Of Stocks Houses and Turkeys

At the turn of the year, the chattering classes were falling all over each other reminding us how bad 2008 was. It is good that it is behind us. Then they proceeded to speculate what the new year will have in store for us. How nauseating! They are behaving as if there is something special about the old year ending and a new year beginning. Magical thinking... The reality is: There is no magic about it. Everything is just the same today. There is no difference between conditions at the end of last year and this year.

Turkeys!!!!

Speaking of turkeys, Nassim Taleb makes this observation in his book The Black Swan:

A turkey is fed for 1,000 days - every day lulling it more and more into the feeling that the human feeders are acting in its best interest. Except that on the 1,001st day, the butcher shows up and there is a surprise. The surprise is for the turkey, not the butcher.

Home buyers and stock holders have learned the same lesson the turkey learned in its short life span. The 'banksters' and stock brokers are acting in the publics best interest for a time. Then from one day to next everything changes. The long knives come out and the slaughter begins.

This theme permeates all facets of life - not just the realm of finance. Having left the United States years ago and observing what looks to me like outright worship of the 44th U.S. president - Barack Obama, I wonder: Will the Obamatrons share the turkey's experience one of these days?

Seasonality and The Black Swan

I have been reading Nassim Taleb's Black Swan. As I was reading I remembered writing about seasonality in the stock market. I concluded at the time that there is validity to seasonal effects in the long run. There was disagreement with my conclusion of course. Be that as it may, the presence of Black Swans calls into question the usefulness of seasonal effects. What is a Black Swan?

A Black Swan is rare event that appears predictable only with the benefit of hindsight, has an enormous impact and is relatively rare. Even though it is rare, it occurs more frequently than the normal bell curve would indicate. Examples of Black Swans are the Crash of 1987, the Dot Com bubble, the bust of the Dot Com bubble, the Panic of 2008...

Black Swan's make seasonal and other strategies much more risky than normal risk measures - Sharpe Ratios, etc. - would indicate.
The public failure of my Goldilocks trading system that I presented on these pages through real time paper trading is an instructive example of the Black Swan's impact.

Prechter Was Right After All

Yes, Prechter was right on so many issues that I got wrong. He predicted for many years that the dollar would rally at the beginning of the deflationary storm. And that is precisely what is happening now. Sure the dollar was constantly under pressure and declined for years against major foreign currencies and in particular against the Euro. Yet, this trend has reversed completely.

Prechter argued against the notion of peak oil. For quite some time he looked like a lunatic, as the crude oil price pushed relentlessly towards $150 a barrel. The situation looks quite different now. Oil has collapsed below $50 a barrel inside of a couple of months and seems poised to challenge $10 a barrel once more.

Most of all, Prechter predicted that the bull market of the 80's and 90's would end in a deflationary collapse. He was absolutely on the mark here, even though the main stream media is still parading 'experts' in front of the public, claiming that the financial alchemists at the FED are so much wiser today than they were in 1930's.

Prechter predicted that the FED would be pushing on a string, trying to stop deflation. So far he has been right on the money on this issue as well. Despite massive cash and credit infusions by the FED and other central banks, equities, housing, most commodities and prices for goods and services have been deflating rapidly.

Yet the verdict whether they can stop this deflationary bout is not yet in. Helicopter Bernanke and his buddy Paulson have been flying non-stop missions dropping money like never before. Current estimates are around US$ 7.5 Trillion when all is said and done. The stakes are high in this epic drama. If they fail the mighty US dollar and with it the empire will fall.

Prechter predicted that government bonds would initially rise and they have.

Then there is gold. He predicted gold would fall. OK, this one he got wrong. And his timing was off a bit. He believed that deflation would strike after the 1987 crash. I did not. He subsequently anticipated deflation several times – too early. However, his score is nearly perfect as far as what would happen during a deflationary cycle.

Collapse of the Western Front

The situation on Monday, October 27, 2008 approached desperation. The gallant Royal Bay Street Infantry Brigade was unable to hold its trenches. The hope of the West rested on the Bay Street boys soldiers, who fought their way back so valiantly last Friday. It was all for nothing. The brave Bay Street Boys were completely routed. The bearish forces took nearly 800 from their TSX Composite Index.

The US side of the front did not fare much better. By mid day the Paulson Bailout brigade had gained some 200 points. But in the end they had to give up 203 Dow points from the start of the day. The ammunition in the form a $700 billion rescue package rushed to the front by Colonel Kashkari provided the initial thrust for the push forward, but it was inadequate nevertheless to save the day.

Tonight, the situation along the entire seems hopeless. The bearish forces are already working on the Asian flank of the Western alliance. It does not appear as if the Asians can hold their ground whatsoever. Hope has all but abandoned the once so proud Western alliance.

There can be no doubt that October 2008 will find its way into the annals of history. They may well mark this October as the point in time when the era of Western hubris ended...

A Near Catastrophe on the Western Front

In the early morning hour of Friday, October 24, 2008 the forces of the bear launched an all out assault against the West and its allies. It began with a ferocious artillery barrage on the Western alliance's front line positions. The amount of shells fired was unprecedented. High explosive shells, shrapnel and even munitions filled with poison gas rained onto the alliance's positions.

The enemy's infantry followed closely behind the advancing curtain of artillery shells. The first line, the Asian markets, fell without any sign of resistance. The second line, the European markets, was also unable to offer any resistance whatsoever to the bearish onslaught. At this time everything seemed hopeless. The long dreaded market crash seemed inevitable.

The third line, the US markets, was in the grip of naked terror long before the bearish enemy reached it. The S&P index futures locked limit down before the market opened. Then the enemy reached the line. Storm troopers quickly penetrated it by some 500 Dow points. At this desperate hour a miracle began to unfold

Resolute front-line commanders rallied their troops and organized a determined counter attack. By mid afternoon success seemed close at hand. The Americans had taken back about two thirds of the territory lost earlier in the day. But in the end it was not to be. Heavy machine-gun fire forced the Americans back. When the fighting ended at the end of the trading day, the American line had been pushed back 312 Dow points from the previous close.

A portion of the third line was occupied by Canadian force. The centre of the Canadian line was formed by the elite forces of the Royal Bay Street Infantry Brigade. It had taken heavy losses in the action of the preceding days and weeks. At the time the forces of the bear reached the Canadian lines nobody would have believed that this badly bruised brigade would carry the day and would become the last beacon of hope for the Western alliance.

Yet everything seemed hopeless at first. Enemy storm troopers pushed through and quickly took away 700 points from TSX Composite Index. But quickly the Bay Street boys took heart. They remembered the word of General Flaherty. He earlier voiced his opinion that Canada is well positioned to weather the global crisis.

The day before the brigade's young dynamic commander Brigadier General Mark Carney had declared the Canadian financial system sound. At this dire moment the Brigadier somehow manages to inspire his troops. Undaunted by heavy machine-gun fire they go over the top and counter attack. The advance is slow but steady until noon. They are pushed back a hundred points or so, but the consolidate their line and push ahead a yard by yard. By the end of trading they have almost reached the original line. They end the day with a small loss of 37 points.

Will their heroic deed inspire financial markets around the world to take back their losses from the forces of the bear? We shall see. Time will tell.