Analysts have again proved that when it comes to predicting the future, their guess is as good as anyone''s.
There is a story that economists use to illustrate the valuation of assets. Once upon a time, a trader bought a tin of sardines for $1 and sold them to a rival for $1.50. This trader in turn sold them for $2 and so on. Years pass, until the current owner came upon a man willing to pay $10. The buyer, who was famished, opened the tin only to find that the sardines were inedible and was rightly indignant. But you dont understand, the vendor said. These were trading sardines, not eating sardines.
The moral of the story is that assets are worth, ultimately, what someone is prepared to pay for them and that price may be a poor reflection of their real value.
The anecdote is useful because it has not gone unnoticed by a fair section of the worlds press that pretty much every asset one can think of is fundamentally overvalued. Whether or not we are in a giant bubble with only one outcome is an argument that could fill this entire magazine. However, at least one major global publication has forecast that the only real end can be either a huge fall in asset prices or serious inflation.
Looking at todays inflated asset markets, a strong parallel exists in reverse with the markets of twenty five to thirty years ago. It offers potentially the same lessons. All investment markets were, apart from commodities, extremely depressed. In addition, with the Dow Jones at the same level as it had been in the early 1960s, nobody could contemplate that it could rise 20% let alone threefold, as predicted by proponents of the Elliot Wave theory. Cash was king, commodities were in strong demand and nobody wanted to touch bonds
Today, on the other hand, it seems as if investors, driven senseless by low cash returns, are on the rampage. These latter day prospectors dig out investment opportunities from Bulgarian real estate to gold mines in Nicaragua. Bonds are being driven to derisory yield levels and there is a bubble of alarming proportions in UK Government debt.
Calculations by The Economist magazine show that house prices have hit record levels in relation to rents, in America, Britain, Australia, New Zealand and most of Europe. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in all of these countries.
In equities, bubbles are developing to mirror the dotcom craze. In the GCC we had already moved into the realm of astrology rather than economic analysis so perhaps we should heed the Bradley Model, amusingly favoured by noted contrarian Dr Marc Faber, which is based on planetary alignments. The Bradley model correctly called the current US stock market rally by bottoming out in December 2005 and apparently will turn down again in November 2006.
However, if there was a massive sell-off of assets around the world, even remotely along the lines last seen in say, 1998, this could conversely produce demand for safe havens such as gold and of course cash. But in which currency?
Any collection of press cuttings from the last two years has just about every professional financial commentator predicting the collapse of the US Dollar. Naturally analysts have been rattled by concerns that foreign central banks might reduce their holdings of US Treasury bonds. Officials at the central banks of both Russia and Indonesia are on record that their banks are considering reducing their dollar reserves. Reports that Chinas central bank intends to trim its purchases of Treasuries and switch some of its reserves to currencies other than the dollar adds more fuel to the concern. This combination of events has led some to ponder the once unthinkable: might the dollar lose its reserve-currency status?
Of course, the deficit is at the heart of this issue. Various economists have put forward at least four arguments why the deficit does not matter and the dollars reserve status is safe. First, its a sign of Americas economic might, not a symptom of weakness. Second, sluggish demand overseas is a big cause of the deficit, hence it is reversible. Third, the deficit exists largely because of multinationals overseas subsidiaries. And fourth, central bank demand for dollars creates, in effect, a stable economic system. It is not difficult to demolish each argument in turn and this has been done credibly. Yet the dollar remains defiant and appears to wrong foot the pros at every point.
So despite everyone calling the reverse, is the dollar still a sound cash bet? As Joe Granville pointed out in the 1970s, an investor should basically stand on his head and act in advance of when favourable or unfavourable news hits the market i.e. buy on the rumour sell on the fact, because the market will have reacted long before the information is out in the open.
HONG KONG When the United States announced another record deficit in its current account last month - this one at $224.9 billion for the fourth quarter of 2005 and $804.9 billion for the year - global investors had what is now a familiar reaction: They noted the news and paid little attention to it.
Investors have been all but ignoring what economists call the fundamentals, chief among them the huge imbalances in the U.S. current account and the federal budget, for most of this decade. The markets, it seems, are no longer as concerned as they once were with what is commonly called “the real economy.”
