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Ray Dalio Warns 'History Repeats' - Understanding Big Debt Crises, Part 1

Ray Dalio Warns 'History Repeats' - Understanding Big Debt Crises, Part 1

Ten years ago this month, the world’s financial system nearly ground to a halt. It was a dramatic and pivotal time, which has had lasting effects on many people’s lives. But, as the founder of the world's largest hedge fund, Bridgewater's Ray Dalio, notes, it was also something that has happened many times in history and will happen many times in the future.

Authored by Ray Dalio via LinkedIn.com,

As you know, I believe that everything happens over and over again and that by looking at those things happening many times, one can see the patterns and understand the cause-effect relationships to develop principles for dealing with them. Prior to 2008, I had studied these relationships for debt crises with my colleagues at Bridgewater, and because we understood these relationships, we were able to navigate the crisis well when many others struggled. 

Today I am sharing our understanding of how debt crises work and how to navigate them well in a new book called “A Template for Understanding Big Debt Crises.” 

I am making it available for free because I am now at a stage of life where what’s most important to me is to pass along the principles that have helped me. My hope is that sharing this template will reduce the chances of big debt crises happening and help them be better managed in the future.

The template comes in three parts. 

The first explains the template for understanding how debt cycles work and provides principles for dealing with them well.

In the second, I look at how three big debt crises worked in depth - the 2008 financial crisis, the US Great Depression of the 1930s, and Germany’s inflationary depression of the 1920s. That way you can experience them in the context of the template. In that part, I also share the notes that I and others at Bridgewater wrote during the 2008 financial crisis so that you can see it unfold through our eyes. 

Then, in part three, I show all the major debt crises that happened over the last 100 years - all 48 of them - in brief form so that you can see how the template applied to all of these cases.   

 To summarize some of the key points found in the book:

  1. All big debt cycles go through six stages, which I describe and explain how to navigate:.
  • The Early Part of the Cycle

  • The Bubble

  • The Top

  • The Depression

  • The Beautiful Deleveraging

  • Pushing on a String/Normalization

2. Getting the balance right between having too much debt (that causes debt crises) and too little debt (which causes suboptimal development) is never done perfectly. Cycles always swing from having too little debt relative to the opportunities to having too much and back to having too little and back to having too much. These swings are exacerbated because people tend to remember what happened to them more recently rather than what happened a long time ago. As a result, it is pretty much inevitable that the system will face a big debt crisis every 15 years or so. 

3. There are two major types of debt crises - deflationary and inflationary - with the inflationary ones typically occurring in countries that have significant debt dominated in foreign currency. The template explains how both types transpire. 

4. Most debt crises can be well-managed if 1) the debts denominated in one’s own currency and 2) the policy makers both know how to handle the crisis and have the authority to do so. As I write in the book: “Managing debt crises is all about spreading out the pain of the bad debts, and this can almost always be done well if one’s debts are in one’s own currency. The biggest risks are typically not from the debts themselves, but from the failure of policy makers to do the right things due to a lack of knowledge and/or lack of authority.”

5. There are four ways of managing debt crises to produce a deleveraging. They are:

  • Austerity

  • Printing money to stimulate the economy

  • Debt defaults/restructuring

  • Wealth redistribution 

6. The way to manage a debt crisis well so there is a “beautiful deleveraging” (i.e. a deleveraging in which debt burdens go down at the same time as economic growth is positive and inflation is not a problem) is to balance these paths so that the deflationary forces balance with the inflationary ones.

7. In general, central bankers could do better jobs of smoothing the cycles and preventing big debt crises if, rather than having a single mandate to control inflation or a dual mandate to control inflation and growth, they have a three-part mandate that includes preventing investment bubbles by curtailing the excess debt growth that is funding them. 

8. When in a big debt crisis, saving the system (by providing lots of liquidity, guarantees, etc.) is most important – and not trying to be precise about it. This includes putting aside moral hazard considerations at that time. As I write: “How quickly and aggressively policy makers respond is among the most important factors in determining the severity and length of the depression.”

9. It’s important that economic policy makers have sufficient knowledge and emergency powers to handle crises well and don’t get caught by legal or regulatory barriers: “ignorance and lack of authority are bigger problems than the debts themselves.” I am particularly worried about how these factors will affect the next debt crisis due to the way regulations now constrain the freedoms to do the right throngs and the fragmented political state of affairs. 

10. After the restructurings and the passing of the debt crisis, policy makers typically need to provide significant stimulus for a number of years (5 to 10) until the hangover effects wear off. “The recovery in economic activity and capital formation tends to be slow, even during a beautiful deleveraging. It typically takes 5-10 years (hence the term “lost decade”) for real economic activity to reach its former peak level.”

This week and next, I’ll be sharing more short excerpts and summaries from the book so you can get a sense of what’s in it and I’d be happy to have a conversation with you about debt crises here on LinkedIn. 

"I'm Gonna Get Him": Maxine Waters Can't Sleep, Wakes Up Enraged At Trump

California Congresswoman Maxine Waters (D) is having bouts of insomnia thanks to President Trump, reports the American Mirror

Speaking at the Stonewall Young Democratic Club of Los Angeles, Waters covered a variety of topics, beginning with her July comments urging her supporters to to harass Trump administration officials in public places in July.

“There are those who said we lacked civility when I got up and talked about the President’s Cabinet, and I said if you see them anywhere, if you see them at a restaurant, if you see them in a department store, even at a gasoline station, just tell them you’re not welcome here or anywhere,” she said to wild cheers.

“And so, it frightened a lot of people, and of course the lying president said that I had threatened all of his constituents,” Waters said.

“I did not threaten his constituents, his supporters. I do that all the time, but I didn’t do it that time,” she said. -American Mirror

Waters then said of Trump: "When I compare what you’re doing with what we have in Washington, D.C., in the highest office in the land, I wake up in the middle of the night and all I can think about is I’m gonna get him." 

“I’m gonna get him. I’m gonna get him,” she said again.

“I’m in this fight and I’m not gonna move,” she told the crowd. “And, as you know, there’s a difference in how some of our leadership talk about how we should handle all of this.

They say, ‘Maxine, please don’t say impeachment anymore.’

And when they say that, I say impeachment, impeachment, impeachment, impeachment, impeachment, impeachment, impeachment, impeachment,” she said to applause.

Waters also addressed concerns that impeaching Trump just means that Democrats get to deal with President Mike Pence: 

“I had a conversation here today with someone asked, ‘Well, what about Pence? If you are able to impeach, Pence will be worse,'” she recollected.

