Monday, January 30, 2012

So, You're Tired of Greece?

Had enough of the EFSF, LTRO and the PIIGS? Bored of austerity, and the yields on Greek, Portuguese and Italian bonds? Oh, good. I've got the next big story all ready for you.

Rickards had an article in the USA News about the recent proposed India/Iran gold-for-oil exchange agreements.

Here's some select excerpts:

But a few weeks ago President Obama moved to choke off Iran's oxygen supply by imposing sanctions on the central bank of Iran. International banks were told if they did business with Iran's central bank, they would be barred from doing business in the global dollar payments system controlled by the United States. Of course, the banks complied.

The result was an immediate isolation of Iran from the dollar system and an acute shortage of dollars in Iran. The Iranian currency, the rial, crashed in value 40 percent against the dollar in a few days. Since many goods in Iran are imported, local prices doubled as merchants demanded more rials in order to acquire whatever dollars might be available on the black market to buy imported goods.

There are any number of reports of massive inflation in Iran after the recent round of sanctions cut Iran off from USD, and, effectively, the oil trade. Rickards goes on to mention reports from Israel that suggest an India-Iran Gold-for-Oil agreement, bypassing the USD entirely. A number of news reports follow up and claim that China is working on similar agreements, rapidly removing the USD from center stage. The inevitable result, these articles suggest, is liquidation of the USD and US Treasury bonds, followed by inflation and austerity here at home.

However, none of that is the news that I want to offer. In fact, none of it should be a surprise to folks following the events in the region.

You see, a few months ago, a drone strike killed a number of Pakistani soldiers. As a result, the government of Pakistan cut off major supply routes to Afghanistan, and has threatened to take increased action limiting US activity in the area.

The second Pakistan's government restricted US activity, as soon as anti-American populist sentiment picked up in Pakistan heading into a Pakistani election, intervention in Iran was decided. It was one of the very few alternatives available for maintaining strategic presence in the area, especially from a supply-line point of view. The massive gold reserves in the Balochistan region of Pakistan, as well as the recently-discovered rumors of 6 trillion barrels of oil (rumors don't mess around), further ensure that we will all learn to spot Balochistan on a map soon.Watch that space. However things shape up, this region should offer any number of challenges to the finance markets.

So, to recap: we're facing a major cold-war confrontation with an unstable, nuclear nation at the center, with complex alliances and extremely high stakes, fragile egos and high-strung tempers. Financial weapons of nuclear magnitude are already in use, and surely more physical nuclear weapons can't be far behind.

Frankly, after this news cycle breaks, you're going to miss the Euro debt crisis. Some combination of an alternate to the US dollar, of rapidly falling US treasury prices, of war in Iran, of power plays between China, India, and Pakistan, of proxy-wars and the threat of World War III, are headed your way. In keeping with Mayan expectations, I suspect these headlines will be appropriately epic.

Terrified yet?

Here, let's get some perspective: What I have just done is predicted that there will be unrest in the middle east.

Sand may be involved. Possibly also oil.

What about my portfolio? What am I going to do about these headlines? Pretty simple. I'm going to turn them off.

Over the past year, I have learned to love news of a different format, one that features price and volume. For example, in November, Ron Roll (@gtotoy), one of the greatest technicians I know, offered an extremely compelling chart in his November read for the week:

The picture we saw in November

Yes, Greece was teetering on the brink even then. PIIGS were scaring everyone. We knew, absolutely knew, that the Center Would Not Hold, and Mere Anarchy was Loosed on the World.

Except... man, that was one hell of a candle in October, wasn't it? On the Monthly timeframe? Unsurprisingly, the indicies are now much higher than they were in November. And, because I did not listen to the armchair politicians, suburban financial policy experts and the ubiquitous doomsayers, so are my accounts. I've got a new high-water mark on one, and another has gained a digit.

The current situation

The truth of it is, the price-action in the market, in every timeframe from the monthly to the five-minute, has demonstrated an incredible bid. Until I see this bid disappear in terms of price and volume, I will continue to be biased long. I plan on buying when things hit support levels, and selling them when they demonstrate resistance, to the best of my ability.

I'll let the talking heads and analysts worry about the implications of gold-for-oil agreements and the role of the USD on the world stage, of the possible strategic importance of Balochistan to China, of LTRO and Greek default. My positions are on, alerts entered, and stops in. My risk is defined and managed. No real reason to listen to the headlines, then, so I'm going to listen to Dax Riggs Say Goodnight to the World instead.

It’s all about ROI, and Dax Riggs is a better investment of my investment time.

