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Minyan Mailbag: Salmon and the Stream

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

Sir,

If there is a conspiracy (and since my primary approach is technical, I really don't care), why would one not want to figure out what outcome is plotted, and participate?

It seem like going into a gun fight with a six shooter against a minyan of armed opponents (sorry - please excuse the indulgence). "They" have the ability to make laws and treaties, "they" have significant allies in every foreign government and international entity, "they" have the gold and silver, "they" have the printing presses, "they" have the ear of the popular media.

The opposite camp, those who think they "know", seem few, unorganized and shrill..

I used to go white water rafting from time to time. The motto of my preferred guide was "go with the flow."

I think "seeing both sides" is wonderful. I prefer to spend time carving out, "one more look" and testing it, rather than engaging in esoteric conversations concerning things that I can not change.

Comment?

Thanks,
Minyan Steve

Steve,

Difficult to disagree with your assessment of the two, "camps." But that matters little to the profit opportunity presented by a thorough analysis of the risk appetite in markets. I would note too that trying to gauge what direction the crowd is going is anything but an esoteric conversation. Such efforts to determine the dominant bias (risk taking or risk avoidance) in markets is an essential part of long term success.

Limning the direction of the rest of the flock has its merits: one can, as you suggest, follow them. Indeed, the history of financial speculation has shown numerous times that some of the best profits in speculation can come in the final phases of bull or bear markets: the point at which, irrevocably, the masses are entrenched in a mature and dominant trend. The risks of running with the lemmings of course is timing a proper exit (which is to say before everyone else). History has shown too that when markets reach important "fat tail" extrema, the reversal of that trend can be remarkably swift and painful. So you better be just right in your exit if you are going to follow the crowd. Being in a crowded trade is not without its risks: JP Morgan's famous dictum that he got rich from selling too early and buying when there was blood in the streets comes to mind.

And armed with a confident assessment of that dominant direction you could likewise choose to go against that trend if you believe the risk and rewards of doing so are attractive. There is no right strategy: I have known men who have made tons of money buying with the trend (and exiting propitiously); and I have known traders who are always selling when others are buying (and, again, exiting propitiously). The strategy one chooses has little to do with the absolute direction of the markets and everything to do with risk management and timing.

Which brings us to the Fed, conspiracy theories, and making money in the markets. Yes, all of those things you said are true: laws and treaties, significant allies; gold and silver; printing presses; the ear of the popular media. But that you and everyone else knows these facts should alter the value of that particular insight. As far as information value theory goes, your observations are of a commodity nature; they ain't worth much if everyone knows them. It would appear then that speaking and writing about the Fed's actions yesterday - be they intentionally conspiratorial or random, goofy errors - is a useful exercise in terms of limning the larger direction of risk appetite.

So whether you use Todd's discussion of Fed conspiracy/mistake to go with the dominant trend (take more risk and play the reflation trade) or against it (shed risk and sell the reflation trade) is an individual decision that hinges on your time frame, your risk appetite, and your timing tools (and if you are going with the reflation trade they better be damn good). But it's still a discussion worth having even on this limited plane of strictly trying to make money in the markets.

Of course, you probably already know where I stand on the subject of moral hazard and the systemic risk implications of a proactive Federal Reserve, so we'll save that conversation for another day.

Best,
Scott

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