“Well, I said, ‘Look, one at a time.’

“You knock one down, one at a time,” she said.

You knock one down, and we’ll be ready for Pence. We’ll get him, too,” she vowed.

White House Coordinating Second Trump-Kim Meeting After North Korean Leader Sends "Very Positive Letter" 

White House Coordinating Second Trump-Kim Meeting After North Korean Leader Sends "Very Positive Letter" 

The White House is coordinating a second meeting between President Trump and Kim Jong Un, after the North Korean leader sent a "very warm, very positive letter" requesting a follow-up summit to their earlier sit-down in Singapore on June 12. 

"The primary purpose of the letter was to request, and look to schedule another meeting with the president," said White House press secretary Sarah Huckabee Sanders during Monday's press briefing, adding that it was a request "which we are open to and already in the process of coordinating."

"The recent parade in North Korea, for once, was not about their nuclear arsenal," Sanders said, pointing to the letter as "further evidence of progress" between Washington and Pyongyang over denuclearization of the Korean Peninsula.

On Sunday, North Korea celebrated the 70th anniversary of its founding with a massive military parade - which conspicuously did not include long-range ballistic missiles. 

The North’s intercontinental ballistic missiles, including its Hwasong-14 and Hwasong-15, have been a main feature of its recent military parades, including one in February, and they have provoked President Trump to the extent that he has threatened military action. Their absence in Sunday’s parade is an encouraging signal for Washington, which has been urging the North’s leader, Kim Jong-un, to ease tensions and focus on diplomacy aimed at ending his country’s nuclear weapons program. -New York Times

Meanwhile, satellite imagery from the last several months analyzed by 38 North has revealed progressive dismantling of key facilities related to their nuclear program. 

new commercial satellite imagery of the Sohae Satellite Launching Station (North Korea’s main satellite launch facility since 2012) indicates that the North has begun dismantling key facilities. Most notably, these include the rail-mounted processing building—where space launch vehicles are assembled before moving them to the launch pad—and the nearby rocket engine test stand used to develop liquid-fuel engines for ballistic missiles and space launch vehicles. -38 North

These facilities are believed to have played a substantial role in North Korea's intercontinental ballistic missile (ICBM) program. Photos taken between July 20 and July 22 reveal the deconstruction, including the facility's rail-mounted transfer structure and other features. 

Commercial satellite imagery of the launch pad from July 20 shows that the rail-mounted processing/transfer structure has been moved to the middle of the pad, exposing the underground rail transfer point—one of the few times it has been seen in this location. The roof and supporting structure have been partially removed and numerous vehicles are present—including a large construction crane. An image from two days later shows the continued presence of the crane and vehicles. Considerable progress has been made in dismantling the rail-mounted processing/transfer structure. One corner has been completely dismantled and the parts can be seen lying on the ground. In both images the two fuel/oxidizer bunkers, main processing building and gantry tower remain untouched. -38 North


US Consumer Credit Hits All Time High As Credit Card Usage Stalls

US Consumer Credit Hits All Time High As Credit Card Usage Stalls

Two months after a near record surge in consumer credit driven by a spike in credit card debt, the US consumer went into a period hibernation to start the summer, when total consumer credit rose by just $8.5 billion in June, with revolving, or credit card debt posting only its second contraction since 2013. Then moments ago, the Fed reported that in July, consumer credit posted a solid rebound, rising by $16.6 billion, above the $14.4 billion expected, and bringing the total to $3.92 trillion, a 5.1% annualized increase from a year ago, and a new all time high.

Of this increase, the bulk was from non-revolving credit, or auto and student loans, which rose by $15.4 billion to a new record high of $3.92 trillion, while revolving, or credit card, debt posted a minimal $1.3 billion increase, barely offsetting the June decline, if enough to also bring the total revolving credit to a new all time high of $1.04 trillion.

In other words, while Americans continue to spend on cars and college, they were far less enthusiastic about charging everyday purchases on their credit cards.

And while the recent flatlining in credit card debt will prompt questions about the resilience of the US consumer during the summer, the recent dramatic upward revision to personal savings notwithstanding, one place where there were no surprises, was in the total amount of student and auto loans: here as expected, both numbers were at fresh all time highs, with a record $1.532 trillion in student loans outstanding, an increase of $8 billion in the quarter, auto debt also hit a new all time high of $1.131 trillion, an increase of $18 billion in the quarter.

Retail Investors Can Now Sell Credit Default Swaps Using An ETF

Retail Investors Can Now Sell Credit Default Swaps Using An ETF

Having revolutionized investing for both ordinary retail investors and institutions, and increasingly crowding out traditional asset managers, ETFs have set their sights on yet another market to disrupt and dominate: the trillion-dollar market in credit derivatives.

Ten years after the financial crisis, a London-based provider of passive products is testing whether the trading strategy of selling default protection has appeal beyond a rare group of institutional debt investors according to Bloomberg. The UK company, Tabula Investment Management, listed an exchange-traded fund on Sept. 7 that tracks a gauge of credit default swaps on European corporate bonds, joining only a handful of ETFs that offer similar exposure. And for the privilege of pretending one is the reincarnation of AIG Financial Products, Tabula will charge an annual fee of 0.5%.

Allowing ordinary investors to join sophisticated hedge funds while bypassing the need for a burdensome ISDA agreement, the Tabula European Performance Credit UCITS ETF (ticker TCEP) works very much how a regular CDS does: it provides a long position in the region’s credit markets by selling protection against default on a group of investment-grade and high-yield companies.

The fund earns a coupon with this strategy, though in the event of a default or other credit event, it could be forced to pay out -- causing losses. The prospect of bringing speculative credit trading to more mainstream investors --  even the Mom and Pop crowd -- would displease Pope Francis, who rebuked the market in May as a “ticking time bomb."

Sarcastic religious commentary aside, the fact that banks are opening up CDS to retail means that there is increasingly little institutional interest to sell CDS (i.e. buy bonds), and as a result the market must be opened to retail investors, who have been eagerly devouring the stocks that institutional investors have been selling to them in ever larger amount in recent years.

The CDS ETF comes months after European regulators warned in April that investors who have presided over a “deterioration’’ in the overall quality of European corporate debt could be caught off-guard by monetary tightening.

Then there is the whole "derivative of a derivative" issue, although we are now so deep into the current asset bubble, that it is not even worth discussing that the modern equivalent of CDOs squared will not have a happy ending.