Saturday, January 28, 2012

On Gold and Stubborn Pool-Noodles

The role of gold in our financial system is a complex topic. In one form or another, the issue continues to resurface like a particularly stubborn pool-noodle. However, unlike a stubborn pool-noodle, views of gold are invariably and inexorably linked to a layer-cake of beliefs: political, social, economic, with nuts of religion sprinkled throughout.

Religion, in fact, is particularly illustrative about gold. The Bible tells us that Moses ascended the mountain to receive the word of God and write down a set of rules that would allow us all to get along. While he was away - stone tablets make for slow dictation, I'll wager - folks waiting for him apparently got really bored. Taking what I imagine is inspiration from Zues in their copy of Ovid, they decided to worship a golden bull.

A gold bull, or a set of written rules? What an interesting dichotomy. The story has always struck me as intriguing, simply because there is so much more to it than meets the eye.

One the one hand, we can choose to worship a piece of golden metal: a physical, tangible, external and limited incarnation of our faith. On the other, we can place our faith in some rules scratched onto a piece of stone. Our confidence is then placed in an intangible force, one that impacts our lives only through the agreements made with one another, agreements that deal largely with how we deal with one another.

Tying the monetary supply to the amount of gold available, by design, limits the amount of currency in circulation. It prevents monetary expansion when our Animal Spirits trend bullish. This slams on the brakes when rapid change threatens: the system is designed to limit the rapid rise in liquidity that feeds rapid, and frequently disruptive, change.

With our full faith and credit shackled to an external control, the pace of change is slowed. Events are biased to the status quo, the zeitgeist eschews change and leans... conservative.

Alternatively, we can place our faith in our ability to interact with one another, in a set of rules that we agree to. Whether chiseled on stone tablets or written on futures contracts, these agreements govern our interactions and, in the final analysis, place our full faith and credit on our ability to work things out.

This does mean that things change a lot faster: not only because external limitations are removed, but also because all that change requires now is agreement. In fact, if we all agree to change the rules, then even the rules can change. To those predispositioned to resist change, to those wired to find comfort in the familiar, this is anathema.

We saw this throughout 2010, when fiscal conservatives howled and watched their bearish portfolios ripped to shreds in the wake of the changed rules embodied by QE2. We will perhaps see it once more as the rules change once again, allowing Europe to address its current crisis.

As Kahneman tells us in Thinking, Fast and Slow, we are naturally lazy. Mentally taxing tasks are against our very wiring, especially when an alternative exists. Rationalization is, then, post-hoc; we make a decision that is in-line with our predisposition, and then find a way to rationalize it. Changing ones mind is in itself difficult. If you have a conservative predisposition, adjusting a world-view to encompass new rules extremely painful, the quotes on the tape be damned.

If the story we tell ourselves is aligned with our natural inclinations, confirmation bias will be strong enough to ignore prices on the tape and increasing red on our P&L. In fact, I would be shocked if those that worshiped the golden calf thought theirs was an act of anything less than perfect religious devotion. As Exodus tells us, had they not sacrificed their own gold and jewellery to create the golden calf?

A person's views on the role of gold, or, indeed, any external arbitrary limitation on our financial system, tells us more about the person expounding the view than it does about their level of education in economics. It speaks to what they place their full faith and credit in, in the very basic sense of the term. It speaks to their locus of control, to their comfort with Rousseau's social contract, to their level of comfort with change.

Sadly, this does imply that we will never be rid of the discussion of monetary basis. It further implies that the discussion will continue to be nuanced with the layer-cake of political, social, and economic views, flavored with the requisite sprinkling of religious nuts throughout, and about as useful as the aforementioned pool-noodle.

As this facet of economics holds up a mirror to the human condition, we who manage positions in the finance markets can recognize this discussion for what it is, and react accordingly. Say, when faced with extremely bullish price-action despite looming European default, we can recognize that our temptation to take bearish bets comes from the visceral revulsion of our id as it reacts to the rules changing once again and hears the clank of a can being kicked further down the road.

With this recognition, we can then resist the temptation to, say, buy calls on the crashing VIX in an attempt to stand in front of the stampeding bulls. And if, despite knowing and understanding all of the above, we still buy said calls on the VIX, as I did on Friday right before the close...

...well, then we deserve to be beaten senseless. With a pool-noodle.

Sunday, January 22, 2012

What's In a Name?

The problem with doing idiotic things, I have discovered, is at the time, they seem really smart.

So, when time came for me to join stocktwits, I thought, "Hey, why not just use my normal twitter handle? After all, that's just efficient." You know, much the same way as having just one kidney is efficient.

See? Real smrt.

