Plea for a New World Economic Order.
Preparing for The Crash, The Age of Turbulence.
Monday 21st,2009.
"Prediction is very difficult, especially about the future."
Niels Bohr Danish physicist (1885 - 1962)
Executive Summary:
I square my long long-term interest rates. I will go short 25% of my allocated position of long-term yields when the yield on the 30 Years US TBonds get to 4.610% then short till it gets to 3.623%. I will square the position and if TYX transgresses 46.30 [No short selling.].
I am long stock ats with a first objective of 1017.64 on SP500 with later a possible new all time high. I will update my final objective when TYX transgresses 41.50. I will square the position if TYX transgresses 46.30 [No short selling.]. I am long 25% of my total allocated position for stocks. I will increase it to 100% when the future on SP500 transgresses 957.2.
I am long minerals with a first objective of $89 on Oil with later a possible all time high. I will update my final objective when TYX transgresses 41.50. I will square my position and go short if TYX transgresses 46.30.
I am short the spread of the yields Corporate Bonds / Trasury Bonds with 25% of my allocated portfolio.
I time the crash with the yield on USTBonds getting at 3.623%.
The crash will be later then I previously anticipated. However I expect that timing it will be easier.
Abstract:
My strategy is continuously evolving as Market gives me more information.
My strategy relies on my analysis of the Market: "Plea for a New Economic Order." However I explain there that there is no way of predicting mathematically the Crash. Hence the hypothesis I make here about the future behaviour of the Market is based solely on my 24 years experience of the behaviour of financial Markets, hunch and intuition. I believe it is reliable.
My strategy concerns only the Markets I have superior knowledge of: fixed rates, yield curve, stock indices and minerals.
It is highly advisable to play a portfolio in these different segments (as we have no superior knowledge of individual specific risk which, hence must be diversified. Off course if I had a superior knowledge in one segment of these Markets I would use it). It is also advisable to play a portfolio of those different Markets giving some weights to fixed incomes, stock indices and minerals.
Th ideal portfolio, for those who know what it is, is build by running an analysis of Principal Components on the historical values of the financial products and using the first component.
For those who don't know what an analysis of Principal Components a sub optimal portfolio is made by using a weighting inversly proportionate to the implied volatility of the financial products.
The ideal weighting are modified with the results of technical analysis.
As I said it is impossible Mathematically to predict the Crash. Chairman Alan Greenspan said it was "Mission Impossible.":
"Much as we might wish otherwise, policy-makers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances. Financial crises are characterised by discontinuous breaks in market pricing the timing of which by definition must be unanticipated - if people see them coming, then the markets arbitrage them away.
.....
That is mission impossible. Indeed, the international financial community has made numerous efforts in recent years to establish such oversight, but none prevented or ameliorated the crisis that began last summer. Much as we might wish otherwise, policy makers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances. Financial crises are characterised by discontinuous breaks in market pricing the timing of which by definition must be unanticipated - if people see them coming, then the markets arbitrage them away."
Alan Greenspan The Age of Turbulence: Adventures in a New World [Economic Order?].
First, although Alan Greespan is the economist that understand best systemic risk he oversees one thing: the real problem with systemic risk is not that you can't foresee it it is that you can't avoid it and insure against it. It means the system can't avoid it. Anyway you will be adversely affected by the depression, it doesn't mean that you can't analyse it and foresee it. It means also that when the Market foresees it we are already in the Crash. So although the Market can't foresee it individuals can.
The problem lies with my model which says that the Crash is the result of an unstable equilibrium due to an inverted yield curve which resolve by a discontinuity of the yield curve as it gets to its stable equilibrium and normalizes.
A Liquidity Trap [Confer: Keynes' Liquidity Trap: A Theoretical Curiosity.] supposes a small shock. History remembers that what triggered Black Thursday was the failure of a small Austrian bank nothing close to a Lehman Brother or a Bear Stearn!
As with any mission impossible, for those who watched that television series as did Alan Greenspan, it is possible for the Impossible Missions Force (IMF no kidding) to accomplish. We are going to use a special toolbox and use it in a smart way. As usual “Should you, or any member of your I.M. force, be caught, or killed, Alan Greenspan will disavow all knowledge of your actions. This tape will self-destruct in five seconds.”.
"New Forces" that were not yet understood were likely behind the unusual environment of low long-term interest rates around the world, he said. "I do think the most relevant likely reason why we are dealing with what we are dealing with are new forces ... in the international market," "Their nature and their behaviour is not something we are going to fully understand, if ever; certainly except in retrospect."
Chairman Alan Greenspan Central Bank Panel Discussion. To the International Monetary Conference.
Beijing, People's Republic of China
(via satellite)
June 6th, 2005
Mæstro, The Forces Be With You!
My special tool is a curiosity of Markets that makes it a special mathematical function of time: it encounters technical supports and resistances which give them small discontinuities in the derivative of the value of financial instruments. These shocks, I pretend, will be sufficient to cause the return of the yield curve to its normal configuration if, of course, the resistance or the support is sufficiently strong. On the other hand when the financial instruments are not on these support or resistance the kinetic energy of the Market would render the yield curve immune to random shocks.