But this latest shrug among investors comes at a moment of heightened uncertainty in the world economy and amid a widening debate as to how to measure its health and resilience.
High among these uncertainties are potential changes in the global interest rate environment, the possibility of a slowdown in the United States and the effect of persistently high oil prices.
“We''re now only guessing why markets are behaving as they are,” said V. Anantha Nageswaran, chief investment officer at Libran Asset Management in Singapore. “In the face of expensive oil and the U.S. Federal Reserve''s continued tightening, the markets aren''t going down, and in the past they probably would have.”
There seem to be only two possible explanations for the performance of global stock markets: Either they are on an ever more reckless binge that has no logical grounding, or they are operating on the basis of a new set of assumptions about conditions that used to be considered dangerous.
If the former argument proves true, as those of bearish sentiment predict, the markets are headed for a crash similar to that of 2000, when the dot-com bubble burst. Such is the underlying fragility, the bears say, that almost any piece of bad news - another spasm of violence in the Middle East, instability in a big oil-producing country, an outbreak of avian flu, a big corporate bankruptcy - could be the tipping point.
If the latter perspective is correct, the world has entered an era that will require new ways of measuring and interpreting economic data. In a globalized economy, those in this camp assert, what once moved markets no longer does, and we do not yet have all the tools needed to gauge what moves them now.
“Are massive U.S. imbalances sustainable? This is the hottest debate today in international finance,” said David O''Rear, chief economist at the Hong Kong General Chamber of Commerce and a longtime voice on the bearish side of the question.
Until recently the lines drawn in this debate were clear. Those arguing that economic fundamentals will again prove relevant tended to be economists, like O''Rear, who were not directly involved in the markets. Those casting fundamentals aside tended to be investors or traders - anyone in search of a “story” - an explanation for why share indexes keep heading upward.
Now things are not so simple. A number of economists - at universities, in leading investment houses, in market research firms, at policy institutes, and even at the U.S. Federal Reserve - are adding intellectual weight to the view in the markets.
They are beginning to argue that long-accepted methods of measuring economic trends - rising global imbalances, falling savings rates, record liquidity flows and the like - must be rethought and possibly replaced to reflect new economic conditions.
Chief among these trends is the continuing increase in the U.S. current account deficit. How much does this mean, these economists ask, given that U.S. assets are more globalized than ever and production abroad often goes uncounted in the bottom line at home?
It means plenty, the traditionalists assert. Even as investment and production are globalized, an obstinate deficit in the accounts of the No. 1 economy remains a potential source of instability.
“Six years ago we said profits don''t matter,” said O''Rear, referring to the prevailing market view at the height of the dot-com bubble. “Now we''re invited to say deficits don''t.”
That is precisely the invitation extended by those who say the continued buoyancy of global stock prices is justified. Their search for an elusive new paradigm is an effort to add weight to this contention.
“The markets are powering ahead, and we need to understand why,” said Louis-Vincent Gave, a partner at GaveKal Research, a Hong Kong economic and market research firm. “We need to understand why the scenario of the permabears, as we call them, hasn''t come to pass.”
The permabears are so nicknamed with reason. Even as money floods into global stock exchanges at record levels, notably into most emerging markets, they insist that investors are ignoring structural weaknesses in the global economy increasingly at their peril.
The U.S. current account deficit now appears to be headed toward $1 trillion in 2006, and Washington has made little progress in reining in the fiscal deficit, they point out. The U.S. savings rate is negative for the first time since figures were first compiled in 1947, and it is risky, the permabears say, to assume that American consumers can keep fueling the global economy by spending more than they earn.
As to the financial markets themselves, the liquidity moving into emerging markets is sustained only by stories that cannot be justified, the permabears assert. Two such stories are that strong demand will push commodity prices up indefinitely and that China and India will replace the United States as growth drivers, should the American economy flag.
All of this, traditional economists say, makes the markets look frighteningly overbought.
“This is a bubble, plain and simple,” said Andy Xie, chief Asia/Pacific economist at Morgan Stanley. “Every bubble has a theory about itself and every bubble bursts. There''s never been an exception.”
