Looking Back
I included this 2004 “Economist” article excerpt in my November 2005 expanded edition of my first book “Trend Following”:
“The size of banks bets is rising rapidly the world over. This is because potential returns have fallen as fast as markets have risen, so banks have had to bet more in order to continue generating huge profits. The present situation is not dissimilar to the one that preceded the collapse of LTCM . . . banks are walking themselves to the edge of the cliff. This is because as all past financial crises have shown the risk-management models they use woefully underestimate the savage effects of big shocks, when everybody is trying to wriggle out of their positions at the same time . . . By regulatory fiat, when banks positions sour they must either stump up more capital or reduce their exposures. Invariably, when markets are panicking, they do the latter. Since everyone else is heading for the exits at the same time, these become more than a little crowded, moving prices against those trying to get out, and requiring still more unwinding of positions. It has happened many times before with more or less calamitous consequences . . . It could well happen again. There are any number of potential flash points: a rout in the dollar, say, or a huge spike in the oil price, or a big emerging market getting into trouble again. If it does happen, the chain reaction could be particularly devastating this time.”
Now that was a great prediction!
Mo dorami Added:
September 22nd, 2008 at 9:57 pm
I thought you don’t believe in prediction asshole
Michael Covel Added:
September 22nd, 2008 at 10:23 pm
Ah, the sarcasm escapes you.
Chris Added:
September 22nd, 2008 at 11:38 pm
Mike
Mo Dorami seems to have forgotten that its one thing predicting where markets are going and another expressing this view with a position - I.E. Trade the price action not your view
Anyway good call - I too felt last August( 2007) as soon as the first wave hit that the Dow was heading to 7000 - My targets now are 5000 over the next 3 years - However I will be long the dow should the price acion prove my view wrong and my system indicates me to buy !!
It seems illogical that all the real a%$& oles - the ones who still believe fundamentals dictate prices are still clinging onto the idea that stocks are undervalued ?
david Added:
September 23rd, 2008 at 4:31 am
Journalists are collecting information to put it into the context of a story. Isn´t that similar to what trend followers do? Learning from history and searching for repeating patterns? I think the only difference is, that trend following traders describe the patterns they find with numbers. Trend followers are making very specific predictions. They bet, that trends with specific traits will repeat. Of course, there have always been trends and there will always be trends, but trends are like snowflakes, they are all different.
Ladi Added:
September 23rd, 2008 at 7:07 am
Great article. I’m sure the banks knew what they were getting into, they knew the potential devastation, but still decided to get into the dirty game of taking too much risk and unrealistic bets. Good call back then, by the writer.
Michael Covel Added:
September 23rd, 2008 at 10:01 am
How do trend traders put price into the context of the story?
Matt - Trading System Reviews Added:
September 23rd, 2008 at 10:03 am
It’s one of these things I have always found interesting, with hindsight these things are really obvious and you can always find people that have come up with a prediction that they are coming. Some people have even done this more than once, the problem is that nobody knows consistently WHEN these will happen.
I know several people who sold their houses years ago as they thought that market was overblown, so renting until prices came down was an obvious move…years went by before prices came down and even after the current falls they are still higher than they were when they sold.
We now have the banks who were left for years increasing their bet sizes, and being allowed to increase their leverage, arguing that it was making money so must be good for the economy. In The Black Swan, Taleb used the analogy of airline regulators insisting that all aircraft be fitted with bullet-proof doors to the cabins of all planes seemed like a good idea in the aftermath of of 9/11, but had they suggested this prior, then the airlines would have been up in arms about meddling regulators as there was no evidence of any need etc. The same is true now of the banking system.
Quite simply we have to go through these problems as part of the capitalist system as nobody can consistently and accurately predict these occurrences. Even if they can, they need to muster the political will to get something done with the huge amount of differing views on the potential problems (or lack of) and solutions. Finally, if they actually get to do something and it works, everyone will turn around and simply say that nothing happening is proof that nothing would happen anyway so those pesky regulations should be done away with….until it actually happens!
cy Added:
September 23rd, 2008 at 12:31 pm
You knew about all this back in 04-05 and didn’t tell anybody?!
You should be held crimally liable for all that has taken place.
Haha…obviously kidding. Love the books. Keep up the good work.
Ken - Todays Breakout Stocks Added:
September 23rd, 2008 at 1:18 pm
There’s a big difference between making a prediction and trading a prediction. Trend traders don’t trade predictions.
It’s human nature to form ideas or opinions of what could happen in the future, but trend traders don’t place trades based on those ideas or opinions.
Ladi Added:
September 23rd, 2008 at 3:54 pm
In addition to this….Making predictions on trades entails way more specificity, than predicting “vague” industry trends. I can make a prediction now, and it might happen in 30yrs time. So…yes! It happened. However, trading on that?….you might blow out your Fund before the prediction comes true, 30yrs later. LOL!
Edward Brode Added:
October 10th, 2008 at 11:11 am
The key word in Trend Following is Following, the word predicting is not part of the vocabulary. That’s why prediction was italicized in Mike’s comment.