand, our subconscious will immediately become more suceptible to the argument that upcoming government stimulus will right the economic ship. (You see what I did there – the use of the word “ship” is insidious.)

Good metaphors are a double-edged sword and their ubiquity in stock pitches suggests investors remain on their guard, never accepting one outright no matter how successfully it seems to communicates the situation.

Wherein Finance Arbs Out the Better Angels of Our Nature

Most people who live or work in an urban center have had the disheartening experience of trying to help out a homeless person only to find track marks up their arm when reaching for your dollar. The fact that the money will likely end up in the hands of a local heroin impresario instead of food is one thing, but at this point we are used to being lied to. I submit that the real discomfort comes from the erasure of what we believed was a humanitarian gesture, that an impulse we were secretly proud of has been used against us. In deciding not to help out the next homeless person, our attempted affiliation with the Good Samaritan has been “arbed out”.

At its Utopian best, capital markets are designed to attract savings towards worthwhile investment to the benefit of the economy as a whole (stop laughing, I’ll get real in a second). In this perfect Platonic world, a small number of traders would step in on the occasions where short term sentiment pushed assets to levels well above or below some concept of longer-term Buffett-y value. This is not, however, the world we live in for rational reasons too numerous to recount. HFT combined with the widespread successful use of technical analysis has created an environment where traders and automated scalpers, measured by daily volume, outnumber long term investors by a significant margin. The resulting increase in volatility has “arbed out” a good part of the impulse to invest for the long term, particularly among retail investors.

I swore I would not allow the word Facebook on this blog, but in abandoning that pledge I promise in turm to keep this section short. The NASDAQ’s technical problems and the potential for improper dissemination of information aside, FB’s IPO went largely to type in the sense that MS priced the deal at the highest point the market would stand. This is their fiduciary duty and the fact that the Supply/Demand curves met at $38, if only temporarily, implies that the price was fair according to classical economics. Because FB’s fundamentals do not support the price, however, means that lottery-induced dreaming and ignorance among retail investors went a long way to getting the deal off. Retail optimism, in this sense, has been partially arbed out.

In the efforts to keep things concise, I wont extend this thought into the broader economy beyond noting that Madison Avenue are the uncontested kings of leveraging or arbing any consistent psychological trait, good or bad, into changes in consumer behavior. To date, admittedly, there is not a lot of revulsion beyond grumbling at the constant Orwellian barrage but at some point some kind of Laffer Curve Peak Advertising will be reached. Despite recent positive comments on advertising from Conor Friedersdorf, my belief that advertising in a capitalist society performs the same function as Soviet propaganda – the sanctioned, unconsciously-accepted-through-mind-numbing-repetition lies that keep the wheels turning – remains pretty much unshakeable.

I’m not at the “End of the World” sandwich board stage yet, but do think we’re playing a dangerous game if this trend keeps up longer term. The pervasive testing of the boundaries of our collective gullibility-politically, socially and economically – feels cumulative, a heavier weight over time if collective cynicism (coughJonStewartcough) is any yardstick. The money pouring out of equity funds could definitely represent an ongoing indicator that mom and pop have had enough of playing Charlie Brown with the investment banks holding the football. The Facebook deal’s certainly not going to help – the next time a broker calls a client with a once in a lifetime IPO opportunity, the client’s likely going to remember the junkie’s track marks.

Bull/Bear = GOP/Dem and Why Being a Good Teammate is a Bad Investing Strategy

Framing market behaviour as a battle between bulls and bears has always made me cringe, appealing as it does to some of our least productive psychological tendencies. Our first, automatic response to finding out that a confrontation is underway is to self-identify with one side or the other, a hardwired subconscious process arising from the herding impulse developed deep in our evolutionary past. Psy-Fi blog does a typically brilliant job describing the negative aspects of herding on trading performance HERE, saving me from elaboration.

Imposter that I am, I don’t just write shit down and expect people to believe me, I co-opt respectable people without their permission for support. Thankfully, in this case there exists what I think as the best general-focused blog post ever written on how to think healthily (you read that correctly), The Wrong Lesson of Iraq by The Last Psychiatrist written in 2007. Ostensibly about the masses’ response to the alleged manipulation of popular opinion by the Bush administration, the post is much more about the dangers of “splitting” –  the broad brush psychological tendency to choose sides –  and the resulting laziness and poor analysis that logically results. Conveniently, the GOP/Independent/Democrat trialectic has a close market analog in Bullish/Neutral/Bearish which will make comparisons easier.

The Last Psychiatrist writes as follows:

Splitting says: Bush is all bad, period.  Nothing he does is good, and if it is good, it is from some malicious of selfish motivation, or an accident related to his incompetence to even be self-serving.  Similarly on the other side, liberals are weak, corruptible, treasonous.

Splitting is always polar; once something is declared “all bad,” an opposite is necessarily declared all good.  Importantly, this isn’t a comparison between the two– he is bad, but she is better; it’s perceived to be two independent, unconnected, assessments, even though to anyone else looking from the outside, they are so obviously linked.  So hatred of, say, liberals is thought to be independent of your preference for Bush, but in reality it is only because you hate liberals that you like Bush.  The hate comes first.  And this splitting makes it nearly impossible to acknowledge any of Bush’s faults.