What is the spin to get mom and pop investor hooked on doing what AIG do infamously did a decade ago with devastating results? In other words, why invest in an index of swaps rather than buy a plain vanilla ETF tracking cash bonds? Simple: the former strips out interest-rate risk from the equation, according to a release from Tabula.

"Specialist credit managers can isolate and manage credit risk using credit default swap indices,’" said Michael John Lytle, chief executive officer of Tabula. “This is a liquid and efficient market, but it isn’t accessible to all asset managers.’’

On the other hand, it was not immediately clear why retail investors would be concerned about isolating credit risk, and furthermore, why they would then turn around and buy an index of swaps which dilutes the impact of the single-name focus.

Meanwhile, institutions have also recently taken to CDS indexes whose volumes have surged as volumes in the cash bond and single name CDS markets have tumbled in recent years, and as money managers seek more liquid alternatives. As Bloomberg notes, institutional respondents to a recent Greenwich Associates survey said they preferred index swaps to single-name CDS. Amid an uptick in volatility, U.S. credit derivatives trading volume jumped 65 percent year-on-year in the first half of 2018, according to JPMorgan.

Until recently, aside for a handful of passive products, the only way to gain exposure to CDS indexes was via derivatives and structured notes, instruments which allow investors to take short positions as well.

To be sure, it is unclear if the plan will work: while a handful of XTrackers ETFs that track indexes of European CDS have managed to gather hundreds of millions of euros in assets, others have been less successful.

In the U.S., ProShares closed one of a pair of long/short products tied to North American CDS indexes, while the remaining fund, the ProShares CDS Short North American HY Credit ETF, holds less than $5 million in assets.

But what is most subversive about the Tabula ETF is that it will put retail investors on the other said of the increasingly popular "fallen angel" trade which many institutional managers such as Oaktree and Horseman Global believe will be the next big short: nearly half of its long exposure to BBB names that some hedge funds have targeted with short positions.

One wonders if "some" of the funds who have been seeking counterparties to take the long side of the "fallen angel" trade didn't call Tabula and, in a repeat of what John Paulson did with Goldman when the two schemed to structure CDOs in a way that would maximize prodits, urged the company to allow retail investors to be the bagholder for what may soon be the trade of the decade.

The Money Game & The Human Brain

The Money Game & The Human Brain

Authored by Lance Roberts via RealInvestmentAdvice.com,

Jason Zweig, a neuroscience and Benjamin Graham expert, re-published an article last year entitled: “Ben Graham, The Human Brain, And The Bubble.” The entire article is a worthy read but there were a few points in particular he made that are just as relevant today as they were when he wrote the original essay in 2003.

“At the peak of every boom and in the trough of every bust, Benjamin Graham‘s immortal warning is validated yet again: ‘The investor’s chief problem — and even his worst enemy — is likely to be himself.'” 

I have written about the psychological issues which impede investors returns over longer-term time frames in the past. They aren’t just psychological, but also financial. To wit:

“Another common misconception is that everyone MUST be saving in their 401k plans through automated contributions. According to Vanguard’s recent survey, not so much.

  • The average account balance is $103,866 which is skewed by a small number of large accounts.

  • The median account balance is $26,331

  • From 2008 through 2017 the average inflation-adjusted gain was just 28%. 

So, what happened?

  • Why aren’t those 401k balances brimming over with wealth?

  • Why aren’t those personal E*Trade and Schwab accounts bursting at the seams?

  • Why are so many people over the age of 60 still working?

While we previously covered the impact of market cycles, the importance of limiting losses, the role of starting valuations, and the proper way to think about benchmarking your portfolio, the two biggest factors which lead to chronic investor underperformance over time are:

  • Lack of capital to invest, and;

  • Psychological behaviors

Psychological factors account for fully 50% of investor shortfalls in the investing process. It is also difficult to ‘invest’ when the majority of Americans have an inability to ‘save.'”

“These factors, as shown by data from Dalbar, lead to the lag in performance between investors and the markets over all time periods.”

While “buy and hold” and “dollar cost averaging” sound great in theory, the actual application is an entirely different matter. Ultimately, as individuals, we do everything backwards. We “buy” when market exuberance is at its peak and asset prices are overvalued, and we “sell” when valuations are cheap and there is a “rush for the exits.” 

Behavioral biases are an issue which remains little understood and accounted for when individuals begin their investing journey. Dalbar defined (9) nine of these behavioral biases specifically:

  • Loss Aversion – The fear of loss leads to a withdrawal of capital at the worst possible time.  Also known as “panic selling.”

  • Narrow Framing – Making decisions about on part of the portfolio without considering the effects on the total.

  • Anchoring – The process of remaining focused on what happened previously and not adapting to a changing market.

  • Mental Accounting – Separating performance of investments mentally to justify success and failure.

  • Lack of Diversification – Believing a portfolio is diversified when in fact it is a highly correlated pool of assets.

  • Herding– Following what everyone else is doing. Leads to “buy high/sell low.”

  • Regret – Not performing a necessary action due to the regret of a previous failure.

  • Media Response – The media has a bias to optimism to sell products from advertisers and attract view/readership.

  • Optimism – Overly optimistic assumptions tend to lead to rather dramatic reversions when met with reality.

Cognitive biases impairs our ability to remain emotionally disconnected from our money.

But it isn’t entirely your fault. The Wall Street marketing machine, through effective use of media, have changed our view of investing from a “process to grow savings over time” to a “get rich quick scheme” to offset the shortfall in savings. Why “save” money when the market will “make you rich?”

As I addressed in “Retirees Face A Pension Crisis Of Their Own:”

Using faulty assumptions is the linchpin to the inability to meet future obligations. By over-estimating future returns, future retirement values are artificially inflated which reduces the required saving amounts need by individuals today. Such also explains why 8-out-of-10 American’s are woefully underfunded for retirement currently.”

The Illusion Of Control

Jason discussed another important psychological barrier to our success.

Online trading firms went further, blowing the traditional brokerage model to bits. With no physical branch offices, no in-house research, no investment banking, and no brokers, they had only one thing to offer their customers: the ability to trade at will, without the counterweight of any second opinion or expert advice. Once, that degree of freedom might have frightened investors. But the new Internet brokerages cleverly fostered what psychologists call ‘the illusion of control’ — the belief that you are at your safest in an automobile when you are the driver. Investors were encouraged to believe that the magnitude of their portfolio’s return would be directly proportional to the amount of attention they paid to it — and that professional advice would reduce their return.”

