Musings Report #41 10-6-12 Do we have what it takes to get from here to there?
You are receiving this email because you are one of the 515 subscribers/major contributors to www.oftwominds.com.
For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights, and thank you for supporting the site.
Do we have what it takes to get from here to there?
This apparently simple question offers profound insights into the dynamics of individuals, households, enterprises and nation-states. If we ask this question "Do we have what it takes to get from here to there?" and anwer it honestly, it establishes a "road map" of what must be in place before a move from here to a better, more sustainable future ("there") can take place.
Since my partner and I built about 100 houses in my career as a builder (1981-86), I tend to conceptualize long-term goals as construction projects, where the only way to get from here to there is to have the necessary tools, skills, experience and capital. If you don't have all of these in hand, building a house will remain a fantasy.
As a trader/speculator, I see the following characteristics as essential to move from here (losing money) to there (consistently earning money):
--the discipline to plan a trade and then trade the plan
--buying only when the equity/commodity is "on sale" according to your system
--hedging every position in some fashion
--selling the position when the stop-loss or target is hit
If any of these is lacking, there is no way to get from here to there.
As my trading mentor Harun I. explained, there is no real need for an "edge" in stock-picking; randomly selected positions will yield positive returns in a disciplined system as losers are weeded out and winners are allowed to run.
On a national level, there is no way for a deeply corrupt society such as China or India to get from here (their current level of development) to there (a higher level of development) because corruption limits social mobility and innovation, as potentially profitable ideas are quickly stolen, copied, pirated or appropriated by corrupt officials.
As correspondent Mark G. recently observed in an email to me, "hyper-centralized entities are institutionally incapable of adopting decentralized solutions." I immediately thought of the Federal Reserve, which has responded to a crisis of "too big to fail" banks holding phantom collateral to support massive leverage and debt with increasingly centralized actions to recapitalize those same centralized banks.
The Federal Reserve is incapable of overseeing a decentralized economy; it has responded by increasing counterproductive central planning (zero interest rate policy, QE-x, money-laundering dodgy mortgages, monetizing Federal debt, etc.) There is no way the Fed's policies are going to get the nation from here to there.
It's a profound question when answered honestly: Do we have what it takes to get from here to there? For most of the world's economies and societies, the answer is a resounding "no."
I have often written about the Status Quo's failure of imagination. The Status Quo in the U.S. is as intellectually bankrupt as it is financially bankrupt. Our "leadership" cluelessly clings to the only model they know: pressure "consumers" into borrowing more money to buy more "stuff" from China, in the magical-thinking belief this churn will somehow lead to sustainable "growth."
That model isn't going to get us from here to there.
Market Musings
I look at many indicators and factors across short and long-term time scales before planning a trade. There is no one "edge" in trading, other than discipline and experience, but over time some indicators help identify the trend. Many traders use DMI, others use MACD and stochastics, others swear by the VIX volatility index.
Still other traders look at currency pairs to identify trends and turning points. I think all have value, in combination with other "tea leaves."
As you know, I have recently noted a correlation between tradable tops and bottoms and the SPX:VIX ratio, which combines the basic stock index with the basic volatility metric. While the absolute number is reaching levels that have been high-water marks, the MACD has just crossed positively. In the past, this cross has been followed by advances.
Another common indicator is the NYMO, the McClellan Oscillator. It too has offered a tradable correlation with market highs and lows (over the short-term).
In some ways, the current global market rally (with the Shanghai Index being the laggard) qualifies as "the most hated rally ever" because global fundamentals are horrid and the return on central bank intervention is clearly diminishing. As technical analysts, we are guided by correlations that have worked to date. There is no guarantee that they will continue to "work," and so every position must be hedged or protected in some fashion.
On the face of it, the rally looks increasingly vulnerable but may yet have one more surge higher. "Most hated rallies" tend to outlast those trying to short them.
From Left Field
Must-see video: Multiple Sidosis (via G.F.B.) A highly intertaining and innovative 9-min. "amateur" film by Sid Laverents (1970), who went on to filmic fame (within certain industry and critical circles) with "Sid's Saga," an impossible-to-get 3-part film series of Sid's life.
F1 car races the Lincoln Tunnel: "Formula 1 team Red Bull Racing somehow ($) managed to convince the Port Authority to close the tunnel between New Jersey and midtown Manhattan so that they could drive the RB7 from Weehawken to 34th Street and back." (2 min. video)
Japan: The grey planet's ticking timebomb (via Joel M.) I saw on DW (English-language TV news from Germany) that low birth rates in Germany will require 300,000 able-bodied immigrants a year just to offset the decline in native workers.... demographics are destiny.
QE3, Deflation And The Fed’s Money Illusion (Chris Whalen) an excellent analysis of the Fed's policies and how they undermine private-capital investment. Change the rules constantly to help your crony buddies and you destroy the private-sector economy...
Thanks for reading--
charles
