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Not Even Close

From CNBC recently:

“Such [trend following] funds use computer models to predict trends in the prices of stocks, bonds, currency, commodities and other markets, betting that valuations tend to revert to a mean following swings up or down.”

On the basic description of trend following strategy how does he get it so wrong? Not even close. Predictions? Valuations? Mean reversion?

Note: My email exchange with the author:

Me: In your piece you say this: “Such funds use computer models to predict trends in the prices of stocks, bonds, currency, commodities and other markets, betting that valuations tend to revert to a mean following swings up or down.” On the basic description of the strategy how do you get it so wrong? Like not even close. Curious.

CNBC: Thanks for the feedback. What about it do you think is off?

Me: When did trend following become about predictions, mean reversion and value? If you did not know and got it wrong, ok. But should correct it.


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Inequality, Free Markets and Crashes

Nassim Taleb and Mark Spitznagel talk about how government intervention postpones the inevitable. Excerpts:

Taleb: Mark, your book is the only place that understands crashes as natural equalizers. In the context of today’s raging debates on inequality, do you believe that the natural mechanism of bringing equality — or, at the least, the weakening of the privileged — is via crashes?

Mark: Well straight away let’s ask ourselves: Are we really seeking realized financial equality? How can we ever know what is the natural or acceptable level of inequality, and why is it even the rule of the majority to determine that? That aside, one can absolutely say logically and empirically that asset-market crashes diminish inequality. They are a natural mechanism for this, and a cathartic response to central banks’ manipulation of interest rates and resulting asset-market inflation, as well as other government bailouts, that so amplify inequality in the first place. So crashes are capitalism’s homeostatic mechanism at work to right a distorted system. We are in this ridiculous situation where utopian government policies meant to lessen inequality are a reaction to the consequences of other government policies — a round trip of market distortion. After we’ve been run over by a car, the assumed best treatment is to back the car over us again.

Taleb: I see you are distinguishing between equality of outcome and equality of process. Actually one can argue that the system should ensure downward mobility, something much more important than upward one. The statist French system has no downward mobility for the elite. In natural settings, the rich are more fragile than the middle class and we need the system to maintain it.

More:

Spitznagel: Well straight away let’s ask ourselves: Are we really seeking realized financial equality? How can we ever know what is the natural or acceptable level of inequality, and why is it even the rule of the majority to determine that? That aside, one can absolutely say logically and empirically that asset-market crashes diminish inequality. They are a natural mechanism for this, and a cathartic response to central banks’ manipulation of interest rates and resulting asset-market inflation, as well as other government bailouts, that so amplify inequality in the first place. So crashes are capitalism’s homeostatic mechanism at work to right a distorted system. We are in this ridiculous situation where utopian government policies meant to lessen inequality are a reaction to the consequences of other government policies — a round trip of market distortion. After we’ve been run over by a car, the assumed best treatment is to back the car over us again.

More:

Spitznagel: The main metaphor of my book is the “Yellowstone effect”: A massive fire in Yellowstone Park in 1988 opened the eyes of foresters to the fact that a century of wildfire-suppression, and with it competition- and turnover-suppression, had only delayed, concentrated, and by far worsened the destruction — not prevented it. This isn’t just about dead-wood accumulation creating a fragile tinderbox network. The real issue is how our tinkering artificially short-circuits the fundamental capacity of the system to allocate its limited resources, correct its errors, and find its own balance through the internal communication of information that no forestry manager could ever possibly possess. (The more this is mocked by technocratic naïfs like Geithner, the more valid it is.) But that capacity is still there, and homeostasis ultimately wins through a raging inferno. This is a cautionary tale for our economy. A crash, or the liquidation of assets that have grown unimpeded by economic reality (as if there were more nutrients in the ecosystem than there actually are), looks to academics and bureaucrats — and just about everyone else as well — like the system breaking down. It is actually the system fixing itself.

Food for thought.


How can you move forward immediately to Trend Following profits? My books and my Flagship Course and Systems are trusted options by clients in 70+ countries.

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Research
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Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.

Ep. 244: Walter Williams Interview with Michael Covel on Trend Following Radio

Walter Williams
Walter Williams

My guest today is Walter Williams, an American economist, commentator, and academic. He is the John M. Olin Distinguished Professor of Economics at George Mason University, as well as a syndicated columnist and author known for his libertarian views.