The “illusion of control,” is another behavioral bias that individuals regularly face. When stock prices are rising, especially in a momentum-driven market, individuals believe that have it “all figured out.” The inherent problems which arise from this “over-confidence” are the layering of “risks” in portfolios which are misunderstood until a correction process begins. As I wrote previously:

“Bull markets hide investing mistakes, bear markets reveal them.” 

The reality is that as individuals we are NOT investors, but rather just speculators hoping the share of stock we purchased today, will be able to be sold at a higher price later. Unfortunately, since individuals are told to “buy,” but never “sell,” only one-half of the investment process is completed.

In other words, the illusion we are in “control” is simply that. Logically, we know we should “buy low” and “sell high.”Yet it is the entirety of our other behavioral biases that keep us from doing so. But most importantly, it is the consistent message from the mainstream media which “feeds our greed” that asset prices will only move higher…and you surely don’t want to miss out on that.

(Read: Experience Is The Only Cure)

The Video Game 

Another risk Jason points out is our “addiction.”

“Psychologist Marvin Zuckerman at the University of Delaware has written about a form of risk called ‘sensation-seeking’ behavior. This kind of risk — people daring each other to push past the boundaries of normally acceptable behavior — is largely a group phenomenon (as anyone who has ever been a teenager knows perfectly well). People will do things in a social group that they would never dream of doing in isolation.”

As individuals, we are “addicted” to the “dopamine effect.” It is why social media has become so ingrained in society today as individuals constantly look to see how many likes, shares, retweets, or comments they have received. That instant gratification and acknowledgment keep us glued to our screens and less involved in the world around us.

We are addicted.

As Jason notes, a team of researchers have proved this point:

“Wolfram Schultz at Cambridge and Read Montague at Baylor in Houston, Texas, have shown that the release of dopamine, the brain chemical that gives you a ‘natural high,’ is triggered by financial gains. The less likely or predictable the gain is, the more dopamine is released and the longer it lasts within the brain. Why do investors and gamblers love taking low-probability bets with high potential payoffs? Because, if those bets dopay off, they produce an actual physiological change — a massive release of dopamine that floods the brain with a soft euphoria.

After a few successful predictions of financial gain, speculators literally become addicted to the release of dopamine within their own brains. Once a few trades pay off, they cannot stop the craving for another ‘fix’ of profits — any more than an alcoholic or a drug abuser can stop craving the bottle or the needle.”

Fortunately, we have support groups to help with most of our addictions from alcohol to gambling. While these groups are there to help us curb our addictive and destructive behaviors for some things, the investing world is full of groups which exist to “feed” our investing addiction.

“Until the advent of the Internet, there was simply no such thing as a network or support group for risk-crazed retail traders. Now, quite suddenly, there was — and with every gain each of them scored, they goaded the other members of the group on to take even more risk. Comments like ‘PRICE IS NO OBJECT’ and ‘BUY THE NEXT MICROSOFT BEFORE IT’S TOO LATE’ and ‘I’LL BE ABLE TO RETIRE NEXT WEEK’ became commonplace.

And the public was urged to hurry. ‘EVERY SECOND COUNTS,’ went the slogan of Fidelity’s discount brokerage — implying that investors could somehow achieve their long-term goals by engaging in short-term behavior.”

By using technology to turn investing into a video game — lines snaking up and down a glowing screen, arrows pulsating in garish hues of red and green — the online brokerages were tapping into fundamental forces at work in the human brain.”

What are the most popular apps on our “smartphones?” 

Video games and social media.

Why, because of the “dopamine” our brain releases.

This is why apps like “Robinhood” and “Stash” that allow for online trading straight from our phones have gained in such popularity. The “immediacy effect” of instant feedback on success or failure keeps us clicking for next winner. Wall Street has become a full-blown casino with individuals lining up to pull the lever to see if they are the next big winner. But, just as it is in Las Vegas, the “house usually wins.” 

The Prediction Addiction

Adding to our list of behavioral flaws and biases when it comes to investing, Jason points out another:

“In 1972, Benjamin Graham wrote: ‘The speculative public is incorrigible. In financial terms it cannot count beyond 3.  It will buy anything, at any price, if there seems to be some ‘action’ in progress.’ – Graham, The Intelligent Investor, pp. 436-437.

In a stunning confirmation of his argument, the latest neuroscientific research has shown that Graham was not just metaphorically but literally correct that speculators ‘cannot count beyond 3.’ The human brain is, in fact, hard-wired to work in just this way: pattern recognition and prediction are a biological imperative.

Scott Huettel, a neuropsychologist at Duke University, recently demonstrated that the anterior cingulate, a region in the central frontal area of the brain, automatically anticipates another repetition after a stimulus occurs only twice in a row. In other words, when a stock price rises on two consecutive ticks, an investor’s brain will intuitively expect the next trade to be an uptick as well.

This process — which I have christened ‘the prediction addiction’ — is one of the most basic characteristics of the human condition. Automatic, involuntary, and virtually uncontrollable, it is the underlying neural basis of the old expression, ‘Three’s a trend.’ Years ago, when most individual investors could obtain stock prices only once daily, it took a minimum of three days for the ‘I get it’ effect to kick in. But now, with most websites updating stock prices every 20 seconds, investors readily believed that they had spotted sustainable trends as often as once a minute.”

While individuals regularly proclaim to be “long-term investors,” the average holding period for stocks has shrunk from more than 6-years in the 1970’s to less than 6-months currently.

The Advisor’s Role

These psychological and behavioral issues are exceedingly difficult to control and lead us regularly to making poor investment decisions over time. But this is where the role of an “advisor” should be truly defined and valued.

While the performance chase, a by-product of the very behavioral issues we wish to control, leads everyone to seek out last years “hottest” performing manager or advisor, this is not really the advisor’s main role. The role of an Advisor is NOT beating some random benchmark index or to promote a “buy and hold” strategy. (There is no sense in paying for a model you can do yourself.)

Jason summed it well:

“The only legitimate response of the investment advisory firm, in the face of these facts, is to ensure that it gets no blood on its hands. Asset managers must take a public stand when market valuations go to extremes — warning their clients against excessive enthusiasm at the top and patiently encouraging clients at the bottom.”

Given that individuals are emotional and subject to emotional swings caused by market volatility, the Advisors role is not only to be a portfolio manager, but also a psychologist. Dalbar suggested four successful practices to reduce harmful behaviors:

  1. Set Expectations below Market Indices: Change the threshold at which the fear of failure causes investors to abandon an investment strategy. Set reasonable expectations and do not permit expectations to be inferred from historical records, market indexes, personal experiences or media coverage. The average investor cannot be above average. Investors should understand this fact and not judge the performance of their portfolio based on broad market indices.

