Is it profitable to ride the bubble?

[blazespinnaker]

Greenspan once made the comment:

""But bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong. Betting against markets is usually precarious at best."

Maybe Greenspan is mistaken here. Maybe 100s of thousands of informed investors have it all RIGHT and are riding the bubble up, getting ready to steal the last chair before the music stops.

[jk]

Re: Is it profitable to ride the bubble?

here's an abstract for an interesting article. the link is:
http://papers.ssrn.com/sol3/papers.c...ract_id=489262
there are links there to download the whole article.


Running with the Devil: The Advent of A Cynical Bubble
JAMES MONTIER
Dresdner Kleinwort Wasserstein - Global Equity Strategy

---

January 16, 2003

Abstract: Not all bubbles are born equal. We explore the nature and underlying psychology of four different kinds of bubbles, in order to assess which comes closest to describing the current market. To us, the current market environment is largely a greater fool market. Because such markets lack fundamental support, they are liable to precipitous declines. This is exacerbated when everyone seems to be watching the same indicator (earnings optimism). As Keynes noted when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and catastrophic force.

montier describes a "cynical bubble" forming after people get burned in a naive bubble, like the internet bubble. afterward everyone knows the echo bubble is destined to burst, but they participate anyway, cynically, thinking they can time their exit before the crash.

[EJ]

Re: Is it profitable to ride the bubble?

here's an abstract for an interesting article. the link is:
http://papers.ssrn.com/sol3/papers.c...ract_id=489262
there are links there to download the whole article.


Running with the Devil: The Advent of A Cynical Bubble
JAMES MONTIER
Dresdner Kleinwort Wasserstein - Global Equity Strategy

---

January 16, 2003

Abstract: Not all bubbles are born equal. We explore the nature and underlying psychology of four different kinds of bubbles, in order to assess which comes closest to describing the current market. To us, the current market environment is largely a greater fool market. Because such markets lack fundamental support, they are liable to precipitous declines. This is exacerbated when everyone seems to be watching the same indicator (earnings optimism). As Keynes noted when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and catastrophic force.

montier describes a "cynical bubble" forming after people get burned in a naive bubble, like the internet bubble. afterward everyone knows the echo bubble is destined to burst, but they participate anyway, cynically, thinking they can time their exit before the crash.

Market bubbles are irrational belief systems. They usually do not start off that way but do end that way.

Everything you need to know to understand how market bubbles work is here.

• November 1998, make the case that the tech market as a bubble Background
• August 1999, states that Y2K was going to be a non-event Y2K
• September 1999, describe the panic that will end the stock market bubble and suggest commodities as the potential "next bubble" Panic
• Nov. 1999, first to describe how the Internet Bubble will end What Will Pop the Internet Bubble
• 2000, described the eventual process of disinflation-inflation at the terminus of the cycle of asset bubbles Ka-Poom Theory
• March 2000, called the tech bubble top Janszen Crying Wolf? Not so Fast.
• Q2 2000 sold all my tech stocks (mostly Cisco in the high 70s from the Compatible Systems acqusition by Cisco and Arrowpoint IPO, but others as well) and went 50/50 bonds and cash
• Q3 2001, took a 15% net worth position in silver, gold, and platinum (turned bullish on PMs)
• August 2002, made the case that the housing market had become a bubble Yes. It's a Housing Bubble.
• December 2004, made the case that when the housing bubble ended it would end in illiquidity Housing Bubbles not like Stock Market Bubbles
• January 2005, explained a seven step, ten-to-fifteen year housing correction process Housing Bubble Correction
• Since re-launching the site in 2006, lots of additional theories that I've started to have put together into a glossary

No one can explain short term events, such as the recent rise in stock prices and bond market rally, although it is fun to speculate.

I've tried to concentrate on explaining long term processes and dynamics based on my research and analysis, place my bets, and maintain my discipline to otherwise do nothing.

My money remains on my Ka-Poom Theory, which means going to cash and short term treasuries as the disinflationary period begins, holding PM positions taken in 1999-2001 and getting ready to add to them if PMs decine below trend in the face of bearish sentiment, getting ready to make a few speculative bets against the stock market (via negative index funds) but trying to wait until the last stock market bear has thrown in the towel, and otherwise sitting in cash until the next big bet becomes obvious, as I did in 2000 - 2001, fully aware that that bet may simply be to add to PM positions.

One credo of Jim Rogers' has served me well over the years. He noted that most investors not only tend to move in herds, to buy at the tops of cycles and sell at the bottom, even the independent thinkers tend to believe they have to be doing something, to keep trading in and out of things. There are hundreds of web sites designed to fulfill this self-destructive tendency of most investors. Here I try to present a economic and market hypotheses that predict medium and long term trends.