Another condition is that the yield curve be sufficiently inverted: the force needed to take it away from its unstable equilibrium is inversely related to the distance between the yield curve and its normal configuration.
Strategy:
Hypothesis:
I am going to use only the three Markets I have superior knowledge of: Treasuries, Stock Indices and Minerals.
The long-term yields will continue their downward secular trend. Hence the yield curve will get more inverted.
The volatility of interest rates will go down till the Liquidity Trap. As will the volatility of any Market we are concerned with (Experience tells us that when Market go up the implied volatility goes down, when a Market goes down its implied volatility goes up.).
Because in a configuration of inverted yield curve bankers chase yields I anticipate that the inversion of the curve will increase and every risk spreads will shrink (That favours stocks and corporate bonds.).
The Market will get some stability from the talks about a second round of stimulus package whether it finally emerges or not.
However the inversion of the yield curve will be soon unsustainable. Our hypothesis, given my empirical knowledge of the yield curve is that, in order to be sufficiently inverted the yield on the 30 years US TBonds needs to be below 3.90%.
We will see that a key level for the yield of the 30 US TBonds is 3.62% after going up to 4.60% Until I change my mind this is the support we are going to use now.
We will see also that key level on the SP500 is 1017.63. However my final objective can be much higher and I don't exclude now a new all time high.
We will see that a key level for Oil is $89.00. However my final objective can be much higher and I don't exclude now a new all time high.
In case I change my mind based on my intuition, feeling or hard facts I will twit.
Except in Case of Emergengy.
I never twit more than once a day!
at 07:00 UT before the start of European trade hours.
The normal yield curve for short-term rate = 0% [Yield Curve of Keynes' Liquidity Trap] goes approximatively through 4.60% for the 30 years US TBonds.
Recent High 50.66 Historical Low Before the Crash and Recent Low: 41.55.
50% Finonnacci Retracement: 46.10
It is approximatively on the yield curve of Keynes Liquidity Trap which is a normal yield curve. It will be difficult to counter the forces of profit maximisation.
The natural forces that bring a yield curve back to the normal yield curve are now working without disrupting the Market.
The 5 Year High is 54.08 The All Time Low is 25.19.
38.2% Fibonnacci Retracement: 36.23.
I am now expecting a return on 46.10 followed by a rapid fall to 36.23.
I am very confident with that level, which is becoming our objective.
Here I am backed by PIMCO. Before the "Crash" PIMCO rarely made mistakes and were long short-term treasuries against the Trend.
PIMCO has an history of telling what is its position after the fact in order to move the Market. It does work sometime but since the "Crash" where PIMCO, which bought a lot of MBS, which it thought were cheap and lost a lot of money they confidence is shattered and they tend to be prone to mistakes: they lost their Midas touch.
“Long-term rates will rise at a faster speed than short- term rates,” Pimco portfolio manager Tony Crescenzi wrote in a report distributed by e-mail early in the Asian trading day. “Market participants decided months ago that
the Armageddon scenario was out and stabilization was in.” he said.
"It would take a worsening in the economy to push the rate below 3.25 percent.", Crescenzi wrote. "Gains in manufacturing would be needed to drive the yield up past 4 percent [On the 10 Years US TNotes]", he said.
A fall to 3.25% would bring TYX to 41.50 the all time low before the "Crash". A very strong support. Should that support be broken PIMCO whould have to buy back his short position in bonds which would, with no doubt project with a rare force TNX on the 36.23 level!
A rise to 4.00% would bring TYX to more than 4.80%, much higher than the yield curve of Keynes' Liquidity Trap. As I showed financial institutions arbitrage more efficiently a steep yield curve than an inverted yield curve [Confer: Chapter I: Model of the Yield Curve.], it is then doubtless that the Market would transgress the normal yield curve and/or stays above it for a sufficiently long time in order for PIMCO to unload its huge position. [Remember when PIMCO spoke they were loaded with bets on increasing long-term yield, they can't buy more now!
In Green the Normal Yield Curve of Keynes' Liquidity Trap. In Orange the Inverted Yield Curve of the Crash Trigger.
Today' Yield Curve.
Corporate Bonds:
I don't touch anything below AAA (For no objective reason I could buy even a portfolio of Junk Bonds now.). I am still selling the spread [corporate bonds yields/ treasuries yields] till the crash. As bankers do the only job they they were trained to do and chase yields. And every risk spread shrink. We will have a configuration we have not seen in recent times: long-term yields go down and risk premia go down.
We are short those spread for 25% of our allocated position. We will go 100% the spread if the tendency is confirmed when the rate on the 30 Years TBonds go down.
Attention: my research does not cover natural gas or agricultural commodities.
It seems strange to expect a rising price of mineral and decreasing long-term yields. In fact my model of the yield curve says that long-term yields don't depend on inflation or inflation expectation unless the FED rises its target rates accordingly. That won't happen because Bernanke knows very well that should he raise the target rates he would cause a immediate catastrophe and he would be the apparent cause of the crash. Believe me he doesn't want that.
