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Twisting the Data: The Fed, Correlations and Intoxication

It is amazing how quick people are to forget how wrong one prediction is, only to move onto believing in another prediction. An excerpt from the chapter “Intoxication”, in Trend Commandments:

A bipolar prediction came across my desk recently: “If the market rises over the next several weeks, today will have been a good day to buy. However, no one can know the answer today. Every day there seems to be a surprise. We don’t know how to predict the behavior of foreign countries or their attacks.”

The nonsense doesn’t stop there. While on the East Coast recently, I was listening to an AM radio finance show. An older man called in to ask how he could buy into various commodity markets. He was worried that they had run too far already. The female host assured him that there was plenty of time and to jump into the market. The caller mentioned that he liked to buy low and was waiting for a pullback. The host told him to start preparing for hyperinflation. She named an African country to enhance her theory and leaned the conversation toward food insurance, needed of course for the coming descent into anarchy.

Think not knowing what you are talking about is new? Think again. President Herbert Hoover circa May 1930: “While the crash only took place six months ago, I am convinced we have now passed through the worst—and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.” Can’t just pick on old-timers. Consider the current day. Lloyd Blankfein (head of Goldman Sachs) said his firm would have survived the credit crisis without government help. The firm’s president, Gary Cohn, was more definitive: “I think we would not have failed. We had cash.” Treasury Secretary Timothy Geithner countered, “None of them would have survived” without government help.

More contradicting rhetoric from a 2010 60 Minutes interview reinforces the propaganda spell cast:

Scott Pelley: “Is keeping inflation in check less of a priority for the Federal Reserve now?”

Ben Bernanke: “No, absolutely not. What we’re trying to do is achieve a balance. We’ve been very, very clear that we will not allow inflation to rise above two percent or less.”

Pelley: “Can you act quickly enough to prevent inflation from getting out of control?”

Bernanke: “We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.”

Pelley: “You have what degree of confidence in your ability to control this?”

Bernanke: “One hundred percent.”

That confidence seems misplaced when you consider Bernanke’s words but a few years before:

In 2005, Bernanke said: “We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s going to drive the economy too far from its full employment path, though.”4 In 2006, Bernanke said: “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

In 2007, Bernanke stated: “At this juncture…the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”

Worse yet? Bernanke told the Senate Banking Committee in March 2011 that he saw “little evidence” that the stock market was a bubble, but provided certainty with this ditty of a response: “Of course, nobody can know for sure.” Why again do we care what this man says?

Not only can the pros not understand the data, but the conclusions they draw are almost always wrong.

Feedback in that adds to my thought:

Hi Mike, thought you might enjoy these. I listen to some of the BBC “More or less” podcasts, found this one (spurious correlations) when scrolling through their archives. So many out there (not just in finance) tend to torture data to find what supports their bias. The podcast and site do a good job at poking some fun at those tendencies.

Thanks!

For the audience:

Podcast “More or less: Behind the stats”: http://www.bbc.co.uk/programmes/p0201hpg

Spurious Correlations website: http://www.tylervigen.com/spurious-correlations

Ep. 386: Expanding Your Thinking with Michael Covel on Trend Following Radio

Expanding Your Thinking with Michael Covel on Trend Following Radio
Expanding Your Thinking with Michael Covel on Trend Following Radio

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Today on Trend Following Radio Michael Covel takes time out to highlight the fact that trend following isn’t only about trading. From gamblers to pharmaceutical executives to those in the film and music industries, trend following is a strategy rooted in human nature itself.

As an example, Michael examines the success of film producer Jason Blum. In direct opposition to the Hollywood mantra of Spend! Spend! Spend!, Blum has chosen another path. Blum, recognizing that big budgets don’t necessarily mean big profits, developed a filmmaking system based on low budget projects. Blum fully understands that close to half of his films will flop. But he also understands that a handful of box office successes will more than cover those losses. This is the essence of trend following.

Michael goes on to quote from a 2005 article by best-selling author Michael Crichton. Crichton, talking about the then-burgeoning field of futurism, explains that these so-called futurists don’t actually know any more about the future than the average man on the street. These “experts” are guilty of the same flawed thinking that spews forth from the minds of traders who think they know what the market will do tomorrow.

