The Credit Crisis Financial Stocks Short Journal
- Thread starter Daal
- Start date
Yo, Daal! I like this journal... Hope you've made some money this year.
If I am permitted, I'd like to chime in every now and then.
If I am permitted, I'd like to chime in every now and then.
Feel free to post your thoughts on anything trading related as you are one of the good posters on ET and is quite knowledgable. Yes I have been making good money this year, mostly due my dovish stance regarding fed funds and eurodollars. But I felt that I traded pretty poorly as I made a big mistake back in April by loading up on junk stock puts, I still cant believe how badly I sized that position. I also fought the rally a few times. If it werent for mistakes I'd be a rich man
Back to the Exhibit 9 chart Inflation and Deflation cycles. One interesting argument against the 'Its a M2 and easy money cycles instead of commodity cycles' is the fact that during deflation cycles M2 went up 5% on average per year, yet commodity prices fell 1% on average per year in the three cycles. So there seems to exist a 'fundamental' other than M2 behind this. In this case the theory would be that in the deflation cycles there was too much supply and commodity prices went down even though the money supply went up(and the Urban CPI by 1% on average per year, it lagged the money supply partly probably due the commodity component of the CPI)
Real economic growth is quite similar in both inflation and deflation cycles(4.1% and 3.6% respectively)
That chart shows that there seem to exist periods where commodities go up more than general prices and price returns of the stock market(that is not including dividends and reinvesting) and periods where they lag general prices and the price return of the stock market. And this seem to be independent of M2, even though it probably has a certain impact
Real economic growth is quite similar in both inflation and deflation cycles(4.1% and 3.6% respectively)
That chart shows that there seem to exist periods where commodities go up more than general prices and price returns of the stock market(that is not including dividends and reinvesting) and periods where they lag general prices and the price return of the stock market. And this seem to be independent of M2, even though it probably has a certain impact
Another possible explanation for these commodity cycles could be interest rates. Low real interest rates lower the cost of holding inventories(and reserves) and act as disincentive for extraction(you can make more just by hoarding reserves and trying to ride the upwave) or buying and storing, then prices would rise to a point where more E&P would kick in but this would take time, higher real interest rates would have the opposite effect(cash and USTs becomes more attractive also)
So commodity cycles could be actually interest rate cycles that trigger a commodity speculation boom. Even though the chart doesn't show the behavior of interest rates, the problem is the chart that shows commodities beat the stock market once and while. If falling real interest rates were the fundamental behind this, stock prices would do well, that is because they like low and falling real interest rates(investors usually repond by increasing price to earnings ratios)
Furthermore then 1982-2000 experience
contradicts this theory, as real interest rates and inflation expectations steadly fell(so did actual inflation and nominal interest rates) yet commodities lagged the price return of the stock market even before the tech bubble started and the urban CPI
So commodity cycles could be actually interest rate cycles that trigger a commodity speculation boom. Even though the chart doesn't show the behavior of interest rates, the problem is the chart that shows commodities beat the stock market once and while. If falling real interest rates were the fundamental behind this, stock prices would do well, that is because they like low and falling real interest rates(investors usually repond by increasing price to earnings ratios)
Furthermore then 1982-2000 experience
contradicts this theory, as real interest rates and inflation expectations steadly fell(so did actual inflation and nominal interest rates) yet commodities lagged the price return of the stock market even before the tech bubble started and the urban CPI
I have no idea if there is global warming or cooling or global nothing. I have never read a book about it, nor watched Gore's film, I have more important things to do/read. But I find it very interesting that 'scientists' that are supposed to be guided by the scientific method enganging in stuff like this
http://www.businessinsider.com/download-the-entire-leaked-climate-emails-2009-11
The thing is, these people can afford to suffer from confirmation and other biases(matter of fact it might are actually help them). If they are wrong what are the consequences?If the next year data shows more/less warming/cooling more/less ice melting or whatever they will just say lets wait for a bigger sample. Same thing happens in a multitude of other fields. If you pick the wrong religion to whorship the consequences(if they exist) only come after death. In a number of fields if you are wrong it will take you a long-time to find out, perhaps you never will
http://www.businessinsider.com/download-the-entire-leaked-climate-emails-2009-11
The thing is, these people can afford to suffer from confirmation and other biases(matter of fact it might are actually help them). If they are wrong what are the consequences?If the next year data shows more/less warming/cooling more/less ice melting or whatever they will just say lets wait for a bigger sample. Same thing happens in a multitude of other fields. If you pick the wrong religion to whorship the consequences(if they exist) only come after death. In a number of fields if you are wrong it will take you a long-time to find out, perhaps you never will
But trading is very different, this is a ruthless field where if you are wrong the market will let you know pretty soon. This is why I view biased trading as probably one of the most important things to get rid off, its not easy, specially if you have large positions in the market favoring a certain approach or prediction.
The temptation to close your eyes and tell yourself everything is fine is large(I fell in that trap many times, although I have gotten better at it, specially after having improving a certain health condition) but a ruthless look at the facts, to me is so important. I dont care if it will make me throw up, faint and destroy my current view of the world, I'm willing to look at the facts and reality and change my views. If I need to be hospitalized in the process, so be it, at the end of the day I only care about my P&L
The temptation to close your eyes and tell yourself everything is fine is large(I fell in that trap many times, although I have gotten better at it, specially after having improving a certain health condition) but a ruthless look at the facts, to me is so important. I dont care if it will make me throw up, faint and destroy my current view of the world, I'm willing to look at the facts and reality and change my views. If I need to be hospitalized in the process, so be it, at the end of the day I only care about my P&L