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IMF: Dollar Carry-Trade Creating Bubbles Around The World

  
Analysis, Economy, Education, Global Indices
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imf-global data

bubble(1)

Read a PDF of the IMF’s recent report here.

The International Monetary Fund (IMF) highlighted the fact that low interest rates in the U.S., plus an apparent “one-way” bet against the dollar has created a global dollar carry-trade that is driving capital flows into emerging markets.

If not handled properly, this will lead to emerging market asset bubbles, which arguably have already begun to inflate.

We’ve highlighted before how places like Hong Kong are seeing property prices go through the roof due to low U.S. interest rates. (more…)

12 Points about About Investing from Howard Marks

  
  Education
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MUST READ1. “The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.” Psychological mistakes are at the same time the biggest source of danger for an investor and the biggest source of opportunity when other people succumb to those mistakes.  If you can keep your head about you when everyone else is losing theirs, you can profit in ways which beat the market. Howard Marks: “The absolute best buying opportunities come when asset holders are forced to sell.”

2.  “Rule No. 1:  Most things will prove to be cyclical. – Rule No. 2:  Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.” Nothing good or bad goes on forever.  And yet people extrapolate sometimes as if a phenomenon will go on indefinitely. “If something cannot go on forever it will eventually stop” famously said Herbert Stein. Situations in which mean reversion does not happen are rare enough as to make a mean reversion assumption a consistent friend to the investor.

3.  “We don’t know what lies ahead in terms of the macro future. Few people if any know more than the consensus about what’s going to happen to the economy, interest rates and market aggregates. Thus, the investor’s time is better spent trying to gain a knowledge advantage regarding ‘the knowable’: industries, companies and securities. The more micro your focus, the great the likelihood you can learn things others don’t.”  Focusing on the simplest possible system (an individual company) is the greatest opportunity for an investor since a company is understandable in a way which may reveal a mispriced bet. Howard Marks puts it simply:  “We don’t make macro bets.”

4.  “We can make excellent investment decisions on the basis of present observations, with no need to make guesses about the future.”  This video has excellent material from Marks on why trying to make macroeconomic predictions is bound to fail:   https://www.youtube.com/watch?v=2It1fzcBoJU  If great investors like Marks, Buffett, Munger, Lynch etc. can’t make macro forecasts, do you think economists can? If you do believe they can, “Where are the economists’ yachts?”  Howard Marks notes that anyone can be right “once in a row” especially when the range of possible outcomes is small.

5.  “There are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest that you’re wrong. Oh yes, there’s a third; you have to be right.”  Being a contrarian for its own sake is suicidal. Not being a contrarian at all means by definition you can’t outperform the market. Being genuinely contrarian means you are going to be uncomfortable sometimes. Howard Marks adds:  “To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them – ideally all three.” (more…)

7 concepts that can make you a better trader

  
  Education
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New traders spend lot of time on indicators, scans, or chart pattern. Lot of that effort is wasted. Instead they should focus on core concepts.

 
If you understand core concepts you will find understanding the market and techniques used by traders easier. All the indicators and techniques are based on some underlying core concept. Many times the people who promote some of these indicators do not understand the core concept or purposefully package their indicators as something that is anti thesis of a core concept.
 

If you are serious about your trading there are some concepts you must know in significant details. Those concepts will help you build a strong foundation on which you can build a trading system. There are seven  concepts you should study:
  • Momentum : If you understand this you will understand trends and mean reversion. You will understand why and how momentum works in the market. Most indicators are momentum based. Trend following and buying strength also works, so does mean reversion. They are all part of the momentum phenomenon. 
  • Market Breadth: Stock markets are composite markets. The overall move in market is an aggregate of moves of several hundred or several thousand stocks. So the level of participation in a move is important. 
  • Equity Selection: Because the overall market is a composite of many individual moves, it becomes critical to select right kind of stocks from the universe of stocks. Hence equity selection is extremely critical. You should know various ways in which one can select equities.
  • Market Anomalies: Market anomalies are the distortions in the market. If you base your trading on a proven and statistically significant anomaly, you will be profitable. Absent that no amount of indicators will help you. A through understanding of anomalies will give you an edge.
  • Market Microstructure: Market Microstructure is a branch of finance concerned with the details of how exchange occurs in markets.  Understanding this will tell you how the market operates. The concept of market microstructre is very critical if you are trading very small time frames or are a day trader. Because to be successful on those time frame you need to find exploitable anomalies in market microstructure. You need to understand role played by market makers, automated programs, arbitragers, large fund buyers and so on. Their tactics and behaviour creates certain patterns 
  • Growth investing : Growth investors buy stocks of companies growing faster than the average company in the market. 
  • Value investing : Value investors buy stocks of companies which are cheap or out of favor.
These are the core concepts around which all trading strategies revolve.

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