  2. Control Exposure to Risk: Include some form of portfolio protection that limits losses during market stresses.
    Explicit, reasonable expectations are best set by agreeing on a goal that consists of a predetermined level of risk and expected return. Keeping the focus on the goal and the probability of its success will divert attention away from frequent fluctuations that lead to imprudent actions

  3. Monitor Risk Tolerance: Periodically reevaluate investor’s tolerance for risk, recognizing that the tolerance depends on the prevailing circumstances and that these circumstances are subject to change.
    Even when presented as alternatives, investors intuitively seek both capital preservation and capital appreciation. Risk tolerance is the proper alignment of an investor’s need for preservation and desire for capital appreciation. Determination of risk tolerance is highly complex and is not rational, homogenous nor stable.

  4. Present forecasts in terms of probabilities: Simply stating that past performance is not predictive creates a reluctance to embark on an investment program.
    Provide credible information by specifying probabilities or ranges that create the necessary sense of caution without negative effects. Measuring progress based on a statistical probability enables the investor to make a rational choice among investments based on the probability of reward.

The challenge, of course, it understanding that the next major impact event, market reversion, will NOT HAVE the identical characteristics of the previous events. This is why comparing today’s market to that of 2000 or 2007 is pointless. Only the outcome will be the same.

One thing that all the negative behaviors have in common is that they can lead investors to deviate from a sound investment strategy that was narrowly tailored towards their goals, risk tolerance, and time horizon.

The best way to ward off the aforementioned negative behaviors is to employ a strategy that focuses on one’s goals and is not reactive to short-term market conditions. The data shows that the average mutual fund investor has not stayed invested for a long enough period of time to reap the rewards that the market can offer more disciplined investors. The data also shows that when investors react, they generally make the wrong decision.

The reality is that the majority of advisors are ill-prepared for an impact event to occur. This is particularly the case in late-stage bull market cycles where complacency runs high.

When the impact event occurs, advisors who are prepared to handle responses, provide clear messaging, and an action plan for both conserving investment capital and eventual recovery will find success in obtaining new clients.

The discussion of why “this time is not like the last time” is largely irrelevant. Whatever gains that investors garner in the between now and the next impact event by chasing the “bullish thesis” will be largely wiped away in a swift and brutal downdraft. Of course, this is the sad history of individual investors in the financial markets as they are always “told to buy” but never “when to sell.”

You can do better.

"It's Like The Zombie Apocalypse" - Water, Batteries, Flashlights Vanish From Shelves As Carolinas Brace For Florence

"It's Like The Zombie Apocalypse" - Water, Batteries, Flashlights Vanish From Shelves As Carolinas Brace For Florence

With memories of the devastation wrought by Hurricanes Harvey, Irma and Maria still fresh in the minds of US consumers, residents of South and North Carolina are taking zero chances as Hurricane Florence - now a Category 4 storm - barrels toward the eastern seaboard. According to local media reports, store shelves have been cleared of vital supplies like bottled water and food as anxious southerners brace for the worst-case scenario.

Shelves at Wal-Marts in North Carolina and South Carolina had been cleared out by Sunday evening, forcing the stores to frantically restock shelves as residents loaded up on everything from water to plywood to generators, per WGN9. Flashlights and batteries also flew off the shelves.



Photos of empty store shelves in South Carolina were circulating on social media, the State newspaper reported.

The pictures of vacant grocery store aisles are flooding social media. They show the places in supermarkets that are normally filled with pallets of bottled water and bread, among other supplies. They are being purchased in preparation for Florence, which is expected to be a "dangerous major hurricane," according to the National Oceanic and Atmospheric Administration (NOAA).

South Carolina Gov. Henry McMaster warned residents to prepare for the worst-case scenario. At a Sunday news conference, McMaster said "presume that a major hurricane is going to hit South Carolina. Be prepared. Be ready." North Carolina Governor Roy Cooper also urged residents in vulnerable areas to be prepared, noting that the storm is expected to generate massive waves and destructive winds. Currently, the storm winds have clocked in at 115 mph.

On social media, one user compared the pre-hurricane run to preparations for a "zombie apocalypse."

While one woman tweeted about stocking up on yoga pants and wine.

If National Hurricane Center projections prove correct, the storm could be most severe to strike North Carolina since Hurricane Fran in 1996.

The NHC warned late Monday morning that "life threatening" storm surges could strike coastal areas of North Carolina, South Carolina and Virginia...

...With hurricane-force winds expected to begin battering coastal areas beginning late Wednesday night before the storm makes landfall on Thursday (that is, barring some last-minute shift in the storm's trajectory).

Meanwhile, insurance stocks tumbled on Monday with shares of AIG, Travelers and other non-life insurerers moving lower. According to Wells Fargo Securities analyst Elyse Greenspan, insured losses could surpass $20 billion - "a manageable level for the industry" - if Florence makes landfall in the Carolinas. Here's an overview of individual insurers' exposure, courtesy of Bloomberg.

  • Primary companies with the largest exposure to homeowners’ include State Farm, USAA, Allstate, Nationwide and Travelers
  • Companies with the highest market share in personal auto include: State Farm, Berkshire Hathaway, Allstate, USAA and Progressive
  • Those with the greatest exposure to commercial- property exposed lines include Liberty Mutual, Travelers, CNA, Nationwide and AIG
  • Reinsurers include Aspen, AXIS Capital, Everest Re, RenaissanceRe, and XL Group

Meanwhile, shares of Generac Holdings Inc, building materials maker Owens Corning and roofing-supplies company Beacon Roofing Supply Inc rallied and retailers like Lowe's and Home Depot also climbed.

While the East Coast braces for landfall, meteorologists warn that this could only be the beginning of the region's troubles during this year's hurricane season. As the National Hurricane Center warned this morning, there are three hurricanes and a tropical storm already fully-formed over the Atlantic, while a tropical depression is presently forming over the northwest Caribbean.

As the timetable for the storm's impact continues to creep forward, North Carolina officials ordered residents to evacuate from the state’s Outer Banks barrier islands beginning on Monday ahead of Hurricane Florence, Reuters reported.

Recession Risk Looms - When NOPE Means Yes!

Recession Risk Looms - When NOPE Means Yes!

While asset-gatherers, commission-takers, and Fed-tinkerers desperately shrug off the recessionary signal from a collapsing Treasury yield curve, there is another 'spread' that is screaming "trouble ahead."