Yes, this will take some unpacking. A decent start would be the equivalence of the terms “permabull and permabear” with “far left and far right” as in each case the namecalling is simultaneously a statement of affiliation and an invitation to dismissal. If I’m bullish, there’s no way I need to read Dylan Grice because the term “permabear” identifies his reports as a market strategist version of Mein Kampf, the ravings of a lunatic. The same is true in reverse of China sceptics and Jim O’Neill (*raises hand sheepishly*). Note the defensive nature of these decisions – branding an opposing view as insane or misguided saves us from testing our own theories, market or policy-oriented. Paragraph two of the excerpt suggests also that the basis of our market outlook may be intensified, or even formed from, a general, personality-based dislike of either optimism (“that idiot always has the pom poms out”) or pessimism (“the bond market has predicted 45 out of the last 3 recessions so i don’t follow it”).

Now the key part:


But splitting is rarely about the target, it’s a convenient heuristic to get the subject out of having to accept the complexity and totality of the other, and of their own emotions about their environment.  In short, when things get heavy, it’s easier to just label black and white and work from there.

Splitting is the reaction to intense anger and frustration in those people who discover themselves to be powerless.

Since it’s all Bush’s fault, there isn’t actually any underlying problem to deal with.


Change “other” to “market” in the first sentence and we can pretty much print out and frame it as one of the best pieces of trading/investing advice ever written. Psychologically it is much, much easier for unsuccessful traders to claim the market is fixed rather than recognize that it is merely (at that stage of their trading career) beyond their comprehension, that more boring, tedious studying must be done and that ignorance is “the underlying problem to deal with”. The emphasis on “their emotions about the environment” is also clearly applicable to trading and investing, as numerous commentators detailing the unproductive nature of investing emotionally have pointed out.

No metaphor is perfect and there are limits to the GOP/Dem Bull/Bear comparison. The limiting aspects of labelling and framing, however, are evident in both areas. Knowledge of how markets actually function will be limited by self-identifying with any group – bull, bear, inflationista – in the same way that ideologues will always be incapable of producing effective foreign policy beyond bombing the living crap out of people until they submit, likely temporarily, to force. Persistent success in investing and trading requires a nuanced, detailed understanding of factors affecting asset performance that is not generally possible by just being a good teammate with fellow bulls or bears.

Standing By for the China Growth Hiccough

One of the favorite tactics of the more Gricean, scaremongery strategists in the early 2000s was a chart comparing the post-peak performance of the Nikkei and the S&P 500. There was never a lot of effort spent on the “why” of the seemingly inexplicable correlation between the two, the Japanese and US economies being so structurally different. Japan, with a giant, manufacturing-based trade surplus using the adapted technology of other nations (early 1990s patent reform remains a vastly underrated factor in the tech bubble) was faced by issues, the inbred keiretsu structure most prominently, that Teddy Roosevelt had taken care of for us (or so we thought). The persistence of the Nikkei/SPX correlation was, and is to a great extent, considered a statistical anomaly.

Investor psychology and the profit-driven (but not insidiously evil) influence of the finance industry are the two factors, which are demonstrably unchanged between the bull markets of Tokyo in the 80s and Silicon Valley in the 90s. The pattern is likely repeating itself in China.

My argument, roughly that China is following the same bull and bust pattern found throughout history, is dependent on distinguishing between the two types of market rallies. In the first, the Manic Type most widely associated with the Tulip Bubble craze, is an adolescent version where most professionals are aware that they are just dicking around, playing Greater Fool. Retail-related fads – Krispy Kreme, Crocs, Beanie Babies, Hoola Hoops and likely LULU sometime in the next ten quarters – feature prominently here. Everyone knows there a “best before” date on the whole thing, it’s just a matter of trading it and finding the exit before a fickle public gets bored.

The adult, Structural Economic version of the bull and bust cycle is a much more serious operation. It involves real, tangible change that dislocates economies across the entire planet for the richer: think steam engine, Internet, cotton gin, Ford’s assembly line, global trade (and the insurance business that made it financially feasible at the initial New World stages), China.

Examples of market reaction to the latter, major trends are remarkably consistent and numerous: well over 80% of Britain’s 19th century rail network was built after the collapse of rail stocks in 1846. The hundreds of American auto manufacturing companies active in the mid 1920s bankrupted their way to three. The same pattern will inevitably hold true for post-bubble technology networks in this century. In this light, using a more macro interpretation and a longer time arc, it is not difficult to see the Great Depression as the awkward adolescent stage of America’s technology-driven march to global economic dominance. The Asian Currency Crisis is a quicker version of the same process for the Asian Tigers. The pattern is evident in each case – a legit, undeniably powerful trend attracts far more investment than it can efficiently digest in a short period, inflated asset bubbles collapse, the actual sustainable trend takes hold.

In all likelihood China will eventually become the world’s largest economy but that’s not the point, at least for developed world investors. Economic changes to the degree being experienced in China have never occurred in history without a serious hiccough that makes every investor wet their pants for a considerable period. And currently, each passing month brings signs of structural stress in the Chinese growth engine – NPLs, inflation, social unrest, property price deflation, corruption, suspicious accounting – that make it increasingly difficult to argue that somehow China will be the first entity ever (and the largest by a wide margin) to transition smoothly from mammoth investment bubble to sustainable growth. This argument involves a New Paradigm.

Sell-side China bulls frequently imply that to be bearish on China-related investments is somehow analogous to long-term bearishness on the Chinese economy, an interesting rhetorical flourish designed to sustain investment in the short term. It would be far more interesting to hear the ways in which China will avoid the “investment bubble/collapse/then steady growth” process that economic history teaches us to expect. Indiscriminately shoveling money at legitimate trends until they break is just what we do. The odds, particularly in light of recent data, that we will have another chart to place alongside the 1980s Nikkei and 1990s S&P 500 appear much higher than an extrapolated straight line growth path into the Chinese century.  I’ll wait for the hiccough and buy with both hands.


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