Certainty in market is road to bankruptcy...
O Ashuji....
Biggest and Costliest mistakes in markets when one is certain about outcomes. Certain outcomes happens only in theory wherein cost of mistake is nothing. Economists/Analysts are certain about their projections to the second decimal point and their confidence is positively correlated with their ability to go wrong consistently. One of the most exciting part about market is outcomes are probabilistic and hence there is grey shade to every trade.
Certainty about outcome is road bankruptcy in markets....
High leverage in any trade in undertaken precisely when risk is at its highest and driving force behind such high leverage is confidence in outcome of the trade. Confidence typically comes when trend has been in place for some time or through illusion of control based insider information/some one's ability to control market. When everyone is convinced about an idea then idea is usually a costly one. I will put few examples of how certainty is quite dangerous in market context...
1) Indian market had traded on upper limit of 20% on 18 May, 2013 with Congress government coming back to power with vast majority. Everyone was convinced that it was golden time for reforms since belief was lack of majority was holding back crucial decisions. What happened after that is known story. Indian had one of the worst government in living memory. Growth slowed down sharply, policy decision came to standstill, rupee collapsed, corruption was the only game......outcome was exactly opposite of what was perceived when government won with thumping victory.
2) John Paulson became household name with greatest trade ever (shorting Sub-Prime MBS during financial crises). He became one of the wealthiest american on one trade. With that trade he was widely followed and his next big trade was as much public as his short trade on MBS was private. His next big trade was Gold and confidence in this trade for most people was very high. Confidence not only in logic of the trade but ability of John Paulson. What has happened to Gold is now history...
3) Similar confidence was in commodities post 2008 financial crises when Fed initiated all sorts of QEs and easy monetary policies....Experts like Jim Rogers and many others were visionaries...but market is humble and makes visionaries more humble...
One can find many such examples where certainty about outcomes is very dangerous thing to bet on....
Confidence in Bernanke Put....
What is most dangerous is confidence in person who is confident about everything....I was listening to today's testimony of Ben Bernanke to congress. I just amazes me how can someone be so confident about outcomes on things as complex as economic outcomes. Not only he had confidence in his ability to project all economic variables (in spite of being consistently wrong in past) but also winding down huge Fed balance sheet without market disruption.
Not only American Media discusses him very often but he is discussed more often on Indian business channels. Bernanke becomes standard disclaimer in every fund manager's recommendation. Such naive disclaimers goes to show how useless these fund managers are because basic tenet of market is MARKET IS SUPREME. In short term sentiments drive market. Market which was ripe for correction corrected post Bernanke testimony on 22 May 2013. Correction across asset class was sharp and due for bounce yet even for bounce Bernanke was responsible with his soothing words that QE will continue. Thus, market confidence is as high as it can be with guy responsible for shake up and bounce later. Now, lets look at few facts.
1) S&P 500 corrected 6-7% from May 2013 high and are now back to new highs.
2) Most emerging market currencies and bonds continue to suffer badly.
3) US10 Year yields shot from 1.6% to 2.7% and are currently at 2.5% (despite all soothing word from Big Ben)...Yields have hardly retraced their gains.
4) Gold silver collapsed and have hardly bounced.
Equity is the only market which has bounced and made new highs while other markets continue to struggle.....thus fact speaks otherwise while confidence in Bernanke soared....TIME TO SELL BEN PUTS....
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