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Friday, February 01, 2008
Tuesday, January 29, 2008
Losses and the Economy | ArthurDeVany.com
Losses and the Economy | ArthurDeVany.com
Losses and the Economy
January 29th, 2008Everyone seems to be worried about bank losses and the state of the economy. Here is a NYT article that sums up this view.
The nice thing about a financial loss is that it is an event that changes values of assets. It does not destroy assets. The real physical things that were there, like houses and factories, are still there and fully functional.
All that has happened is that prices have adjusted to new information. It doesn’t really matter that a few banks will have to restate the value of their loans. The new prices are signals that will redirect the flow of investment and spending to new assets and commodities. Some relative prices will change, but the price level may not change. If it does, that is not significant either.
What will matter is how these changes affect expectations and liquidity. A sudden revaluation would usually increase liquidity, but a slow revaluation would reduce it. A fall in liquidity would hurt because valued transactions do not take place.
Just as in a hyper inflation, people will not buy or sell if they can’t form a reasonable expectation of what an acceptable price is. I remember the story Axel Leijonhufvud used to tell of a store owner in Brazil during their hyper inflation. He had a striking vase in the window and Axel asked how much he was selling it for. The store owner said it is not for sale. Why not? Because I don’t know the price for it and if I name a price and you buy it means I was a fool.
So, the real problem is not that there are losses. It is that prices need to change and that will take a while. All the interventions that are being proposed or passed into law by an ambitious Congress will slow that process and confuse the clarity of future expectations. One thing this is not about is consumer spending; that is a discredited Keynesian idea but the Congress loves it because it empowers them to spend. People will not spend if prices have not adjusted. Giving them money will not change that. Like the Brazilian shop owner, they have to come to an understanding of what the price is.
Sunday, January 27, 2008
Wishing Wealth: GMI: 0; GMI-R: 0; 16th day of the down-trend; A great new book on the Turtles
Wishing Wealth: GMI: 0; GMI-R: 0; 16th day of the down-trend; A great new book on the Turtles
Michael Covel's new book, "The Complete Turtle Trader," is a masterpiece in describing the trading philosophy and rules used to train the famous Turtles, who learned how to make millions trading, in a two week course taught to them by Richard Dennis and William Eckhardt in the 80's. The most important thing I learned from this book was the mentors' primary emphasis on exits from a trade rather than entry. Dennis is quoted as basically saying one might profit by selecting positions by trial and error as long as one had a good exit strategy. Go into every trade as if you will lose money and you will be prepared in advance for that possibility and limit your losses. Don't take my word for this, read the book. The turtles used an extremely systematic and innovative set of rules to trade futures, which I think can be adapted for trading equities. This is a good time to be out of the market, to analyze one's prior trading performance and to, perhaps, read a great book..
Michael Covel's new book, "The Complete Turtle Trader," is a masterpiece in describing the trading philosophy and rules used to train the famous Turtles, who learned how to make millions trading, in a two week course taught to them by Richard Dennis and William Eckhardt in the 80's. The most important thing I learned from this book was the mentors' primary emphasis on exits from a trade rather than entry. Dennis is quoted as basically saying one might profit by selecting positions by trial and error as long as one had a good exit strategy. Go into every trade as if you will lose money and you will be prepared in advance for that possibility and limit your losses. Don't take my word for this, read the book. The turtles used an extremely systematic and innovative set of rules to trade futures, which I think can be adapted for trading equities. This is a good time to be out of the market, to analyze one's prior trading performance and to, perhaps, read a great book..
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