Over time, as my stocktwits stream evolved to where I was posting live entries and exits, my twitter stream was forcibly exposed to my market activities. This led inevitably to the question most traders are subjected to at what few social gatherings we manage to stumble to: "Hey man, I've saved a little money, what should I buy?"

I found myself unable to answer the question. After all, I am in no way a financial advisor. Additionally, since this conversation invariably came up before we had eaten, my ideas tended towards short-term purchases of rapidly depreciating assets. Like burgers. Or hot dogs. (I like hot dogs.)

I was ruminating over this limitation over lunch today when I stumbled across Kyle Metivier's latest brilliant brain-dripping. Kyle names his portfolios. As he correctly points out, unlike the banal and irrelevant act of naming a newborn, the Naming of a portfolio is Important.

I thought back to my dinner-time conversations, and as with most of my conversations, came up with what I should have said well after the fact. Portfolios aren't hard to generate. You just have to name them first.

The Hipster 
"I had a stock like that last year... it's pretty obscure, you've probably never heard of it."
Apple (AAPL); Silicon Graphics (SGI); Urban Outfitters (URBN); Pandora (P); SAB Miller (LON:SAB)

"Every stock is sacred, every stock is great. If a stock is wasted, God gets quite irate."
 Apple (AAPL), Google (GOOG), Intuitive Surgical (ISRG), Panrea Bread (PNRA), Whole Foods (WFM)

The Dude 
"The Stock abides. I don't know about you, but I take comfort in that."
 Altria (MO), Microsoft (MSFT), Diego (LON:DGE), Stewart Enterprises (STEI)

The Burnout Parent 
"Brokerage? Account? Do they do layaway?"

I could really do this for hours.

I hope to the Flying Spaghetti Monster that no one takes any of this as investment advice. It isn't, any more than stock picks over dinner should be. Asking someone else to do your stock picking for you, then blindly following their recommendation is a great way to lose money, and possibly lose friends, or, at the very least, folks you can have dinner with.

There are far better questions to ask. If you're just getting started, as so many of my friends seem to be, then instead of asking which stocks to invest in, invest in learning which questions to ask. Start by reading some of the great blogs out there targeted at managing your own money.

Yes, it's a boring subject. Yes, it's not easy to learn. And yes...'re probably easily distracted.

Sure, it's not easy. Neither was driving when you first started learning which pedal the clutch was. But you had an incentive. The thought of helping your prom date off the handlebars, bicycle bell a-chingin', was probably petrifying. For some reason, retiring with a portfolio filled with Enron and Fannie Mae stock seems less terrifying. I'm not sure why this is, but the reason is probably depressing.

Fortunately, finding incentive in the world of finance is easy. I personally recommend blogs with personality. The truth is, the world of finance is full of wonders and miracles but man takes his little hand and covers his eyes and sees nothing. Check out Kyle's blog, which is a great introduction to the world of finance. Josh and Barry run more general finance blogs, and they're not scared of getting technical.

A word of caution, reflective of my biases: personally, I would avoid Zerohedge et al, who, despite being some of the most talented writers and number crunchers in the biz, have been bearish for over five hundred S&P points. That sort of thing is a no-no in my book, since sitting in cash during one of the greatest bull-runs in history makes for a painful retirement plan. (If you're looking for great questions to ask, however, they do provide an excellent sampling.)

So, future dinner company, I implore you: don't make me pick a portfolio for you, especially before dinner. Pop open a blog, do some reading, and ask better questions.

Otherwise, I'm going to recommend hotdogs. I do like them hotdogs.

Tuesday, January 10, 2012

Economic Outlook

I have a couple of discussions regarding the illusion of free will and the power of stories. Therein I shall invoke Tesla's autobiography and Plato, because apparently I like to pretend I'm smart. However, before I wax philosophical some more, I would like to discuss the more mundane matter of my bias in our current market environment.

I live and breathe the markets. Believe me, I am well aware of the cloud of pessimism that surrounds Europe, and the associated uncertainty that imposes cement galoshes on any shred of macroeconomic optimism. However, despite the pessimistic zeitgeist, no matter how scary the potential events that could occur, I can't ignore one simple fact:

Last year, we closed flat., if we don't get an earthquake, tsunami, and nuclear disaster in one of the world's largest economies, coupled with massive unrest in the world's largest landmass, compounded by discussions that threaten default in the world's largest and most liquid markets, aggravated by downgrades of major economies...

If we do better than all that, which (hopefully) isn't asking too much, well, we should maybe close better than flat? I mean, we had a nuclear meltdown, people. I'm all black-swanned out.0

And if not, well, I do have quite a lot of trust in my stops.

