Today's Ideas:

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    Wednesday, October 8, 2008

    6 months

    Before I share an observation, I'll remind you that there is a huge difference between trading and investing. Furthermore, most economic analysis is useless for trading purposes. To prove the point, many predicted the global rate cut. If they are "all longed up" in stock, they will pat themselves on the back for being so brave and prescient. This common method of deduction will cause ruin at some point in most trader's careers, as they will hold losing trades when "nothing has changed" in their analysis. After all, we see vehicles every day that don't respond as anticipated. If there is no way to quantify an event, it cannot be used definitively. This is illustrated by the failure to rally, when the "bailout" passed, and can be seen each quarter when stocks have "blowout" earnings, only to sell off. Only after the fact, can reporters be sure of the cause for market moves. Even then, it is just their opinion, and a labeling they are comfortable with.

    Notably, the usual "it takes 6 months for a rate cut to take effect" mentality has been absent on this rate cut announcement. I can only surmise it will be a very, very long 6 months for most traders, and especially "investors". Either this is the turn (to start higher), or it will be viewed as a panic and desperation. The point is that nobody can know, so trust your own instincts, and use proper risk control. In the end, it all comes down to risk control, as anybody can stumble upon a tradable "edge". The key is to exploit it consistently, by not attributing too much of your success (or failure) to your perceived intelligence. The bottom line is things are only going up, down, or sideways, so even a monkey has a 1/3 chance of being correct, and on one of the last 2 outcomes he breaks even! The real question is how much does he make when he's "lucky", and what does he lose on the last 1/3 outcome?

    Links I like:

    -Check out France's "solution".

    -England and more comparison's to the Great Depression.


    Blogger The Lonely Trader said...

    Yeah, Mish is an unabashed critic of the French. I can't argue with his analysis, because in the end I like what I read. Still, Sarkozy has framed the problem more accurately than any other European politician I have observed. You gotta give him props for at least understanding more than the rest. My question is, given the constrained policy options that politicians have -- and I admit that the constraints are self-invented and self-limiting -- which would you choose: Paulson's Or Sarkozy's? If history is any guide, Sarkozy's idea actually has a chance to do some good with the most direct effects -- that is, if all you have in front of you for options is throwing "good" money after bad. Recall when the great tax rebate debate was hitting the MSM back in early 2008. There was this excellent idea from some economics professor to invest that money in infrastructure and public works instead -- because in the end, consumers would spend it on, well, consumables. The more positive side of the argument was that it would support the construction and materials manufacturing industries as well as bring (part of) our infrastructure up to 21st century standards. I have to say, I prefered that to the tax rebate. And if we have to spend $700B, I would prefer to spend it on something that will actually have a lasting and more direct material affect on our economic "hardware".

    October 9, 2008 12:58 AM  

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