Fundamental data, news, and financial markets are supposed to be highly related in a way that makes sense and can be read by skilled financial experts, and converted into profitable investment and trading actions. To a great extent that used to be case, but in 2014 Bloomberg reports that hedge funds closures are running at the highest rate since 2009. The old model is at least temporarily broken.
In this article I will attempt to demonstrate:
1. That the markets have come to reflect an “impossible logic”, which can be demonstrated in just a few charts.
2. The “impossible logic” stems directly from absurd economic interventions from policy makers. The inequality that stems from current policy is now clearly in a negative feedback loop. Instead of higher stock markets reflecting a healthy economy, it reflects an engineered process that reinforces inequality that increasingly restrains the economy.
3. This leaves investors with a challenge they have never faced before. Policy not only is not working, it can not work without a sweeping and fundamental reboot that currently is nowhere in sight. This means that investment management has reached a darwinian moment. To continue to add value the investment management business needs to find a new solution for the times – the systems trading solution.
Charts showing “impossible logic”
Despite the constant media hype on the economy, 2014 is now showing up to be the worst US macroeconomic performance since 2008.
Despite the constant media hype, underlying US corporate earnings are falling:
Despite this backdrop the US stock market has just had the strongest rally in history:
How could this happen now that QE3 has ended? It turns out that the Federal Reserve has decided to continue QE. The new policy is apparently that they just don’t tell us about it anymore:
Absurd Economic Intervention
I hope investors understand that the configuration decribed above involves an “impossible logic”. No wonder the best minds are struggling with the extreme and disconnected financial data. In order to understand what is happening we need to look a little deeper.
As I have described before economic growth has been in a secular decline for over 40 years, directly connected to Richard Nixon’s August 1971 announcement. However, the process seems to be accelerating. This is because the “solution” is deeply flawed. It is based on a defective model. Too much debt and inequality, can not be remedied by even more debt and inequalty. Perhaps the best explanation on the current dynamic comes from this article by Thad Beversdorf:
The Investment Challenge
This leaves us with accelerating dysfunction in both the economy and markets. What is an investor to do? Can you front run the central banks as their actions become ever more desperate and substantial and yet increasingly opaque? I’ve thought about it, but while it is important to follow this story, successful positioning requires a degree of preemptive knowledge. Unfortunately, there is no publicly available information that makes this feasible, particularly now that QE has become “discretionary”.
The solution is, therefore, to move to systems trading. Here the reason, rationale, and logical sequencing of economic influences and interventions, become mute. Whatever the cause and effect, there will always be trends and the need for risk management. Maximizing what can still be achieved just focusing on this area reveals a wholely different set of possibilities that can already be shown to have adapted to radically different periods over the last 11 years.
Investors must now rethink how well they believe any expert can predict the outcome of the current extraordinary circumstances and weigh this against time tested systems that have produced remarkable performance, with sustantial risk management, over multiyear periods.