The last few months have seen Philly Fed New Orders tumbling, but without a concurrent slowdown in Prices Paid.

h/t @LeutholdGroup

The spread between New Orders and Prices is the so-called NOPE Index, and as Leuthold Group notes, a drop below -40 has historically signaled notable trouble ahead for stocks, bonds, and the economy.

h/t @LeutholdGroup

The last time NOPE dropped below -40 was in 2010 as stocks tumbled and The Fed was forced to restart QE (Operation Twist) to save the world. This time we doubt Powell would bow to Trump's demands for Plunge Protection.

In other words - something big is coming!

Is The New York Times Undermining Peace Efforts By Sowing Suspicion?

Is The New York Times Undermining Peace Efforts By Sowing Suspicion?

Authored by Diana Johnstone via The Ron Paul Institute for Peace & Prosperity,

The New York Times continues to outdo itself in the production of fake news. There is no more reliable source of fake news than the intelligence services, which regularly provide their pet outlets (NYT and WaPo) with sensational stories that are as unverifiable as their sources are anonymous. A prize example was the August 24 report that US intelligence agencies don’t know anything about Russia’s plans to mess up our November elections because “informants close to... Putin and in the Kremlin” aren’t saying anything. Not knowing anything about something for which there is no evidence is a rare scoop.

A story like that is not designed to “inform the public” since there is no information in it. It has other purposes: to keep the “Russia is undermining our democracy” story on front pages, with the extra twist in this case of trying to make Putin distrustful of his entourage. The Russian president is supposed to wonder, who are those informants in my entourage?

But that was nothing compared to the whopper produced by the “newpaper of record” on September 5. (By the way, the “record” is stuck in the same groove: Trump bad, Putin bad – bad bad bad.) This was the sensational oped headlined “I am Part of the Resistance Inside the Trump Administration”, signed by nobody.

The letter by Mister or Ms Anonymous is very well written. By someone like, say, Thomas Friedman. That is, someone on the NYT staff. It is very cleverly composed to achieve quite obvious calculated aims. It is a masterpiece of treacherous deception.

The fictional author presents itself as a right-wing conservative shocked by Trump’s “amorality” – a category that outside the Washington swamp might include betraying the trust of one’s superior.

This anonymous enemy of amorality claims to approve of all the most extreme right-wing measures of the Trump administration as “bright spots”: deregulation, tax reform, a more robust military, “and more” – cleverly omitting mention of Trump’s immigration policy which could unduly shock the New York Times’ liberal readers. The late Senator John McCain, the model of bipartisan bellicosity, is cited as the example to follow.

The “resistance” proclaimed is solely against the facets of Trump’s foreign policy which White House insiders are said to be working diligently to undermine: peaceful relations with Russian and North Korea. Trump’s desire to avoid war is transformed into “a preference for autocrats and dictators”. (Trump gets no credit for his warlike rhetoric against Iran and close relations with Netanyahu, even though they must please Anonymous.)

The purpose of this is stunningly obvious. The New York Times has already done yeoman service in rounding up liberal Democrats and left-leaning independents in the anti-Trump lynch mob. But now the ploy is to rally conservative Republicans to the same cause of overthrowing the elected President. The letter amounts to an endorsement of future President Pence. Just get rid of Trump and you’ll have a nice, neat, ultra-right-wing Republican as President.

The Democrats may not like Pence, but they are so demented by hatred of Trump that they are visibly ready to accept the Devil himself to get rid of the sinister clown who dared defeat Hillary Clinton. Down with democracy; the votes of deplorables shouldn’t count.

That is treacherous enough, but even more despicable is the insidious design to destabilize the presidency by sowing distrust. Speaking of Trump, Mr and/or Ms Anonymous declare:

“The dilemma – which he does not fully grasp – is that many of the senior officials in his own administration are working diligently from within to frustrate parts of his agenda and his worst inclinations” (meaning peace with Russia).

This is the Iago ploy. Shakespeare’s villain destroyed Othello by causing him to distrust those closest to him, his wife and closest associates. Like Trump in Washington, Othello, the “Moor” of Venice, was an outsider, that much easier to deceive and betray.

The New York Times is playing Iago, whispering that Putin in the Kremlin is surrounded by secret “informants”, and that Trump in the White House is surrounded by people systematically undermining his presidency. Putin is not likely to be impressed, but the trick might work with Trump, who is truly the target of open and covert enemies and whose position is much more insecure. There is certainly some undermining going on.

Was the New York Times oped written by the paper’s own writers or by the CIA? It hardly matters since they are so closely entwined.

No trick is too low for those who consider Trump an intolerable intruder on THEIR power territory. The New York Times “news” that Trump is surrounded by traitors is taken up by other media who indirectly confirm the story by speculating on “who is it?” The Boston Globe (among others) eagerly rushed in, asking:

“So who’s the author of the op-ed? It’s a question that has many people poking through the text, looking for clues. Meanwhile, the denials have come thick and fast. Here’s a brief look at some of the highest-level officials in the administration who might have a motive to write the letter.”

Isn’t it obvious that all this is designed to make Trump distrust everyone around him? Isn’t that a way to drive him toward that “crazy” where they say he already is, and which is fallback grounds for impeachment when the Mueller investigation fails to come up with nothing more serious than the fact that Russian intelligent agents are intelligent agents?

The White House insider (or insiders, or whatever) use terms like “erratic behavior” and “instability” to contribute to the “Trump is insane” narrative. Insanity is the alternative pretext to the Mueller wild goose chase for divesting Trump of the powers of the presidency. If Trump responds by accusing the traitors of being traitors, that will be final proof of his mental instability. The oped claims to provide evidence that Trump is being betrayed, but if he says so, that will be taken as a sign of mental derangement. To save our exemplary democracy from itself, the elected president must be thrown out.

The military-industrial-congressional-deep state-media complex is holding its breath to breathe that great sigh of relief.

The intruder is gone. Hurrah! Now we can go right on teaching the public to hate and fear the Russian enemy, so that arms contracts continue to blossom and NATO builds up its aggressive forces around Russia in hopes that this may frighten the Russians into dumping Putin in favor of a new Boris Yeltsin, ready to let the United States pursue the Clintonian plan of breaking up the Russian Federation into pieces, like the former Yugoslavia, in order to take them over one by one, with all their great natural resources.

