Forex Money Show Keynote Presentation

Here’s an overview of today’s Keynote Address at the Forex Money Show, September 16, 2007, 9:00am


Variant Perception

    -What is it
    -Signs it may be nearby   
        language; things that don’t sound quite right
        listen for weasel words:
              Spend more time with his family
              No one could have forsaw this
    -What it is NOT

1.  EXAMPLES:   
a) Everyone knows that Rate Cuts lead to a weaker U.S. dollar right?

b) What does Radio Sell?   

c) The Persistence of Myths

a) A majority of Americans incorrectly think that Saddam Hussein was directly involved in planning the Sept 11, 2001, terrorist attacks, and that most of the Sept. 11 hijackers were Iraqi.

b) A majority of Arab world are convinced that the destruction of the World Trade Center on Sept. 11 was not the work of Arab terrorists but was a controlled demolition; that 4,000 Jews working there had been warned to stay home that day; and that the Pentagon was struck by a missile rather than a plane.

How does it work? 
    Media reports what already happened
    People can be intellectually Lazy
    Generalities, short cuts, Heuristics
    Sound bites / Bumper sticker media   
    Budget cuts
    MSM / Blogging

Several past, present, future examples of trading Variant Perception & Trading

1. CPI Inflation
    Core Inflation (Inflation ex-inflation)
    History of this is here (Stephen Roach,  Arthur Burns, 1973)
    Milk, Wheat, Beef

TRADE:  long Oil, Gold

2. Employment NFP
    Worst post WW2 recession recovery
    Change in official B/D data (uh-oh)
    Income gains concentrated in top 10%

TRADE:  short Recruitment, Temp Help Firms   
        long Tiffany, Nordstrom’s, Coach

3. Real Estate
    "Backwards" cycle
    Too easy credit
    Speculative excess

WARNING SIGN: Delinquencies, Defaults, Foreclosure in 2006 were greater than new homes built,  according to (database of pre-foreclosure, auction and REO Properties)

TRADE:  Short home builders, mortgage lenders, banks (missed BDs until later)

4.  FOMC meeting (Tuesday)
Fed Futures have been "forecasting" a rate cut since January 2006

5. Confusing Cause & Effect: Rate Cuts, and the Dollar:  Conventional wisdom holds that Fed rate cuts hurt the dollar. FACT CHECK:  In the four rate-cutting cycles since 1990, the dollar actually strenghtened strengthened three out of four times (12 months after initial rate cut)  And the one time it didn’t advance — 1998 — it was flat.

Prior cycles, US markets were outperforming overseas. Now, they are UNDERperforming.  Growth is slowing here, China remains red hot, Europe is strengthening, and record oil prices are fueling the Middle East, Canada and S. America. Oh, and the Euro didn’t exist in those previous cycles.

6.  No Trade? 

“Human beings, as we know them, developed from earlier species of animals.”

It turns out that the United States had the second-highest percentage of adults who said the statement was false
— and the second-lowest percentage who said the statement was true,
researchers reported in the current issue of Science. (Only adults in
Turkey expressed more doubts on evolution).


Now for the hard part: 10 elements that make Variant Perception/Contrary Investing especially tricky:

1) You cannot be a full time contrarian. Why? The crowd is actually right most of the time. Remember, they are what moves markets, why equities go up, why a pop song becomes a #1 hit. Indeed, the crowd is why indexing works.  As Ned Davis asked, "Do you want to be right, or do you want to make money?")

2) Cliches: This gets reflected in such cliches as "Don’t fight the tape" and "The Trend is your friend;" The crowd is neither right nor wrong, but instead is its own truth, a self fulfilling prophesy. 

This leads to some unexpected outcomes. 

3) Expect extremes to get even more extreme: The crowd will take markets much higher and much lower than they should go based on reasonable, logical metrics. The crowd, even when factually wrong, is right most of the time because they ARE the market. 

4) Safety in numbers: No one gets fired for groupthink. In every nature documentary that you have ever seen, its the gazelle at the edge of the herd that the lions devour. The rest of the herd is safely huddled together. Thats the anti-contrarian lesson (if you are a gazelle)

5) Love/Hate are emotions, not investment ideas: Whenever the crowd loves or hates something, it worth noting. That’s when contrarians are the ones who will make a giant score. Think short-sellers in Enron or Tyco, or the buyers of tech stocks in late 2002.

6) From Crowd to Mob: Where Contrarians shine is when the crowd morphs into an angry mob. Once the bulls become convinced the market is invincible, their full throated cries will be readily apparent. So too, the bears, usually in the depths of a recession.

7) Quantify! It is worthwhile to quantify consensus vs variant perception — rather than rely on gut feelings. A few years ago, I put together a guide to the Contrary Indicators of the 2000-03 Bear Market. It outlines both the anecdotal AND the measurable contrary signals (and 2003 was a great buying opportunity). Use both the anecdotal and quantitative approaches in concert.

8) Consensus knowledge already in the price: The idea of Variant Perception is that when most investors know something, it is already built into the stock price. Therefore, going along with the crowd will not generate alpha or above market performance.

9) Consensus equals closet indexing: While I favor indexing for many investors, investing with the consensus can be more expensive. The cheaper way to achieve the end goal of consensus investing at a lower cost is to simply buy and hold index funds.

10) Forget forcasting: Most people do not even understand the present with any precision or accuracy. There’s a reason for that: there are powerful interests with a vested stake in presenting the world in a certain way. Their spin on events serves their own narrow purpose, often to the detriment of the public. (Hence, my tendency to push back and be skeptical of what I am spoonfed).