As I make the assumption that for TYX = 47.00 the yield curve normalized, Hence I will square the positions and look for another entrance point.
In the meantime an key pivotal point on WTI (Crude Oil) was $61.5. It has been transgressed. Expect an explosive behaviour of minerals now.
Reminder: before the Liquidity Trap there is no theoretical upper limit for the price of minerals.
All Time High: 147.27; Recent Significative Low: $32.40; Mid Point: $89.835;
100%% extension between 73.38 and 58.32: $88.44.
50% retracement between 147.27 and 32.40: $89.835
38% Fibonacci extension between 73.38 and 32.40: $89.03;
We get an interim key point at $89.00.
Given the way Oil is going up now I use 100% of my allocated portfolio for minerals.
The Minerals Go Up When The Yield Curve Is Inverted.
Stocks:
Because of of the change of hypothesis I made about TYX I have to change my objective for SP500. I have not yet set an objective but it will be probably much higher than 1017.64.
When the yield curve is inverted stocks tend to rise faster. If TYX transgresses 46.30 I will square my position and wait till it the yield curve is inverted again.
I will wait till we get down to 41.55 on TYX in order to try and find an objective. As for now be comfortable in being long stocks.
High 1586.50; Low: 665.70; Retracement 38.2%: 1017.64
Breaking 957.2 will make the SP500 explosive.
Don't ask me questions about any specific company or security: I don't have a clue!
The SP500 Goes Up Faster When The Yield Curve Is Inverted.... Till the Crash, Of Course!
Trading Tactics:
I am going to remind me of some self evident principles of trading. However as Charles de Gaulle put it:
"Cela va sans dire mais cela ira mieux en le disant."
Whatever technical systems a use I must stay disciplined. Creativity is before action. Execution exclude any creativity.
It is far better that I use a bad system with discipline than use an excellent system with none.
I may have great trading ideas but lack of trading discipline may get me bankrupt.
Traders more often than not fall in love with their positions. Probably because they identify their success with their own personal value. Nobody is perfect and everybody makes mistakes. My ideas are tools they are not me.
As a result I tend to let my losses run and book my gains. I gain as a churl and lose like a King. When I should cut my losses and let my gains run.
I always should decide on a stop loss before I enter a trade.
I must have some tolerance for losses: I should never set a stop loss too close to my key points: traders tend to love to trigger the stops.
I should never try to pick a bottom or a top: when it succeed it may make me feel I am the King but it rarely succeeds (except on the pit.) I am much better off if I check first that the trend has started even slightly: The Trend is my Friend.
If I bought and I believe the Market is overbought I should diminish or square the position not go short: there have been too many traders that have lost their shirt trading against their great idea.
However:
Like always the Liquidity Trap is an exception:
On the day of the Liquidity Trap the Market will be so overbought I will probably have sold it much lower and be cutting my lossess when time will have come to sell.
I can't follow the trend in a discontinuity so I have to pick the Top. But that is a perilous adventure:
"The clear evidence of underpricing of risk did not prod private sector risk management to tighten the reins.
In retrospect, it appears that the most market-savvy managers, although conscious that they were taking extraordinary risks, succumbed to the concern that unless they continued to "get up and dance", as ex-Citigroup CEO Chuck Prince memorably put it, they would irretrievably lose market share. Instead, they gambled that they could keep adding to their risky positions and still sell them out before the deluge. Most were wrong."
Alan Greenspan The Age of Turbulence: Adventures in a New World [Economic Order?].
"The market can stay irrational longer than you can stay solvent"
"There is nothing so disastrous as a rational investment policy in an irrational world."
I will have to trade before the top because the loss involved if I am a bit late are tremendous.
I will have to cut my gains: the counterpart will be bankrupt, to what use is it to have a bankrupt entity owe me money (That includes an exchange or the entity from which I will have borrowed the stocks I have shorted.): I will cash in when they are still solvent!
The best strategy would be to stay on the sideline. But would my animal spirit will let me do that?
Mission Accomplished, Mæstro!
All of This Stays True Until the Poor Becomes Richer Relatively to the Rich.
My Political Orientation According to Nolan Chart Survey!
As Liberal as John Maynard Keynes!
As Libertarian as Friedrich August von Hayek!
Extreme Economic Conditions Call for Radical Solutions. The Provocative & Controversial Innovation
Since John Maynard Keynes and Friedrich August von Hayek.
It is of the Uttermost Importance That, When the Financial Market Crashes, Which It Will Inevitably Do, we Restore as Fast as Possible the Economy by Implementing our Plausible Alternative Solution as to Minimalize the Economic Sufferings of the People.
To That Order I am Building Redundant Social Networks. Please Grow the Networks!
You Can Comment on This Article Here.
I Will Incorporate Any Meaningful Contribution Into my Tract and Credit the Author.
If you Believe you can Make a Significant Contribution to my Work Please Apply Here.
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