Messin’ With My Financial
Brain Jan 16 ‘15
Doug
Wakefield
Why
is it that unlike anything else we purchase in our daily life, our brains are
naturally hardwired to believe that when investment prices move higher,
we must make purchases or hold on rather than start selling and reducing
our position? The higher price go, the stronger the belief they will continue
rising.
Car
dealerships have year-end sales. Black Friday sales have now been pushed back
into Thursday. Want to find cheaper prices for your airfare, hotels, and rental
cars? No problem.
Yet,
when it comes to gaining wealth, we are most convinced AFTER prices have soared
for years, that NOW is the time to buy, BUY, BUY!!
Yet
this bubble is different than the last one, or the ones before it. I know of no
other time in history where the idea of Money for Nothing based
on zero interest rates has lasted for 6 years. If you know of one, I want to
know.
The
very idea of “we can inflate” (inflation
– a continuing rise in the price level usually contributed to the volume of
money and credit), has been used relentlessly by central bankers to “overcome deflation” (a
contraction in the volume of money or credit that results in the general
decline in prices) as proof that with enough debt and time, things can return
to “normal”. This continues to produce ever-larger crowded trades across the
global spectrum, larger in size than any bubble before it. No on need go far to
look for signs of a massive drag on the global economy from this
“experiment”.
Crowds of Humans Leading or Following?
Every
headline of “investors buy” or “investors sell” is actually incorrect, since
humans would never watch prices plummet or catapult in minutes, only to
immediately trade at a previous low or high for hours. This can only be
explained by the fact that ALL humans, whether managing billions or thousands,
are being lead by the actions of the dominant traders in world markets, the
speed of light trading programs otherwise known as high frequency trading.
Equity
Market Structure Literature Review, Part II: High Frequency Trading, US
Securities and Exchange Commission, March 18, 2014
“The SEC’s Concept Release
on Equity Market Structure recognized that HFT is one of the most significant
market structure developments in recent years. It noted, for example, that
estimates of HFT typically exceeded 50% of total volume in U.S.-listed equities
and concluded that, ‘by any measure, HFT is a dominant component of the current
market structure and likely to affect nearly all aspects of its performance.’”
Even this corner of the market has been impacted by
the Chicago Mercantile Exchange (CME) offering discounts for central banks to
trade futures. You can’t make this stuff up. I do wonder if the discounts
offered in 2014 were extended for this year, and has contributed to recent
extreme volatility?
“What is the Central Bank Incentive Program? – The
Central Bank Incentive Program (CBIP) allows Central Banks to receive
discounted fees for their proprietary trading of CME Group products. Program
participants receive discounted fees on CME, CBOT, and NYMEX products and COMEX
futures products for electronic trading only. CBIP participants will receive
discounted fees through Dec 31, 2014.” [CME
Group, Central Bank Incentive Program, Questions and Answers, July 2013]
Chasing the Final Dollar
In a
world where the FOMO, or fear of missing out, is more powerful than one’s
understanding of historic changes and warnings at the system level, piling in
has proved very costly as we start 2015.
Overcoming
the Fear of Missing Out, Huffington Post, Nov 7 ‘14
No
place is it more overpowering, than when central bankers promise that allowing
financial assets to deflate is not an option, while central bankers also tell
you that strangely enough, risk levels have surpassed those of previous
bubbles.
Was
the final “all time high” in US stocks achieved during the last days of 2014,
the Dow reaching 18,000 and the Wilshire 5,000 topping 22,000, or will the
global stocks break out after the ECB’s release on January 22nd, ignoring
all of those “little” nasty risks that keep growing?
The
question we all seem left with as we start off 2015 is “Do today’s central
bankers with THEIR high-speed computers trading futures alongside their
electronic money creating machines have infinite powers to always bring back
“calm” in global markets, stopping “risk on” assets from deflating, or could
the lessons from history still have their place in this brave new world?
One
thing is for certain. The
Nirvana Trade is way into overtime.
Vanguard
Sets Record Funds Inflow, MarketWatch, Jan 5 ‘15
Investors gave stock pickers a resounding vote of
no confidence in 2014, pouring $216 billion — a record inflow for any
mutual-fund firm — into Vanguard Group, the biggest provider of index-tracking
products, according to preliminary figures from the mutual-fund group.
ETF
industry booms in record-breaking year, Financial Times,
Jan 11 ‘15
Investors
ploughed record amounts of cash into exchange-traded funds last year as the
expansion of the ETF industry accelerated worldwide.
Numerous records for ETF inflows were set in 2014 by providers, and across asset classes and geographies. This was helped by a massive surge in December, when investors allocated $61.5bn of new cash, a monthly record.
Speeding Can
Bring Serious Injuries
Many pieces of
information pour through our brains weekly. The emotional intensity of the last
few weeks has proven different from the last 3 years, as we have watched
powerful swings in both directions in stocks. This is not abnormal, but
perfectly normal when one considers that the longer we trust in “more debt and
intervention to the rescue”, the greater the instability from herding.
The following was
pulled from pages 65 and 66 in my paper, Riders
on the Storm: Short Selling in Contrarian Winds:
“On Monday morning, the fallacy of
composition that Dr. Jacobs had debated with his colleagues was now to take
place. No more marketing. No more debating, just the hard cold reality of the
markets.