In this episode of Trend Following Radio:

  • Why embracing uncertainty pays big
  • Trend following: it’s human nature
  • Losses: acceptable when you strategize to cover them
  • The sunk cost fallacy
  • Opening your mind to alternative ways of thinking
  • The mistake of blindly accepting the word of “authorities”

“I remind you there is a new kind of special occupation. I refuse to call it a discipline or a field of study. It’s called futurism. The notion here is that there is a way to study trends and know what the future holds. That would indeed be valuable if it were possible. But it isn’t possible. Futurists don’t know any more about the future than you or I. Read their magazines from a couple years ago and you’ll see an endless parade of error.” – Michael Crichton

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Ep. 385: Paul Slovic Interview with Michael Covel on Trend Following Radio

Paul Slovic Interview with Michael Covel on Trend Following Radio
Paul Slovic

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This time on Trend Following Radio, Michael Covel talks with Paul Slovic. Paul is president of Decision Research and a professor of psychology at the University of Oregon, and today he talks with Michael about the science behind risk perception.

To demonstrate how people tend to conflate actual risk with their perceptions of risk, Michael and Paul discuss a topic that’s always been a hot button issue in the public consciousness, nuclear power. In the early days of this industry, people were rightfully concerned with the possible mismanagement of such a potentially dangerous technology – concerns seemingly crystallized by the partial meltdown at Three Mile Island in 1979. Similar concerns continue to be raised today, particularly in light of the Fukushima disaster of 2011. But as Paul explains, neither of these tragedies can completely outweigh the obvious benefits of nuclear power. It’s a case of risk perception to overcome the actual risk posed.

The conversation also focuses on the role of the media in influencing people’s decision-making processes. Why is it, you might ask, that the media spends so much more time pushing negative stories than positive ones? The answer, according to Paul, goes back to biology. It’s a survival mechanism in human beings that we’re affected far more by negative stimuli than positive stimuli. This makes sense when you consider the external dangers we’ve faced in our evolution. So today, we tend to harp on the bad things that happen while ignoring the good.

In this episode of Trend Following Radio:

  • The psychometric paradigm of risk perception
  • Balancing risk vs. reward
  • The concept of affect heuristics
  • How the media sways the public’s risk assessment
  • Fast vs. slow thinking
  • Risk in the context of decision making

“Bad is stronger than good. If something goes wrong in a system it decreases our trust in the management of that system more than when something goes right. Something goes right, it doesn’t really boost our trust and confidence. It’s the negative that outweighs the positive, and the negative is being conveyed to us much more frequently and forcefully through the media than the positive is.” – Paul Slovic

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Ep. 384: Living by Your Own Rules with Michael Covel on Trend Following Radio

Living by Your Own Rules with Michael Covel on Trend Following Radio
Living by Your Own Rules with Michael Covel on Trend Following Radio

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On today’s show, Michael Covel talks about decision-making, and how too often people allow the “rules” of others to dictate the actions they take. This, as Michael explains, is indicative of the politically correct culture that’s taken root in all of society.

What are we to think when wildly successful comedians such as Jerry Seinfeld, Louis C.K, and Chris Rock flat-out refuse to play college campuses because of the closed-minded, irrationally sensitive nature of today’s student bodies? How have we arrived at a place where anything less than absolute conformity to preselected attitudes and beliefs means running the risk of being labeled “something”? Racist? Homophobic? Sexist? The list goes on.

What’s worse, as Michael points out, is that this culture of victim-hood has many feeling they’re entitled to certain things simply because they “exist”. These are the people who blindly accept societal rules, rather than analyze and develop proper strategy. Good decision-making, whether in trading or everyday life, means developing a plan and a set of rules and then sticking to them. Because in the end, everyone gets what they want (to paraphrase trader Ed Seykota).

In this episode of Trend Following Radio:

  • Good decision-making through clarity
  • Examining identity politics
  • Operating under your own rules
  • Political correctness: it’s about agendas
  • Good trading means using your system and your mind
  • The importance of staying focused

“We’ve been crippled by social security, Medicare, Medicaid, by welfare, by entitlements. And that is the root of the problem. Entitlements. Let me be clear…You are entitled to nothing.” – Frank Underwood

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Ep. 382: Dissecting Duplicity with Michael Covel on Trend Following Radio

Dissecting Duplicity with Michael Covel on Trend Following Radio

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On today’s show Michael Covel examines the duplicitous nature of the mainstream financial media, how its talking heads insist on pretending they can predict the future, and how even its most respected publications promote seemingly opposing ideas.