And when this fails, as it has been failing, and will continue to fail, the United States has all those brand new first strike nuclear weapons being stationed in European NATO countries, aimed at the Kremlin. And the Russian military are not just sitting there with their own nuclear weapons, waiting to be wiped out. When nobody, not even the President of the United States, has the right to meet and talk with Russian leaders, there is only one remaining form of exchange. When dialogue is impossible, all that is left is force and violence. That is what is being promoted by the most influential media in the United States.

Morgan Stanley Calls It: Stocks Will Peak In December

Morgan Stanley Calls It: Stocks Will Peak In December

In a recent note, Morgan Stanley which recently has become arguably the most bearish of the big banks, said it had lowered its US equity allocation to +0%, noting that it was "removing a positive bias to US equities that has existed since April 2017.

As justification it cited the recent strength in US equities which "now means outright downside to Morgan Stanley's 12-month price target" and notes that "while our cycle models remain in 'expansion', a phase that has historically seen valuation overshoots, we are increasingly concerned that the bulk of this tailwind is already behind us."

As a result, the bank no longer recommends any US equity exposure above an investor's benchmark.

The bank, which two months ago downgraded the tech sector to Sell  - a recommendation that has had mixed results at best - goes on to note that while its US equity strategists forecast strong returns last year, expectations for this year have been far more limited, driven in part by concerns that peak EPS growth is now behind us (Exhibit 4), and more recently by defensive leadership (Exhibit 5).

Picking up on a point we made one week ago, the bank also notes that recent US equity strength is also unusually extended versus ex-US equities (Exhibit 6) and other risk assets (Exhibit 7).

Invoking the "rolling bear market" model proposed some time ago by its chief equity strategist Michael Wilson, Morgan Stanley writes that US outperformance has been an ongoing theme in recent years, "but even by these halcyon standards, US equity strength in the face of weakness in credit, emerging markets, Italy and copper prices (to name a few) is notable."

More importantly, looking ahead the bank cautions that it is growing mindful that the next 2-3 months are heavy with potentially market-moving events. Below is a partial list of risk events waiting for investors as they come back from summer holidays. "While something always lies ahead for markets, this slate is material, especially in the face of recent outperformance."

Events aside, Morgan Stanley is also worried about three key secular trends that pose a growing risk to the market:

A turn in our cycle indicators would dramatically lower the expected return for all equity markets in our framework. Such a turn would likely need worsening labour markets and consumer confidence. A short-lived turn in these models was a reason why we reduced exposure sharply in November 2015, and kept it low (for too long) through October 2016.

Higher real rates/tighter financial conditions: Higher US real rates, absent a pick-up in growth/productivity, would directly compress equity risk premiums for US and EM equities, while higher rates in Japan would likely strengthen JPY, creating a problem for Japanese stocks. We think that Europe is the market with the most real rate 'cushion' relative to the last 10 years, one reason why it's at the top of our global pecking order. Higher real rates would also boost the case for allocating into bonds.

Signs of a larger margin/EPS growth peak: Our equity strategists see the case for this growing. We expect 3Q18 to be the peak in EPS growth for US stocks, and while the market expects some deceleration next year as we lap tax, we think that the deceleration is likely greater than expected due to tough organic comps, already elevated margins and rising costs. We are materially below-consensus for EPS in Japan and EM. Again, we see risks in Europe as somewhat lower.

Putting this all together, the bank which recently overtook Goldman Sachs in terms of revenue thinks that it is more likely that it will reduce risk exposure, rather than raise it, over the next 3-6 months.

And here is the (calendar) punchline: if credit spreads made a cycle trough in early February - as Morgan Stanley assumes - the average equity peak has come ten months later - which would be December - while yields have historically peaked seven months later, or right about now, in September.

In conclusion, while the bank's strategists don't urge their clients to sell outright - at least not yet - as "the history here is both limited and variable", it ends by saying that it doesn't expect "to stay for the very last song at the party."

'Steady State' Or Deep State? Ron Paul Crushes The New York Times' Hate-Driven Coup

The New York Times unleashed a firestorm by publishing an anonymously written op-ed from someone purporting to be a "senior US Administration official" and who writes of a secret cabal within the US government that conspires to thwart President Trump's agenda.

Presented as a heroic "resistance" from within, many see it as the work of a dangerous and undemocratic "deep state."

As Ron Paul and Daniel Mcadams discuss below, is the "steady state," as the NYT anonymous writer terms it, really another word for the "deep state"?

Peter van Buren sums the situation up perfectly: The op-ed does indeed signal a crisis, but not a Constitutional one. It is a crisis of collusion, among journalists turned to the task of removing a president via what some would call a soft coup.

Because it’s either that, or we’re meant as a nation to believe an election should be overturned two years after the fact based on a vaguely-sourced tell-all book and an anonymous op-ed...

Primetime NFL Ratings Down 9% As Trump Trashes Kneelers

Primetime NFL Ratings Down 9% As Trump Trashes Kneelers

The NFL's primetime matchup Sunday night between the Green Bay Packers and the Chicago Bears struggled to attract viewers, following a dismal Thursday night season opener which saw viewership plunge to the lowest levels in nearly a decade

Despite a dramatic turnaround by the Packers who overcame a 17-0 halftime disadvantage to score a 24-23 victory over the bears, last night's Sunday Night Football game garnered just 14.4/25 in metered market results, a drop of 9% from the September 10, 2017 SNF matchup between the Dallas Cowboys and the New York Giants, reports Deadline

Despite the delays in getting numbers from Nielsen due to Hurricane Irma hitting Florida last year, the Cowboys flooding of the Giants went on to pull in 24.2 million viewers. As a point of comparison, that was a rise of 5% from the 2016 SNF opener.

So, once the final numbers are in, we may see the SNF opening of the 2018/2019 season down from both of the last two years, even though it has the best metered market result for any NBC Sunday game in almost a year. -Deadline

It wasn't all bad news, however - with three of Sunday's four NFL ratings metrics increasing over last year, accroding to Sportsmediawatch

The Week 1 NFL national window, featuring Cowboys-Panthers in 80% of markets, had a 15.7 overnight rating on FOX Sunday — up a tick from last year (mostly Seahawks-Packers: 15.6) and down 7% from 2016 (mostly Giants-Cowboys: 16.9).


As for the early afternoon windows, CBS earned a 10.6 overnight for its singleheader coverage — up 23% from last year (8.6), up 4% from 2016 (10.2) and the highest for the Week 1 singleheader since 2015 on FOX (11.7).

