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Shalom Hamou
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Our Goal: Propose as soon as possible an economy after the inevitable financial crash has occurred. That market economy is free of credit. So it will strip the banks from their relevance. Registration for ☮ La Nouvelle Économie. will be closed the day of the crash at the close of the NYSE,... More
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☮ La Nouvelle Économie.
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  • Strategy for a Liquidity Trap. 0 comments
    Jul 15, 2009 4:05 AM | about stocks: AGG, AGZ, BHD, BIV, BWX, BWZ, EDV, IEF, IEI, IGOV, ISHG, QQQ, SPY, SLV, UGL, OIL, JJC, GLD, GBS, GLL, SCO

    Plea for a New World Economic Order.

    Strategy For a Liquidity Trap: Wednsday 15
    tn, 2009.

     

    "Prediction is very difficult, especially about the future."
    Niels Bohr Danish physicist (1885 - 1962)

    Abstract:

    My strategy relies on my analysis of the Market: "Plea for a New Economic Order." However I explain there that there is no way of predicting the Crash. Hence the hypothesis I make here of the Market getting to SP500 = 1015 is based solely on my 24 years experience of the behaviour of financial Markets, hunch and intuition. I believe it is reliable.

    This strategy concerns only the Markets I have superior knowledge of:  fixed rates and yield curve, stock indices and minerals.

    It is highly advisable to play a portfolio in these different segments (as we have no superior knowledge of individual specific risk which, hence mut be diversified.) and to play a portfolio of those different Markets giving some weights to fixed incomes, stock indices and minerals.

    Strategy:

    Hypothesis:

    The long-term yields will continue their downward trend. Hence the yield curve will get more inverted and the volatility of interest rates will go down till the Liquidity Trap.

    Because in a configuration of inverted yield curve bankers chase yields I anticipate that the inversion of the curve will increase and risk spreads will shrink.

    Those lower interest rates will be favoured by their lower volatility [Confer: Chapter I: Model of the Yield Curve.].

    The Market will get some stability from the talks about a second round of stimulus package whether it finally emerges or not.

    However the inversion of the yield curve will be soon unsustainable.

    When we get to the key level of 1015 on the SP500 the Market will be very fragile and as it gets to a strong technical resistance any random shock can trigger the Liquidity Trap. 

    That last hypothsis would hold only on the condition that at that time the rate of the 30 Years Treasury Bonds will be below 4.15%.

    Another condition of a Liquidity Trap would be that the price of mineral go up.

    A Liquidity Trap [Confer: Keynes' Liquidity Trap:  A Theoretical Curiosity.] supposes a small shock. History remembers that what triggered Black Thursday was the failure of a small Austrian bank nothing close to a Lehman brother or a Bear Stearn!

    For a description of the Crash Confer: Chapter III.Greenspan Conundrum and Bernanke Global Saving Glut.Paragraph 3: Bubbles & Bursts.s.

    In the unlikely case I change my minde based on my intuition, feeling or hard facts I will Twit.

     

    Minerals:

    As the yield curve is inverted and will probably get more so till Keynes' Liquidity Trap, I am still long the minerals (Oil, Precious Metals (Gold, Silver,..),  Base Metal (Copper)...) [Confer:  Chapter V:The Myth of Inflation., Paragraph 1:The Commodity Conundrum Solved! The Hidden Parameter of Interest Rates.].

    Attention: my research does not cover natural gas or agricultural commodities.

    As I make the assumption that for SP500 = 1015 the unstable equilibrium will be resolved, and the yield curve normalized, I will square the positions and get short with puts deep out of the money.

    In the meantime an obvious pivotal point on WTI (Crude Oil) is $61.5. Expect an explosive behaviour once that key point is transgressed.

    Reminder: before the Liquidity Trap there is no theoretical upper limit for the price of minerals.

    Treasuries:

    I am still long the Treasuries (long-dated). Expecting a normalization of the yield curve I will square the position and go short for SP500 = 1015.

    A vital pivot is 41.56 (4.156% on the 30 Years Treasury Bonds) the recent low on TYX (07/08/09) which is close to 41.51 (4.151% on the 30 Years Treasury Bonds) the lowest point established before the present economic crisis on 06/03/05. Should that pivot not be transgressed I would revise my 1015 point for Liquidity Trap on the SP500.