[0] With that said, I have recently stumbled across some literature that suggests the Indo-Pak region is one to keep a close eye on, including the borders between Iran, Afghanistan, and Balochistan. Due to recent resource and mineral discoveries, which I am working to verify, we may see some sparks here. Upon verification, this will merit its own post.

Wednesday, January 4, 2012

On Learning

On a recent airplane trip, I had occasion to sit next to a singularly impressive young 'un. We started speaking when I realized he was far too young for the neuroscience book he was engrossed in. His little brother, not quite of double-digit age, was timing himself solving rubik's cubes while simultaneously watching documentaries on his iPhone.

In short order I discovered he was interested in finance. This should have been surprising to me, but honestly, it wasn't. If he were a dimmer bulb like yours truly, he would have allowed himself to be distracted by physics. I was an absolute nut about nuclear physics at his age, which proved to be a gateway drug to special relativity, and it was all downhill from there. No, not for him such mundane pursuits: he had on his mind bigger and better things.

"Tell me about investment banking," said he. Needless to say, we stayed in touch.

I couldn't make this stuff up if I tried. I'm not worried about the national debt, if this is the generation we're handing it over to.

Terrible shame he's Canadian.

Today, he continued in his trend of skipping the easy questions and slapping me upside the head with the tough ones. His email read:

I was curious to know the various learning techniques...I want to learn things quickly. I'm interested in knowing if there is a preferred method to learning that has been previously developed that I can use.

I thought I would share my response, edited for blog format.

  • We learn by stories. This is, however, a double-edged sword.
  • Frequency, not intensity, is the primary factor behind how well we learn something.
  • Writing rants helps focus, which in turn helps learning.
  • Tim Ferriss' resources regarding speed-reading can come in handy.

As with most biological processes, it is extremely difficult to find a one-size-fits-all solution that I can recommend. I will instead offer a list of guidelines that I have personally found useful. I encourage you to tailor the tidbits you find useful from these into something that works well for you, and evolve and change as your lifestyle and mindset changes.

I will start by saying that we, as human beings, are built to learn by stories. Several religious texts from the Bhagavad Gita to the Koran refer to this "teach by story" theme. Finance makes this fallacy -- and it is a very serious limitation -- readily apparent. In fact, Animal Spirits devotes a chapter to this (chapter 6, if memory serves). Gödel, Escher, Bach delves farther into this mechanism by positing that many of these limitations arise from the correlation-heavy aspect of neural networks (our brains, of course, being a natural extrapolation in scale thereof).

We learn best when the lesson is couched in a story. So, the point of the incompleteness theorm may best be remembered in context of Hilbert's challenge; special relativity is remembered within the context of the Twin Paradox; Glass-Steagall is remembered in context of the 2007 financial crash.

Limitations of this method deserve a mention here, and I point to those far more articulate than myself. There is a TED talk on the subject (Video|Transcript). Additionally, Taleb's Black Swan absolutely revels in discussing the limitations and their implications to knowledge as a whole.

Another vital aspect to learning is the concept of "Frequency, not intensity." Personally, I have found that working on something for a given amount of time, a little every day, is the path to mastery. For example, as I mentioned earlier, finance happens to be a passion of mine. As a result, I don't sleep until I have learned one new thing for the day, every day. After all, no one looks back on life and remembers the nights they got plenty of sleep.

Much like working out, you can't make it up if you skip a few days then double up the next day. You'll just exhaust yourself, and not gain traction.

Another little trick I find useful is carrying a book and my favorite pen (a little hubris I indulge in) with me everywhere. It's not uncommon for me to stop and scribble for a few minutes, then review the notes at the end of the day. You will be amazed at how much this helps focus. For example, it allows the compilation of thoughts so when one is asked a question out of left field (such as, "how does one learn quickly?") the answer is ready to go from when, say, you considered the question over lunch a few months ago.

Finally, on to more mundane aspects of learning. Tim Ferriss lists several common techniques in his books, specifically The Four Hour Workweek. His work on speed-reading, which is especially useful, is summarized well on his blog.

A word of caution here: Ferriss' works may lead to more extreme methods, since he is by all accounts an unusually extreme person. Personally, I would strongly advise against the use of mental supplements (even benign ones such as Huperzine A) or alternative sleep schedules. While I personally employ some of these, I don't recommend them.

In closing, I want to mention that learning is best achieved with a goal in mind. To paraphrase Lewis Carroll's grinning cat, "If you don't know where you're going, any road will get you there."

I have a date with the European markets in two hours, and will now cease my babbling. I hope someone out there finds this information useful.