"Patience was an element that a number of the supertraders stressed as being critical to success. James Rogers said it perhaps most colorfully, 'I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. In essence, by not wanting to trade, I had inadvertently transformed myself into a master of patience. By forcing myself to wait until there was a trade that appeared so compelling that I could not stand the thought of not taking it, I had vastly improved the odds."
The New Market Wizards

[bart]

Re: Is it profitable to ride the bubble?

...
No one can explain short term events, such as the recent rise in stock prices and bond market rally. No one can do that, although it is fun to speculate.
...

*mumble, mumble*... *splutter, splutter*... oh ye of little faith... ;)

And right here you have a thread that does just that: Management or Manipulation: The TIO Story ;)



Seriously, I do think I have something quite significant with this TIO & TOMO issue, and just added two new charts to that thread. Here's the one that applies to your comment:




Do note that I'm in no way, shape or form saying that the markets are totally driven or totally manipulated by TIOs & TOMOs, but rather that the correlations are quite striking at the very least.
DYODD applies too, as usual.


For those unfamiliar with TIOs & TOMOs, they are basically short term loans available only to a select group of banks and financial institutions, and issued by the US Treasury and Federal Reserve banks respectively.
My working theory is that they are being and have been used to manage or manipulate (you decide which - my belief is that it is both, depending on which time period is in question) the US stock markets.

By the way, terrific recap - very clear & logical, and a great track history to boot.
Applause

[EJ]

Re: Is it profitable to ride the bubble?

bart, if I've not said so recently, I am very glad you are here and utterly respect your analysis. My point is that I'm no good at the short term analysis, only the trend analysis. There is much $$$ to be made in solid short term trends, but I can't see them. That's not my talent. There are better sites for tracking and profiting from short term market changes, so the effort of running this site does not provide reasonable, differentiated value to readers if I focus on the short term.

While playing The Bubbles, and helping readers do so, what I have been looking out for for readers and for myself is the Black Swan, the unexpected event that might wipe out my readers, whom I consider my friends. That's one of the reasons I steer them away from distractions like Y2K. The real deal will be unexpected and charts will not help us.

My #1 concern these days is Russia. All is not as it appears. It is worse.

[bart]

Re: Is it profitable to ride the bubble?

Hey EJ...

First, I completely agree on Russia. Its very much off most folk's radar and not at all "safe". Monty Guild had an article a few months ago that covered the general area of the "new" cold war, and the recent murders do not exactly augur well either.

Second, thanks for the vote of confidence - it truly means a great deal to me. I think you know by many things that I have a huge amount of respect and admiration for you and the crew, and what you're trying to do.

Third, the link to that TIO piece and the other thread was both meant light heartedly, and also primarily as an effort to bring what appear to be at least a partial explanation of recent unusual market behavior to a broader audience. I wish I had your talent for taking extraordinaily complex topics and presenting them very clearly and simply, while losing little of the real facts too.

Its very difficult for me to judge the kinds of things I sometimes post or link to, as compared to what you're trying to do with the forum and your overall efforts. I certainly don't want to cross those purposes of informing and writing to a much broader audience than what my own site or views are all about.

Don't get me wrong here too, I'm not at all upset or concerned - no worries - I guess it boils down to not knowing what your preferences are. I know I can be a loose cannon at times, and much of the time it comes as a big surprise to me that I was.
Would you prefer if I stayed more away from shorter term timing or trading issues, since it can unnecessarily detract from your primary messages?

[blazespinnaker]

Re: Is it profitable to ride the bubble?

Market bubbles are irrational belief systems. They usually do not start off that way but do end that way.

Well, I wonder if a business case could be made for recognizing a bubble and taking advantage of it.

My point isn't to encourage anyone to do this because it means developing skills which aren't about recognizing real value, but rather to wonder if perhaps this is a viable business model in the same way that selling cigarettes or pornography is a viable business model.

If it is a viable business model, then Greenspan (and Bernanke and the rest), are arguing incorrectly that investors don't see a bubble and therefore they should not try to correct (because after all, if the smart money doesn't think there is a bubble..)

I am arguing that perhaps the smart money does see a bubble and are taking advantage of it, which is why the fed does need to 'lean against it', because the smart money is getting rich at the expense of the macro economy.

Where am I going with this? Well, the fed isn't particularly stupid, so if this were the case, perhaps this is just more evidence that the fed is utilizing the bubble economy to deal with various economic ills.

Something, btw, I have yet to buy into. I'm not much of a tin foil hat guy

[EJ]

Re: Is it profitable to ride the bubble?

bart, you're doing great. I should probably just shut up because nothing I'm saying here is meant as criticism. Keep up the good work. Love your charts and thoughts, and finster's and everyone's stuff, too. It's all great.

[bart]

Re: Is it profitable to ride the bubble?

...
I am arguing that perhaps the smart money does see a bubble and are taking advantage of it, which is why the fed does need to 'lean against it', because the smart money is getting rich at the expense of the macro economy.

Where am I going with this? Well, the fed isn't particularly stupid, so if this were the case, perhaps this is just more evidence that the fed is utilizing the bubble economy to deal with various economic ills.