I include in this group of malevolent spinners the Politicans, Wall Street (especially bulge bracket firms), Government data sources, big Mutual Funds, Media, and Industry spokesgroups.


See also:

Lose the NewsI wish an SEC-mandated disclosure accompanied all pundit forecasts: "The undersigned states that he has no idea what’s going to happen in the future, and hereby declares that this prediction is merely a wildly unsupported speculation."

Folly of Forecasting: News is hardly new. The vast majority of it is backward-looking, informing you as to what has happened already. Investing is about what is going to happen; what’s occurred in the past may be of interest, but it’s hardly germane to the investment process. Indeed, by the time the news is "out," it already has been built into the stock price.

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  1. VJ commented on Sep 16

    Here we go:


    Area homeowners’ taxes left unpaid

    Checks sent out by the troubled American Home Mortgage Investment Corp. to pay the property taxes of more than 70 homeowners in the Baltimore metropolitan area have bounced, local officials said yesterday.

    Baltimore City received bad checks for 53 properties – a total of about $63,500. Baltimore County said American Home Mortgage checks bounced for 21 properties, totaling $41,000. Taxes are due at the end of the month.

    Homeowners often make monthly payments for property taxes, insurance and other fees to their mortgage companies to be set aside in escrow funds until the money is due. It’s unclear why American Home Mortgage, which filed for Chapter 11 bankruptcy protection Aug. 6, did not have the money to cover the checks or what it intends to do about it. Escrow accounts are protected by state law from creditors during bankruptcy proceedings, said Raquel Guillory, a spokeswoman for the Maryland attorney general’s office.

    “Late taxes come with stiff penalties.”



  2. donna commented on Sep 16

    Wow, you have to give a whole talk on this?

    I’ve lived my whole life like this…

  3. SINGER commented on Sep 16

    on topic…

    From your experience at the show this weekend, what would you consider to be the overall current perception of the Dollar vs. the EURO going forward????

    just curious…

    how was LV???

  4. RW commented on Sep 16

    I began shorting home builders and mortgage lenders more than a year ago but with only a few rather notable exceptions it was a real slog and an excellent illustration of how difficult it can be to go against the crowd: builders and lenders who were absolutely and unquestionably in collapse could surge upward in price at the drop of a hat.

    Now the impulse appears to be to will the credit crunch swiftly past but AFAIK the history of credit crunches involving real estate have been long, drawn out affairs and the impact on the $USD generally not favorable when interest rates fell.

    The growing problems caused by American Home Mortgage that VJ posts are not the problems of a mortgage lender they are the problems of a mortgage servicer, a very different and particularly ugly can of worms because it can cause defaults that should not have otherwise occurred.

    Calculated Risk had a good discussion at concerning what was beginning to happen at AHM and why troubles at servicing organizations could be so devastating and difficult to deal with.

    This is a real nightmare, for homeowners trying to hold on and make their payments and for those who were hoping the default rate would stabilize and ease fears concerning asset-backed securities. And failure to ease those fears is not going to calm volatility in the currency markets or anywhere else IMHO.

  5. Lotka Volterra commented on Sep 16

    1998 – Internet’s never going to stop going up! Everyone needs a personal website!
    1999 – Your investment is 100% liquid at all times.
    2000 – “Irrational Exuberance”
    2001 – Dot-Con Bomb! Who Knew (TM)? Only suckers sell on a dip. Hold and go long.
    2002 – Timing the bottom is everything!
    2003 – Aliens invade Iraq! Forget everything we told you about Internet! (and who told it to you)

    2003 – Housing is never going to stop going up! Everyone needs a place to live!
    2004 – Your investment is 100% liquid at all times.
    2005 – “Irrational Exuberance”
    2006 – Credit-Con Bomb! Who Knew (TM)? Only suckers sell on a dip. Hold and go long.
    2007 – Timing the bottom is everything!
    2008 – Aliens invade Iran! Forget everything we told you about Housing! (and who told it to you)

    2008 – ________ is never going to stop going up. Everyone needs a ________!
    2009 – Your investment is 100% liquid at all times.
    2010 – “Irrational Exuberance”
    2011 – ________ Bomb! Who Knew (TM)? Only suckers sell on a dip. Hold and go long.
    2012 – Timing the bottom is everything!
    2013 – Earth destroyed by Asteroids! Kaput to Endless Cycle of Con Death and Rebirth.

  6. David Davenport commented on Sep 16

    “Human beings, as we know them, developed from earlier species of animals.”

    It turns out that the United States had the second-highest percentage of adults who said the statement was false — and the second-lowest percentage who said the statement was true, researchers reported in the current issue of Science. (Only adults in Turkey expressed more doubts on evolution).

    The USA also has more Democrats than Republicans, as revealed by the most recent Congressional election.

  7. D. commented on Sep 16

    You cannot be a full time contrarian. Why? The crowd is actually right most of the time. Remember, they are what moves markets.

    It can be a 10 km walk to the lake but it can take less than a minute to drown. So when do you become a contrarian?

    1. From the strat… you stay home and read a book about the world’s lakes while others start walking?

    2. Take a left turn at 10km when everyone else is taking a right turn?

    3. Watch everyone else jump in the lake and you stay put and watch the non-swimmer drown.

  8. Groty commented on Sep 16

    Re: Persistence of Myths

    Charlie Sheen and Rosie apparently are Arabs. Who knew?

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