On the other side of the debate lie two core arguments: Either the globalized economy has made traditional economic measures inaccurate, or if they are still valid, they are no longer relevant.
Either way, those favoring a new look at accepted economic thinking arrive at the same conclusion: There is no cause for concern over those quaint things called structural problems, they say.
For a time those of a bearish bent could dismiss such notions as little more than the flying of kites - a more sophisticated story in the markets but a story nonetheless. With the emergence of new theoretical backing, however, those who justify the high valuations now found in many share markets are gaining adherents.
Among the most prominent of the theories drawing the attention of both economists and investors are these:
The Dark Matter theory. Two economists, Ricardo Hausmann of Harvard University and Federico Sturzenegger of Harvard and the Universidad Torcuato di Tella in Buenos Aires, say that current account statistics mismeasure a country''s financial position because they are based on the geographic origin of goods - an outmoded concept.
In a globalized economy, exports from China, for example, may well add to the profits of a U.S. company like Motorola, which sends management know-how and technology to China - assets that are unaccounted for in the numbers. Borrowing the term dark matter from physics, the two economists call this the hidden wealth of U.S. companies with such assets abroad.
“When we apply our methodology,” the authors wrote in a much-circulated paper, “we find that the U.S. has run no current account deficits over the last two decades and that global imbalances are relatively small and very stable.”
Sweat equity. Two economists of the U.S. Federal Reserve Bank, Ellen McGrattan and Edward Prescott, theorize that current measures do not account for the rising number of Americans who run their own businesses and save by way of investments in them. As a consequence, the traditionally calculated savings rate is massively understated.
“Sweat investment is financed by worker-owners,” they wrote, and this “intangible investment in the business sector” adds significantly to gross domestic product, productivity and actual savings.
Plutonomy. Ajay Kapur, chief global equity strategist for Citigroup Investment Research in New York, asserts that skewed wealth in the United States, Britain and other highly globalized countries fuels investment because more people have incomes above the median and invest more.
“We think this income and wealth inequality helps explain many of the conundrums that vex equity investors, such as why global imbalances are growing along with the bull market,” Kapur and his colleagues wrote recently. “Implication 1: Worry less about these conundrums.”
A brave new world. If there is one theory that draws these strands neatly together into a compelling whole, it belongs to GaveKal, a small, independent research firm whose startling ideas draw large clients.
The shift from industry to services in the advanced economies, the outsourcing of manufacturing to developing nations, the real estate “revolution,” as Gave calls it - all of this has yet to be fully reckoned into the data and has brought us into “Our Brave New World,” which is the title of a book GaveKal published last year.
“The bears argue that the structure of the world economy today is unsustainable,” Gave said during an interview.
“We argue that it''s not only sustainable but that it''s stronger than it was.”
Are these new theories gaining significant currency? Are we in for a major rethink of how we calculate what is taking place before our eyes? So it would appear.
GaveKal''s clients include the huge U.S. hedge fund Tudor Investments and J.P. Morgan Chase. Meanwhile, Brad Setser, a fellow at the Institute for International Economics in Washington and a former official at the U.S. Treasury Department, tries to incorporate the sum of “dark matter” into his analysis of the current account.
“The acceptance of the thesis is pretty remarkable,” Kapur, the Citigroup strategist, said during an interview by telephone. “People are willing to look hard at a new interpretation if you back it up with hard data.”
The outstanding questions now are whether, and how quickly, financial markets as a whole will incorporate new thinking on old subjects.
“Markets are operated by people, and not all of them are in the new camp,” said Kathryn Welling, the editor of Welling@Weeden, a publication of the U.S. investment firm Weeden. “We may live with huge imbalances for now, but as long as we do they''ll be out there as a future source of panic.”
Pada saat bullish, muncul prediksi indeks yang agak2 overshoot. Misal ke 2,000 dst. Kenyataannya baru nyampe 1,550 sekian.
Demikian pula sebaliknya. Pada saat trend bearish atau koreksi muncul prediksi yg juga agak2 overshoot, misal ke 1,200… 1,000… dst.
Well, only time will tell.