    However as I was told by my mentor in technical analysis: "Double tops and double bottoms simply don't exist." he meant for long-term Market trends.

    I have no reason to expect a change in the secular trend of long-term yields. [ Confer: Chapter III.Greenspan Conundrum and Bernanke Global Saving Glut. and Chapter III.Greenspan Conundrum and Bernanke Global Saving Glut.Greenspan Conundrum and Income/Wealth Disparities.]

    It seems strange to expect a rising price of mineral and decreasinng long-term yields. In fact my model of the yield curve says that long-term yields don't depend on inflation or inflation expectation unless the FED rises its target rates accordingly. That won't happen because Bernake knows very well that should he raise the target rates he would cause a immediate catastrophe and he would be the apparent cause of the crash. Believe me he doesn't want that.

    A good objective would be 3,80% for the Yield of the 30 Years Treasury Bonds (Extension of Fibonnacci for 50.66 - 41,5).

    SP500 = 1015 and TYX = 38.00 would make me completely confident.

     
     
     

    Corporate Bonds:

    I don't touch anything below AAA. I am still long corporate bonds will short for SP500 = 1015. As bankers do they jobs and chase yields. And every risk spread shrink. We will have a configuration we have not seen in recent times: long-term yields go down and risk premia go down.

    Stocks:

    Still long the stocks will square and go short on SP500 = 1015. The behaviour of the Market looked worrying recently but the way it resist to the long set back is precisely why I estimate that the Liquidity Trap is not close and comfort me on the long outlook for stock.

    The obvious key point is 929 which I consider more important than the recent high of 957.2.

    Don't ask me questions about any specific company or security: I don't have a clue!

     
     

    Trading Tactics:

    Whatever technical systems one use he must stay disciplined. Creativity is before action. Execution exclude any creativity.

    It is far better to use a bad system with discipline than to use an excellent system with none.

    You may have great trading ideas but lack of trading discipline may get you bankrupt.

    Traders more of then than not fall in love with their positions. Probably because they identify their success with their own personal value. Nobody is perfect and everybody makes mistakes. Your ideas are tools they are not you.

    As a result they tend to let their loss run and book their gains. They gain as churls and lose like Kings. When they should cut their losses and let their gains run.

    They should never try to pick a bottom or a top: when it succeed it may make them feel they are the King but it rarely succeeds (except on the pit.) One is much better off if he checks first that the trend has started even slightly: the Trend is their Friend.

    If they are buying and they believe the Market is overbought the should diminish or square the position not go short: there have been too many traders that have lost their shirt trading against their great idea.

    However:

    Like always the Liquidity Trap is an exception:

    On the day of the Liquidity Trap the Market will be so overbought they will probably have sold it much lower and be cutting their loss when time will have come to sell.

    They can't follow the trend in a discontinuity so they have to pick the Top. But that is a perilous adventure:


    "The market can stay irrational longer than you can stay solvent"
    "There is nothing so disastrous as a rational investment policy in an irrational world."

    They should cut your gains: the counterpart will be bankrupt, to what use is it to have a bankrupt entity owe you money (That includes an exchange or the entity from which they have borrowed the stocks they shorted.): cash in when they are still solvent!

    The best strategy would be to stay on the sideline.But would their animal spirit will let them do that?


    All of This Stays True Until the Poor Becomes Richer Relatively to the Rich.

    My Political Orientation According to Nolan Chart Survey!

     
    Extreme Economic Conditions Call for Radical Solutions.
    The Provocative & Controversial Innovation
    Since John Maynard Keynes and Friedrich August von Hayek.


    It is of the Uttermost Importance That, When the Crash Comes, Which It Will Inevitably Do, we Restore as Fast as Possible the Economy by Implementing our Plausible Alternative Solution as to Minimalize the Economic Sufferings of the People. To That Order I am Building Redundant Social Networks. Please Grow the Networks!


    You Can Comment on This Article Here.

    I Will Incorporate Any Meaningful Contribution Into my Tract and Credit the Author.
    If you Believe you can Make a Significant Contribution to my Work Please Apply Here.

    I stand ready to give some sort of exclusivity for my future articles in exchange for substantial coverage.
    Otherwise read the Publisher Agreement.

    The Tract will be ready to go to for edition on August 1st, 2009. I am looking for an editor.

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