To emphasize his point, Michael opens the discussion by talking about the publication process for his first book, Trend Following. After being passed on by one publisher, he was eventually signed by the publishing side of the Financial Times conglomerate. The same FT, as Michael points out, that’s been trashing trend following for decades.

And nothing has changed. Michael reads from a September 2015 FT article in which author Stephen Foley gives trend following the traditional mainstream bashing we’ve come to except. But in the same issue, FT conducts an interview with Nobel Prize-winning economist Robert Shiller, in which Shiller says, he sees a massive stock market bubble – the kind of thing trend following has repeatedly proven to be best-equipped to handle.

In this episode of Trend Following Radio:

  • Trend following: a system, not a theory
  • Opinions are worthless without strategy
  • The mainstream media’s continued attacks on trend following
  • No one knows the future – embrace the idea
  • Theories are conjecture
  • Focus on the now – that’s the indicator

“So there is a bubble element to what we see, but I’m not sure the current situation is a classic bubble, because I’m not certain that most people have extravagant expectations.” – Robert Shiller

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Ep. 380: Lessons from Ken Tropin with Michael Covel on Trend Following Radio

Ken Tropin
Ken Tropin

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On today’s show, Michael Covel talks about how people that are ahead of the curve often find themselves isolated – even ridiculed – by those who don’t yet get it. This, as Michael points out, is certainly true for trend following traders, and some of the sharpest push back comes from the talking heads of the media.

To emphasize his point, Michael plays clips from an interview between CNBC’s Joe Kernen and Graham Capital’s Ken Tropin, a highly successful trader who heavily incorporates trend following techniques into his overall strategy. To Michael, of utmost significance in the two men’s exchange, is the fact that Kernen bumbles through the interview wholly unprepared (either via incompetence or on purpose). Kernen didn’t respect Tropin or his strategy enough to do even the most basic homework beforehand.

Michael’s discussion then moves on to the topic of uncertainty. In direct opposition to media personalities, that are paid to pretend to know what the market will do, trend following traders embrace the knowledge that they can’t predict the future. Uncertainty makes the game more exciting, and not just the investment game. As Michael demonstrates, the principles of trend following can be effectively applied across myriad disciplines.

In this episode of Trend Following Radio:

  • Recognizing that without a strategy, you’re at the mercy of the machine
  • Embracing uncertainty
  • Understanding that knowing every market move won’t help without a plan
  • The importance of setting your strategy beforehand
  • Seeing that media personalities are paid to pretend to know all
  • How the principles of trend following apply to other disciplines

“Trend following is one of the most mature and well-established systematic trading styles with a thirty-three year track record of profitability.” – Ken Tropin

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Ep. 378: Embracing Failure with Michael Covel on Trend Following Radio

Embracing Failure with Michael Covel on Trend Following Radio
Embracing Failure with Michael Covel on Trend Following Radio

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On today’s show Michael Covel vents some of the frustration he’s been feeling over the past few weeks. Central to his discussion is the idea of failure, and how the vast majority of people are unable – or unwilling – to accept how vital it is to overall long-term success.

Michael opens by pointing out that most people today seem to be under the delusion that someone will always be there to take care of them. This, as Michael explains, is by design. Government and the talking heads of the media want the average citizen to be soft, dependent, and unwilling to take risks. Safety and security, according to the official line, should be valued above all else (even if it is all an illusion).

But this line of thinking doesn’t account for the truly successful of the world. Those who’ve risked everything and succeeded – specifically because they failed and learned from their mistakes. Success requires tenacity and dedication, but neither are required if you don’t take a risk in the first place. Because if you never take a shot, you’ll never hit the target.

In this episode of Trend Following Radio:

  • Understanding that success requires failure
  • Seeing past investment myths
  • Recognizing that no risk means no profits
  • Understanding that there’s no such thing as a perfect strategy
  • Shattering the notion that someone will always take care of you
  • Accepting that there are no guarantees

“I’ve failed over and over and over again in my life. And that is why I succeed.” – Michael Jordan

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