Europhoria Now, Recession Soon

3 Comments for “Europhoria Now, Recession Soon”

1. Rob G

   Oct 27th - 6:07 pm

   

   FINALLY!! Someone who gets it. Thank you so much Danielle for being the voice of reality in all this senseless turmoil. I have been trying to tell my fellow traders this exact scenario for 18 months but they keep scoffing me off saying “relax, everything is fine. They had a problem and they fixed it..”. All this palaver every few weeks is nonsense. Saying is one thing, doing is another. Let’s see what happens when Greece actually utters the words..”we just can’t do this, we need to leave the EZ and stop throwing good money after bad”.

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2. DGDye

   Oct 29th - 5:06 pm

   

   I would like to make two points:

   First, the number one common trait of successful traders is their ability to remain dispassionate about their subject. As soon as one allows political advocacy or social commentary to infect one’s trading, they have joined what are called the “gullibles,” the group of perpetual losers that comprises average investors and their average returns. In the zero-sum-game of the futures market, for example, where 98% of investors lose money, it is the gullibles who provide the funding for the billionaire traders on the other side of these losing trades.The man who hired Bruce Kovner, for example, liked the fact that Kovner believed that anything could happen. He had no prejudices towards the direction of the market at any given time. Kovner went on to earn 87% per year for 10 years and is now one of the most successful traders in history. (At 87% per year, $2000 invested in year one would become $1 million by year ten).

   Similarly, I personally know a trader who has averaged 18.6% per year — after fees — for 40 years at a risk level that is lower than the industry average. In fact over the past three years, his fund has earned 96%. And he doesn’t take a management fee; rather, he takes only a percentage of what his investors earn. How is that for a meritocracy in a world of money managers extracting fees for questionable management results? He now manages billions, not from marketing and media commentary (he’s a terrible marketer), but because of the organic growth within his funds and word-of-mouth.

   You see, people assume that higher returns involve higher risk. This just isn’t the case. If one examines closely the results of so-called conservative money managers who are happy to report the extent to which they protect the capital of their clients, one often finds the highest risks of all. Let us say that over a time period of, say, 8 years a manager has managed a 30% return on invested capital. That works out to about 4% per year (I’m being generous with my math). Considering that annual inflation over that time period runs at about 3% (inflationdata.com) and assuming a typical management fee of 1% of capital, investors are in fact paying someone to earn them a real return of about zero.

   If your formula for expected risk is (probability of risk x risk) divided by (probability of return x return), you see very quickly that a so-called “conservative” approach results in excessively high risk levels because the lack of performance is guaranteed, leading to an overall risk number that asymptotically approaches infinity because your losses over time are virtually guranteed. Often these money managers will use the market indexes as benchmarks in their advertising. Benchmarks are the first refuge of mediocrity. If I had put my money in a mattress in 2000, I could legitimately claim that I had outperformed the Nasdaq over the past 11 years.

   Similarly, pension funds have started to realize to their collective horror that in a deflationary economy, conservative investments will not pay the bills. Again, the risk of failure is certain, meaning the overall risk is almost infinite. It is this guaranteed failure that has the Canada Pension Fund possibly investing in Yahoo, for example, lest they add to the grotesque level of unfunded liabilites that hangs over the pension world because of so-called conservative investment principles.

   Now I wouldn’t care how these conservative money managers invest their investors’ capital except that many of them have taken to alleging that investors who pull their money from their funds are being duped by other money managers making unsupportable claims of higher returns. As I have shown, the real risk to an investor is conservative investing over several years with virtually guaranteed mediocracy. Investing with a so-called “conservative” money manager is a sure-way to the poorhouse. There are other investment methodologies that can return several multiples of the conservative “by-standers” with lower risk levels.

   My second point is the arrogance of the pseudo-intellectuals. These are the pundits who never seem to be on any list of the greatest traders with the best results, yet always seem to have the answers to questions of economic and market direction. They assume we live in a linear world where one can zero in on a specific fundamental, such as global debt, and conclude, ergo, the markets must decline. Are they right? Usually, but only in the same sense that a meteorologist who in May warns of snow is right: you hear his warning, grab your parka, start the furnace, hunker down…sweat through Summer and Autumn, missing all the sunshine… and in December, he says, “I told you so!”

   To be a successful trader, one must be aware of what is called “maximum excursion.” “ME” consists of the constant wiggles and divergences of the market as it travels in the direction suggested by its fundamental underpinnings. If one is a conservative money manager, they extract little from these movements because they are, for the most part, on the sidelines. Often conservative money managers will deride “reckless speculators” as not being “in-the-know,” whereas the conservative money managers with their mediocre results act as though they speak from a position of omnipotence. They take refuge in the “real economy,” meaning the way things “should” be going, and anyone who assumes something else clearly doen’t understand “reality.”.

   What these conservative money mangers fail to realize, however, is that we do not live in a rational, linear world. The algorithmic traders know this. And when the conservative traders arrive at a major market result with their grand pronouncements of “I told you so!” based on their flawed, naive perception of the 3D puzzle with a thousand moving parts that is the markets, they typically do not realize that they are feeding on crumbs, and the very algorithmic/speculative traders they deride as ignorant of economic reality, have in fact made off with the main course…and are already onto the next big meal.

   As some have said, “The most oblivious are the most over confident.”

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   • brian

     Oct 30th - 5:47 pm

     

     DGDye, No one seem to be able to call these moves consistenly, if you have a trader with that record I’d like to know their name please . Brian

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