At the same time, a stock I’ve had my eye on for some time – after owning it for most of last year – is Nintendo. It was a monster for the first ten months of last year – it’s been a dog most of the time since. But the last few weeks it’s improved. And now it’s threatening to break out.
This kind of price action doesn’t quite fit my crowding out theme – when resources outperform to the exclusion of most other sectors – especially consumer stocks. So it’s time to look at how I could be wrong.
I’ve enlisted the help of a cracking book called ‘The Psychology of Intelligence Analysis’ by Richard Heur. In it he describes the cognitive biases analysts have looking at data. Heur says that our brains just ain’t wired right to look through the natural fog of uncertain and incomplete data, and the man made fog of deception and bias.
So Heur developed a number of techniques for raising the bar in intelligence analysis – and one of his key recommendations; spend as much time thinking about how you think as about the analysis at hand. Now that may sound a bit self-indulgent, after all who’s got the time? The problem is that it’s probably right.
Most people, me included, tend to go with the first analysis that they come up with that fits the facts, and then stick with it as if their lives, or at least their reputations, depended on it. And then all sorts of biases creep in – the big ones being to search out data that confirms the thesis, while downplaying data that contradicts it.
Heur says we should use aah – analyse alternative hypotheses. Constantly.
Now, there are two main hypotheses that compete with the crowding out call.
The first is the deflationary boom call. This is what Gavekal (http://www.gavekal.com/) call ‘the natural state of capitalism’ – falling commodities, rising corporate value added. Gavekal has been hoping for a spontaneous fall in commodities for over a year. They may get their wish for a while – some commodities and resource stocks are overextended, some have large speculative length. But I still see above trend demand and below trend resources supply this year. I don’t see a strong case for anything but a temporary ‘disinflationary boom’.
Second, the deflationary bust. There are lots of people who believe that the credit crunch will lead to an inexorable fall into deflation. There are some strong arguments for this call. Not least from Edward Chancellor and other disciples of Minsky. But the one I most enjoy reading is from http://www.elliotwave.com/ - they put us in a final 5th wave of the commodities boom, and already over the top of wave II ‘up’ of a supercycle 5 waves down in equities.
Now this might sound like Greek to some, but what the Elliot wave theorists argue is that we see major feedback loops between markets and society. When this kind of market action has happened before – from 1979-82, it was marked by certain traits in society; fear of terror, fear of environmental collapse, food hoarding and fear of resource scarcity. And the rise of the anti-hero in the big movies and TV series of the day.
You have to admit, the similarities are spooky. In terms of anti-heroes I’m currently torn between Daniel Day-Lewis in ‘There Will be Blood’, the guy with the weird haircut in ‘No Country for Old Men’, McNulty in ‘The Wire’, and Vic Mackey in ‘The Shield’. Check out http://museumofthe70s.blogspot.com/ for more ‘70s references. Maybe the Elliot Wave boys are onto something.
Now in terms of covering against the risk that we are approaching a serious deflation, I think my short Eastern Europe trades will work – and they would also be the canaries if things were starting to deteriorate. I will likely double them up at the expense of my resource holdings if the trade gains momentum.
If we move to sustained disinflationary boom – something I think is a very low probability event – then my fund will get into difficulty. I’ll get stopped out of my Eastern European shorts at the very least.
Right now, I still think the crowding out call is the one that best fits the facts. But I’m aware that things could get volatile in the current consolidation. So I’ve hedged some resources exposure – to protect myself from wanting to cut what are meant to be long term holdings at the lows. I’ve shorted some gold, cable and the Euro. Right now, the hedges are doing their job; they’re making money and I’ve not felt the need to cut any stocks.
I’ve enlisted the help of a cracking book called ‘The Psychology of Intelligence Analysis’ by Richard Heur. In it he describes the cognitive biases analysts have looking at data. Heur says that our brains just ain’t wired right to look through the natural fog of uncertain and incomplete data, and the man made fog of deception and bias.
So Heur developed a number of techniques for raising the bar in intelligence analysis – and one of his key recommendations; spend as much time thinking about how you think as about the analysis at hand. Now that may sound a bit self-indulgent, after all who’s got the time? The problem is that it’s probably right.
Most people, me included, tend to go with the first analysis that they come up with that fits the facts, and then stick with it as if their lives, or at least their reputations, depended on it. And then all sorts of biases creep in – the big ones being to search out data that confirms the thesis, while downplaying data that contradicts it.
Heur says we should use aah – analyse alternative hypotheses. Constantly.
Now, there are two main hypotheses that compete with the crowding out call.
The first is the deflationary boom call. This is what Gavekal (http://www.gavekal.com/) call ‘the natural state of capitalism’ – falling commodities, rising corporate value added. Gavekal has been hoping for a spontaneous fall in commodities for over a year. They may get their wish for a while – some commodities and resource stocks are overextended, some have large speculative length. But I still see above trend demand and below trend resources supply this year. I don’t see a strong case for anything but a temporary ‘disinflationary boom’.
Second, the deflationary bust. There are lots of people who believe that the credit crunch will lead to an inexorable fall into deflation. There are some strong arguments for this call. Not least from Edward Chancellor and other disciples of Minsky. But the one I most enjoy reading is from http://www.elliotwave.com/ - they put us in a final 5th wave of the commodities boom, and already over the top of wave II ‘up’ of a supercycle 5 waves down in equities.
Now this might sound like Greek to some, but what the Elliot wave theorists argue is that we see major feedback loops between markets and society. When this kind of market action has happened before – from 1979-82, it was marked by certain traits in society; fear of terror, fear of environmental collapse, food hoarding and fear of resource scarcity. And the rise of the anti-hero in the big movies and TV series of the day.
You have to admit, the similarities are spooky. In terms of anti-heroes I’m currently torn between Daniel Day-Lewis in ‘There Will be Blood’, the guy with the weird haircut in ‘No Country for Old Men’, McNulty in ‘The Wire’, and Vic Mackey in ‘The Shield’. Check out http://museumofthe70s.blogspot.com/ for more ‘70s references. Maybe the Elliot Wave boys are onto something.
Now in terms of covering against the risk that we are approaching a serious deflation, I think my short Eastern Europe trades will work – and they would also be the canaries if things were starting to deteriorate. I will likely double them up at the expense of my resource holdings if the trade gains momentum.
If we move to sustained disinflationary boom – something I think is a very low probability event – then my fund will get into difficulty. I’ll get stopped out of my Eastern European shorts at the very least.
Right now, I still think the crowding out call is the one that best fits the facts. But I’m aware that things could get volatile in the current consolidation. So I’ve hedged some resources exposure – to protect myself from wanting to cut what are meant to be long term holdings at the lows. I’ve shorted some gold, cable and the Euro. Right now, the hedges are doing their job; they’re making money and I’ve not felt the need to cut any stocks.
by Anthony Sampson 
by Clayton Christenson 
by Richard J Heuer Jnr 
by Adam Smith 
by Edward Chancellor 
by Adam Smith 
by Adam Smith 
by Adam Smith 
by Tom Hodgkinson 
by Curtis Faith 
by David Spanier 
by Robert Prechter 
by Russel Napier 
by Bjorn Lomborg 
by Valclav Smil 
by Jared Diamond 
by William Greider 
by Mark Penn 
by Benoit Mandelbrot 
by Ben Bernanke 
by David Hacket Fischer 
by Janet Lowe 
by G C Selden 
by Barry Eichengreen 
by Barry Eichengreen 
by Barry Eichengreen 
by Nigel Lawson
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