‘From 9:30-9:40 a.m., program selling
constituted 61 percent of NYSE volume. Between 11:40 a.m. and 2:00 p.m.,
portfolio insurers sold about $1.3 billion in futures, representing about 41
percent of public futures volume (Brady Comm. 1988:36). In addition, portfolio
insurers sold approximately $900 million in NYSE stocks. In stocks and futures
combined, portfolio insurers had contributed over $3.7 billion in selling
pressure by early afternoon.
From 1:10 – 1:20 p.m., program selling
constituted 63.4 percent of NYSE volume and over 60 percent in two intervals
from 1:30 to 2:00 p.m. In the last hour and a half of trading, insurer sold
$660 million in futures. The DJIA sank almost 300 points in the last hour and a
quarter of trading.’” [Capital Ideas and
Market Realities: Option Replication, Investor Behavior, and Stock Market
Crashes (1999) Bruce Jacobs, Co-founder and Principal of Jacobs Levy Equity
Management, pg 73]
And
the power of computers alongside the herding behavior by crowds hasn’t changed
since 1987, as attested by the Securities
and Exchange Commission’s joint paper with the Commodity Futures Trading
Commission, Findings Regarding the Market Events of May 6, 2010, released
on September 30, 2010:
“LIQUIDITY CRISIS IN THE E-MINI
The combined selling pressure from the Sell
Algorithm, HFTs and other traders drove the price of the E-Mini down
approximately 3% in just four minutes from the beginning of 2:41 p.m.
through the end of 2:44 p.m. During this same time cross-market arbitrageurs
who did buy the E-Mini, simultaneously sold equivalent amounts in the equities
markets, driving the price of SPY also down approximately 3%.
Still lacking sufficient demand
from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly
buy and then resell contracts to each other – generating a “hot-potato”
volume effect as the same positions were rapidly passed back and forth. Between
2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted
for about 49 percent of the total trading volume, while buying only
about 200 additional contracts net.
At this time, buy-side market depth in the E-Mini
fell to about $58 million, less than 1% of its depth from that morning’s level.
As liquidity vanished, the price of the E-Mini dropped by an additional 1.7% in
just these 15 seconds, to reach its intraday low of 1056. This sudden
decline in both price and liquidity may be symptomatic of the notion that
prices were moving so fast, fundamental buyers and cross-market arbitrageurs
were either unable or unwilling to supply enough buy-side liquidity.[pgs
6 & 7, italics and underlining my own]
Will things smooth out next week and the next leg of the global
equities bubble continue with the ECB’s announcement? Has the start of 2015
been a harbinger that all the many “highest in history” or “worst in 30 years”
warnings seen in Q4 ’14 are now coming home to roost?
We must all wait and see. One thing is for certain; merely creating
another scheme to drive down sovereign debt yields to produce even more “lowest
yields on record” days, will not change the hard cold realities facing the REAL
global economy.
Off
To The Races – European Court Gives Green Light to QE, Oxford World
Financial Digest, Jan 14 ‘15
“The first stage in a trilogy of critical European
events this month has just been completed. The European Court of Justice (ECJ)
has given its preliminary decision concerning the legality of European Central
Bank bond buying, deciding that the practice was legal “in principle” and that
the ECB just needed to meet some guidelines, such as explaining its rationale.”
Shrinking
European Banks Will Cause Massive Credit Gaps, Oxford World Financial
Digest, Jan 14 ‘15
“The Financial Times has published a very
interesting article about how new regulations in the European banking sector
might lead to a huge contraction in lending, and thus growth, across the
continent. The European economy has never moved away from bank-based extension
of credit as has the US economy. Therefore, there is no Fannie Mae or Freddie
Mac for mortgages, and companies still overwhelmingly rely on bank loans for
financing. With new rules being put in place, lending profitability will drop
by about 66% for the banks, so they will have little incentive to continue in
such businesses.”
The idea of “unlimited money” was a bogus creation from the start. I
have found that the majority of traders, whether bearish or bullish, understand
that the “free money” is building more and more problems across the system.
They look for short term gains from moves, and never follow a “leave it alone
and my retirement will be fine” type of behavior. This, when combined with the
information shown above, means that with every delay of game, the pressure only
grows. Eventually, a lot of people are going to get hurt very badly.
Confidently promoting a short-term illusion for crowds must by its
very nature, produce highly volatile times ahead. Few will profit from what is
coming. Most, like previous bears, will be caught unprepared mentally to take
action as the environment changes.
Being a Contrarian
I
have found that using the “nirvana trade”, one has been able to profit from
being a contrarian as volatility has picked up greatly since mid 2014. These
are shorter-term trades, like those following the bullish crowd, and should be
considered by anyone concerned with the massive number of risks being revealed
across the financial and economic system.
If
you looking for a true contrarian take, and are seeking to gain insight into
how the defensive side of this game can prove profitable in bubble land, I
cannot think of a better time to subscribe to The Investor’s Mind.
The
cost for procrastination continues to rise. The value for good research is
extremely low in comparison to the speed in which wealth can be destroyed. Click here to start the next
six months reading the newsletters and trading reports as we come through
this incredible year.
On a Personal Note
I
have recently started a blog called, Living2024.
It is a personal blog, not business. I wanted to have a place to write some
deeper stories about where this entire drama seems to be taking us all. I hope
you will check it out.
Doug
Wakefield
President
Best Minds Inc. a Registered Investment
Advisor
1104
Indian Ridge
Denton,
Texas 76205
Phone
- (940) 591 - 3000
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