The topics are liberty and economics.

In this episode of Trend Following Radio we discuss:

  • Why Williams calls himself a radical
  • The morality of markets
  • The welfare state and bailouts
  • How Williams didn’t “think poor” growing up
  • The nefarious aspect of minimum wage
  • How Williams stayed positive and avoided bitterness despite opposition
  • Malcolm X. and Martin Luther King, Jr.
  • Why there’s no poverty in the United States
  • How Williams felt about the Fall of 2008 and the bailouts that took place
  • How we got to the point where people want to trust the state so much
  • How Williams has developed a thick skin to deal with the criticism of his radical nature

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“How does something immoral, when done privately, become moral when it is done collectively? Furthermore, does legality establish morality? Slavery was legal; apartheid is legal; Stalinist, Nazi, and Maoist purges were legal. Clearly, the fact of legality does not justify these crimes. Legality, alone, cannot be the talisman of moral people.”

Ep. 243: John Mauldin Interview with Michael Covel on Trend Following Radio

John Mauldin
John Mauldin

My guest today is John Mauldin, a noted financial expert, a New York Times best-selling author, a pioneering online commentator, and the publisher of one of the most widely read investment newsletters in the world.

The topic is finance.

In this episode of Trend Following Radio we discuss:

  • Credit card rates and zero interest rate policy
  • The improper use of credit
  • Debt spirals
  • Central bank policies that keep whipsaw periods going
  • The actions in Japan and how they can spread across the world
  • The justifications that Mauldin sees behind the scenes
  • Black swans and boom-bust periods
  • How the 2008 financial crisis wasn’t a true black swan event
  • The “why” behind zero interest rate policy
  • The specter of Keynesianism over the world

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Two Guys That Have No Clue About Anything: Otherwise Known As Standard Wall Street News

Watch.

I like to review the Linkedin profile of these money reporter types. Their CVs are often more informative than words spoken.


How can you move forward immediately to Trend Following profits? My books and my Flagship Course and Systems are trusted options by clients in 70+ countries.

Also jump in:

Trend Following Podcast Guests
Frequently Asked Questions
Performance
Research
Markets to Trade
Crisis Times
Trading Technology
About Us

Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.

Ep. 242: Jean-Philippe Bouchaud Interview with Michael Covel on Trend Following Radio

Jean-Philippe Bouchaud
Jean-Philippe Bouchaud

My guest today is Jean-Philippe Bouchaud, the Chairman of the multi-strategy quantitative hedge fund Capital Fund Management (5B+ AUM) and co-supervisor of the research team. He is a well known authority in the field of Econophysics, co-author of “Theory of Financial Risks and Derivative Pricing”, a Professor of École Polytechnique where he teaches Complex Systems and has his Ph.D in theoretical physics from École Normale Supérieure.

The topic is Trend Following.

In this episode of Trend Following Radio we discuss:

  • Bouchaud’s physics background and how it collided with the world of classical economics
  • The Black-Scholes model, and its still use; experimenting with simulation
  • Bouchaud and his colleague’s paper, “Two Centuries of Trend Following“
  • The efficient market hypothesis
  • Why the existence of trends is one of the most statistically significant anomalies in financial markets
  • How trends predate trend following
  • Why classical economics has no framework through which to understand “wild markets”
  • Benign randomness vs. wild randomness
  • Accepting uncertainty
  • Differences between physicists and economists

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Trend Following Goes Against Established Orthodoxy

Trend following can be a counterintuitive. It goes against the orthodoxy of buy and hold, fundamental analysis, value investing, Warren Buffett, EMH and Federal-Reserve-Trust-the-Government ZIRP policy. Further, it is not day trading, HFT, Elliott wave or candlestick patterns. All market prediction strategies are false narratives.

Trend following is something different. Trend following reacts to market movements.


How can you move forward immediately to Trend Following profits? My books and my Flagship Course and Systems are trusted options by clients in 70+ countries.

Also jump in:

Trend Following Podcast Guests
Frequently Asked Questions
Performance
Research
Markets to Trade
Crisis Times
Trading Technology
About Us

Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.