Dari pengalaman saya jual beli tanah & properti, kalau mau beli saya ngebid yg pesimis. Tapi saat jualan, saya kasih sentimen yg optimis (misal: akan ada proyek mall, prospek untuk bisnis, dsb).
Biasalah, namanya juga orang dagang…
The Greatest Emotional Problem Facing Traders
Friday May 26, 9:23 am ET
By TradingMarkets Research
Recently, in my TraderFeed blog, I suggested that traders faced a greater emotional hurdle than either fear or greed: overconfidence. Overconfidence is what leads us to take on too much risk for too little reward. It is what allows us to wager our hard-earned money on untested and unproven market signals. Indeed, almost by definition, beginning traders start their trading careers in an overconfident state. After all, in what other performance field–sports, music, or chess–would a newcomer enter a competition with experienced professionals and truly hope to compete?
Research reviewed by Scott Plous in his book “The Psychology of Judgment and Decision Making” suggests that overconfidence is greatest in situations where individuals have no better than chance odds of being correct in their judgments. One of the reasons for this is called the Gambler''s Fallacy. A person who guesses market direction once a day and has a 50/50 chance of being correct will encounter, on average, about six occasions per year in which he or she is correct five times in a row. Some of these random traders will, by sheer good fortune, hit this streak early on in their career. According to researcher Ellen Langer, early (but random) experiences of success lead individuals to be highly confident in their ability–even when the task is guessing the outcome of coin tosses! This is because they are more likely to attribute success to internal factors–skill–than to situational reasons or chance. The gambler who experiences a (random) streak of wins becomes convinced that he has a hot hand and raises his bets accordingly. The result is predictably disastrous.
Do traders behave differently from gamblers? Research suggests not. Terence Odean found that traders who were most confident in their decision-making traded the most frequently–and lost more money than other traders because of the increased transaction costs. A provocative study from the London Business School presented traders with price data and asked the traders to make trading decisions based on the data. Traders were not informed that the data were generated randomly. The traders who expressed the greatest confidence in their decisions, not surprisingly, were also the ones who, on average, lost the most money. The “illusions of control” demonstrated by these traders can reach extremes bordering on the absurd. In Langer''s studies in which coin tosses were presented as tests of “social cues”, for instance, 40% of all subjects insisted that their ability to guess the outcome of the coin tosses could be improved with practice–and 15% believed that enhanced concentration and an absence of distractions would improve their results.
A different kind of overconfidence can be seen in surveys of traders and investors, asking them for their expectations for the market. Traders feel better about their ability to call market direction than is warranted. For example, in such surveys as those conducted by Investors Intelligence, over 70% of respondents pronounce themselves either bulls or bears–despite the fact that the majority of time the market is range bound. Research cited by Hersh Shefrin, in his review of behavioral finance studies entitled Beyond Greed and Fear, finds that traders are most bullish after extended rises–with inexperienced traders most bullish of all. That is paradoxical, because market returns historically have been greatest following years of decline, not years of strength. Similarly, it is not uncommon to see put-call ratios elevated after a five-day period of decline, despite the fact that returns, on average, are superior following five days of weakness than after five strong days. Quite simply, traders extrapolate from the past to the future–and confidently act upon these (false) expectations.
Is it possible to immunize oneself from overconfidence? My personal therapy for treating overconfidence has been to test out my trading ideas and calculate: a) precisely how often the pattern would have been successful if used in the past; and b) how much of a P/L edge was present over that time. Those statistics, which I report on my blog, ground me in the inherent uncertainty of markets and prepare me for the very real possibility, with any trade idea, that I will be wrong. This, in turn, has helped me greatly with risk management, as I am unlikely to wager a large proportion of my trading stake on any uncertain proposition–even when the odds are in my favor. The past is hardly a guarantor of the future, but by assuming that the future won''t be better than the past, we can soberly assess the downside and avoid overconfidence.
The best trades, I find, have enough of a historical edge to make me feel confident about the idea, but also enough potential downside to prevent me from feeling overconfident. Planning for each trade being a potential loser may seem counterintuitive, but it keeps risk management sharp and overconfidence at bay. And that makes a world of difference to the bottom line.
Brett N. Steenbarger, Ph.D.