Something, btw, I have yet to buy into. I'm not much of a tin foil hat guy

Indeed, and that's why I used the "Management or Manipulation?" approach with the various data series. Reasonable folk can interpret the same data in different ways, and it can also be useful to both.

Tin foil hat wise, I do have a model made from .999 fine silver and sometimes wear it when I'm outside my cage - interested? ;)

[bart]

Re: Is it profitable to ride the bubble?

bart, you're doing great. I should probably just shut up because nothing I'm saying here is meant as criticism. Keep up the good work. Love your charts and thoughts, and finster's and everyone's stuff, too. It's all great.

I didn't take it as criticism at all. I just wasn't sure if you'd prefer less stuff about timing or trading... or even *tweaks* about the central bank cartel... ooops, I mean jocks/geeks system. ;)

[blazespinnaker]

Re: Is it profitable to ride the bubble?

Indeed, and that's why I used the "Management or Manipulation?" approach with the various data series. Reasonable folk can interpret the same data in different ways, and it can also be useful to both.

Tin foil hat wise, I do have a model made from .999 fine silver and sometimes wear it when I'm outside my cage - interested? ;)

Don't get me wrong Bart, I bow down before your obviously superior fed watching.

I wonder though, do you think there might be a common cause? Or maybe the causation runs the other way, when the S&P goes up that causes the fed to do temporary loans .. ?

[bart]

Re: Is it profitable to ride the bubble?

Don't get me wrong Bart, I bow down before your obviously superior fed watching.

I wonder though, do you think there might be a common cause? Or maybe the causation runs the other way, when the S&P goes up that causes the fed to do temporary loans .. ?

Don't bow down - just throw small change? ;)
(rimshot)


I must admit you lost me on it running the other way. What would be the motivation for the Fed and/or Treasury to offer loans when the S&P goes up?

By the way, if you're looking at how the S&P is going up before the TIO operation starts, do keep in mind that the date of the initial annoucement that there will be an upcoming operation is not public, and in my opinion is probably at least 1 and probably 2 days days ahead of the public announcement, as shown on the US Treasury site itself.

[jk]

Re: Is it profitable to ride the bubble?

I must admit you lost me on it running the other way. What would be the motivation for the Fed and/or Treasury to offer loans when the S&P goes up?

if i understant the tio's, they occur when the treasury declares it's got some spare cash laying around that it wants to lend short term. so what is the source of the treasury cash? bond and bill sale proceeds not yet dispursed to other agencies? tax payments? thus the graph could be explained differently if there were a source of liquidiy that would pump up the treasury's cash on hand while simultaneously increasing cash at hedge funds or prop desks or other security buyers. off hand, i can't think of anything, but given your knowledge of the details of these things, perhaps you can. of course then we'd have to think about why the primary dealers want to borrow these funds short term- what could they want to do with the money if not put it into the equity market? how does the rate on the tio's compare with alternate sources of bank funding?

[blazespinnaker]

Re: Is it profitable to ride the bubble?

I must admit you lost me on it running the other way. What would be the motivation for the Fed and/or Treasury to offer loans when the S&P goes up?

Fair enough, but to be honest, I see no sincere economic reason to manipulate the stock market either.

If it is for political gain, it certainly isn't working.

[bart]

Re: Is it profitable to ride the bubble?

if i understant the tio's, they occur when the treasury declares it's got some spare cash laying around that it wants to lend short term. so what is the source of the treasury cash? bond and bill sale proceeds not yet dispursed to other agencies? tax payments? thus the graph could be explained differently if there were a source of liquidiy that would pump up the treasury's cash on hand while simultaneously increasing cash at hedge funds or prop desks or other security buyers. off hand, i can't think of anything, but given your knowledge of the details of these things, perhaps you can. of course then we'd have to think about why the primary dealers want to borrow these funds short term- what could they want to do with the money if not put it into the equity market? how does the rate on the tio's compare with alternate sources of bank funding?

You pretty much have it on TIOs as far as where the cash comes from, except perhaps that many tax payments come due around the 15th, and that's when the lending operations tend to start. But the lending operations do frequently occur and some start on other days than around the 15th, so its not a terribly reliable indicator.

I'd think that there would tend to be absolutely huge spikes around April 15th, and it does tend to be the highest then and at other quarterly periods - but again, there are also pretty large operations at other times too.

It is way more than the Fed's primary dealers who have access to the TIO auctions too - its basically the majority of commercial banks.

The TIO rate ranges from roughly the Fed Funds rate, down to perhaps 50 points under it and I'm unaware of any US source than can lend huge amounts at those relatively low rates for short periods (except the Fed itself and othr central banks of course). Keep in mind that it is an auction too, so the rates will be quite close to "market" rates.

I'm still not clear on what you think the motivation would be for the Fed and/or Treasury to offer loans when the S&P goes up (as opposed to the causation being the other way)?