Eight Notes on the End of the Recession Trade
1. Separate the economy from what happens in the speculative markets, because historically, they don’t track together 100% of the time.
2. The speculative markets definitely had a stagflation/recession trade on until the last month.
3. That trade was being unwound over the last month, in direct response to the official data released and Fed action in the markets. Notice the title wasn’t “RECESSION is over,” but “recession TRADE is over.”
4. Whether that official data was accurate, or not, and whether that Fed action was helpful, or not, is BESIDE THE POINT. The market reacted to it in a certain way, and as a trader, I respond to the market’s reaction. Whether or not there is or isn’t a recession, or how such a recession may be defined and by whom, doesn’t matter very much to someone trying to make money in the speculative markets.
5. Inflation is a monetary phenomenon, and prices follow imperfectly and belatedly. I suggest a search at Mises.org for papers on or written by Cantillon for further information. I agree that CPI et al are flawed measurements, but that goes back to point 4, above.
6. Some people always view things in the worst possible light, and vice versa. Remember that it’s never as bad as you think it is, and it’s never as good as you think it is.
7. Most of the pundits writing about economics and the markets are doing you a great disservice, by either imagining concrete and immutable relationships between the markets and the economy (see point 1), or by performing genuinely awful and innumerate economic “analysis.”
8. If we respond to the market with proven, tested strategies, and apply them consistently and with discipline, we’ll usually make money. I don’t know about you, but to me, that’s more important to me than any broad economic debate.
May 6th, 2008 at 1:23 pm
I think of all those notes, no. 8 is KEY. Sticking to your plan and not panicking no matter what the market is doing is always going to serve you better over the long term. However, you need to make sure your plan is sound ;) I’ve been following Ken Fisher’s ideologies in his book, Only Three Questions that Count, and on his new blog at Fisher Investments Blog. Thank you also for your insights - all these in combination have helped me become a better trader.
May 6th, 2008 at 4:11 pm
Right on Bill. right on.
Re Fisher: He is obviously an extremely successful investor and has done well by his clients and for himself. However, if you track his articles in Forbes he just adjusts his forecast whenever convenient. I am not talking about making mistakes or poor predictions, we all do that all the time, me more than others.
But he would start by saying that the markets would be up 40% in the next 12 months for example, as he did about a year ago. Then when nothing pans out, he makes it look like he predicted the run up in the emerging markets and the stagnation in the US markets; which he did not. I would be careful trading based on his, or anybody else’s, opinion.