FOX scored an 8.8 for regional coverage featuring 49ers-Vikings in a plurality of markets — up 5% from last year (mostly Philadelphia-Washington: 8.4) but down 19% from 2016 (feat. Packers-Jaguars: 10.8). -Sportsmediawatch

Trump effect

Adding to the NFL's primetime woes was President Trump, who attacked the league and player protests early Sunday, tweeting "Wow, NFL first game ratings are way down over an already really bad last year comparison. Viewership declined 13%, the lowest in over a decade. If the players stood proudly for our Flag and Anthem, and it is all shown on broadcast, maybe ratings could come back? Otherwise worse!"

Trump then retweeted a response showing a boy in a wheelchair attempting to stand  for a parade. 

Earlier in the day, Trump retweeted an article showing Miami Dolphins players kneeling during the National Anthem: 

Last Thursday's NFL opener between the Panthers and the Falcons dropped 8% over last year - the lowest level for an NFL opener since 2009. 

Let's see how attendance does this year... 

Fed Should Buy Stocks In The Next Recession: Former IMF Chief Economist

Fed Should Buy Stocks In The Next Recession: Former IMF Chief Economist

Our economy’s journey to becoming Japan will take one giant step forward if former IMF chief economist Olivier Blanchard has his way. His "outside the box" solution for our next recession? The Fed should buy stocks, finance the federal deficit and buy goods. He detailed this thought provoking idea at the Boston Fed’s monetary policy conference that took place this past weekend.

This thinking comes as a result of a "general sense [that] the Fed has to re-think its approach to combating recessions," according to a new MarketWatch article.

Why must it re-think its approach? Because the Fed itself has eliminated most of its tools used to fight recessions by keeping the United States in a lower interest rate environment for too long, instead of raising rates as the market roared. Now we have a stock market at all time highs and record debt levels yet again - but this time with a Federal Reserve that has far fewer options to combat the next recession than it ever has had in the past and with a neutral rate of interest that is lower than it has ever been in the past.

Fascinatingly enough, economists are only now starting to realize that this lack of firepower could be a detriment to the Federal Reserve in the future. Blanchard stated over the weekend that the Fed could probably handle a small recession, but a more major recession, like the one we experienced in 2008, should prompt the Fed to resort to "previously unheard of policies".

When interviewed by MarketWatch, Boston Fed President Eric Rosengren stated that he wasn’t sure there would be support for this type of monetary policy, as Blanchard was describing it. We'd be interested in revisiting his answer in the midst of a crisis. 

Rosengren went on to say "We definitely have tools. The question is whether we have the sharpest tool in the shed and whether we’re going to be able to deploy them."

Allow us to be the first to guess that they do not have "the sharpest tools in the shed", in more ways than one. 

Apparently convinced that two wrongs do in fact make a right, Rosengren then stated he would be "a strong advocate" of QE the way that we know it best: asset purchases and rate cuts. Such a cavalier attitude about this type of damaging monetary policy belies the larger problem of the Fed's balance sheet, which stands at over $4 trillion with no signs of lightning up in any material way.

But Blanchard doesn’t seem to think that this $4 trillion dollar balance sheet is even a problem. "If we need it, we could clearly double it and nothing terrible would happen," Blanchard reportedly said.

He concludes that he is not sure why people believe the Fed should only buy assets, but not goods.

“We have this notion that it is only OK for the central bank to buy assets and not goods. But that’s a restriction we imposed on ourselves,” Blanchard is quoted as saying.

Yes, how bizarre that the Fed doesn't buy, say, baseball cards to boost the "wealth effect" at the card collector level, or maybe Tesla Model 3s, just because.

Of course, Neither Blanchard nor Rosengren seem to realize that the reason we are in a place where central banks had to buy $15 trillion in assets to begin with is because the Fed and this type of thinking has put us in to begin with. What will this discussion look like in another 10 years, after the next crisis? We don’t know, though we are sure every problem we'll be dealing with by then will be exactly what we deserve.

"Algos Ain't Investors" Trader Warns Quiet Markets Don't Mean Safe Ones

"Algos Ain't Investors" Trader Warns Quiet Markets Don't Mean Safe Ones

For the last few months of summer, amid dwindling volumes and the deafening roar of event risks around the world, US equity markets have meandered higher on a bed of ever-decreasing volatility as machines (and corporate share-buy-backers) bought every headline dip, sold every vol rip, and generally confirmed Trump's narrative that everything is awesome.

Even as the economic data is dismal...

But as former fund manager and FX trader Richard Breslow warns, algorithms aren’t investors. They are very aggressive day traders. Nothing more than that.

They key off of market depth, flows and momentum. They interpret the world strictly in the moment. Humans shouldn’t try to emulate that behavior. It doesn’t pay off over any meaningful time period. You may be able to get away with it for a day or two.

Via Bloomberg,

The calendar is conspiring to make this a day where in Europe and North America, participation is going to be light and interest in events even less so.

It’s quiet.

That doesn’t mean all the pressures that have been roiling markets are suddenly spent and it’s time to get the party started again. But that seems to be the recommendation of the day.

We are all aware of the amusing comments from a gathering on the banks of Lake Como in Italy. They were followed by a slew of commentators gushing over the attractiveness of the BTP market. I know people like to tout the nice risk reward of a trade by saying the stop is only half as far away as the objective. Actual flesh and bones investors should require the fundamental story to carry the same sort of profile. Especially if they are going to execute another bunch of trades, or even re-handicap the ECB’s intentions, based upon it.

Carry is a powerful narcotic. Most efficaciously pursued when there is a reasonable expectation of some semblance of calm. A majority of the people I talk to don’t think volatility is suddenly preparing to resume its gloriously delicious slumber. Stop watching the e-mini futures. Yet, I’ve got an inbox with oodles of folks telling me things are “overdone”, luscious opportunities are beckoning and all we have to do is winnow out the wheat from the chaff.

That may be true and I’m being overly cautious. But dismissing the concept of “contagion” as a momentary, panicky phenomenon may equally be overly bold. Especially as I’m staring at a launchpad view that reminds me that the MSCI Emerging Markets Index made a new low on the year just this morning. And their EM Currency Index, at least on my charts, isn’t screaming, “quick, catch my falling knife.”

I detest the concept of purchasing power parity. But I understand its potential allure. If it does have any usefulness, it is over a long period of time. The same is true, on both counts, trying to analyze currency movements in terms of correcting for, or exacerbating trade flows and current account deficits. It’s risky, and not very nice, to talk to traders as if they are economists.

It’s probably a good day to take a deep breath and see how prices play out. It won’t be the last chance you’ll have to get involved. Aside from basking in some feel-good comments and getting excited by the lull, you need to ask, what, if anything, has changed.