The same burden is on an informed trader in relation to how the market works, the real economy, and peoples' perspective of both.
Any trader worth his weight in peanut butter knows that the huge efforts of central banks around the world are the main reason that markets are up. This is reality. Yet it makes no sense to go on and on about what markets "should" be doing. Reality as far as markets are concerned is what's actually happening in the market. Sure, there are different possible future outcomes and it's important to stay abreast of them and be prepared for them. But they aren't here now and they may never come. It's the "they may never come" part that get's truncated and ignored to the detriment of a lot of traders.
I look in the mirror and ask myself questions on a regular basis. One question I ask is "Who the fuck are you judge?" This is how I keep myself from being a judgmental asshole (I hate judgmental assholes) so don't think I'm putting down or judging the blog I'm about to mention, they are a million times better than me in blogging. The blog I'm referring to is ZeroHedge.
ZH has some of the best research anywhere on the web or the street. They dig through every nook and cranny of the market and the world economy and what they uncover for the most part is not pretty. They lay it all out as comprehensive as you want. They have a huge readership that, judging from the comments agree with nearly everything they write. Shoot, I agree with nearly everything they write, so.... yeah.
But the reality is outside of maybe buying & holding gold you can't trade off of Zero Hedge.
I agree with what they write but when it comes to trading I look at the market through the lens of Reflexivity.
the Theory of Reflexivity is among other things a conceptual framework of how markets work. It's also a conceptual frame work of how society works but that's another post.
This theory was brought to the forefront by George Soros. The crux of the theory is that there is a two way connection between the market and it's participants' thinking that effect each other. i.e. if a market event happens that makes you and a lot of other market participants think the market will go down, and you all sell everything, and the market goes down, that doesn't prove you all were right.
Yours and everyone else's actions, based on yours and everyone else's thinking made you all sell everything and all of your selling created a supply and demand imbalance on the supply side and the market fell.
This also works in reverse. If the market keeps going up and up and up and makes people think it will keep going up they will buy. If it goes up long enough and far enough even the smartest of market participants, knowing the market is over priced and unsustainable will still buy. This is a bubble.
He calls it a two way connection because the participants thinking (part of the cognitive function) and actions (part of the manipulative function) effect each other and the market. These effects are complicated to say the least. Soros explained the two functions like this:
"On the one hand people seek to understand the world (or market) in which they live. (or trade) This is the cognitive function. On the other hand people seek to make an impact on the world (or market) and change it to their advantage. This is the manipulative function."
He goes on to explain the relationship between the functions:
"When both functions operate simultaneously the phenomena doesn't only comprise of facts but also of expectations of the future. The past is uniquely determined but the future is dependent on the participants decisions. Consequently participants can't base their decisions on knowledge because the contingencies about the future sets up a two way connection between the participants thinking and the thing in which they participate, which has an effect on both. It introduces an element of uncertainty into the course of events."
That "element of uncertainty" leads traders to have to rely on what happened in the past, repetitive patterns, and sometimes out right guess work to make decisions. In the case of ZH I think it leads them to rely too heavily on their biases when deciding what to write about. It also reinforces their bias the more they uncover and write about it. And while seemingly factual, there's a two way connection between facts and prevailing opinion that fucks our facts up. On one hand we try to understand facts, on the other hand we try to influence facts. This throws our whole understanding of the facts off.
ZH writes good shit but it's not time for what they're focused on right now. It seems like the manifestation of flawed sense of reality is that they are stuck in bear mode. Don't get it twisted, the main writer and probably owner(?? I'm not sure) is a beast with his! I call him Yogi Bear because he is definitely smarter than the average bear.
But he writes bearish shit ALL the time at a time when Central Banks around the globe are doing everything in their power to make what he writes irrelevant. IMHO As a service to his readers he should give them more news they can use. I doubt if he see's it that way because as a participant in the market, trading market and financial blog market, it's impossible for him or any of us to fully understand said markets.
Knowing this is 90% of the battle though. Knowing the two way connection between thinking and reality fucks up both is invaluable in life and trading.
The two-way connection between the cognitive function and the manipulative function introduces uncertainty into both functions. Because of this, participants can't base their decisions on knowledge. So, ZH, with what always seems like pin point analysis of the world economy with sources, charts, graphs, infographs and other things still writes with imperfect understanding. Whether they trade or not, don't know, but in any case I think writing about the markets is participating.
But this isn't the main reason you can't trade off ZH, it's a piece of the reason.
Another part of the reason is because by them pointing out trouble spots they prod others who have an interest in making the future happen differently than the way the excepted bias or what could be excepted as realistic circumstances would lead one to believe it will happen.
In other words, every hole ZH points out gives regulators, policy makers, or anyone else with an interest in keeping things from turning out as fucked up as ZH thinks it will, a chance to fill the hole up so the market doesn't fall into it, or they at least distract the market enough that they won't notice that they've fallen into a hole and by the time they do notice, a latter to climb out is presented. In that way ZH changes the conditions of the economy they observe not by merely observing, but by also writing about what they observe.
This leads to another of the main tenants of the Theory of Reflexivity, that reality can be manipulated.
We confuse natural science with social science. In natural science reality is easier to discern because facts are independent of anyone's thinking. If we pour wine in a wine glass until it's full and instead of stopping we continue to pour wine it will overflow and spill outside of the glass. If we all thought it wouldn't overflow that wouldn't matter, it still would. It's different in social phenomena. If we all are made to believe someone or thing is our enemy and that them attacking us is eminent we're likely to act proactively. This could make the thing or people our enemies even if at first they weren't.
Soros says he came across this fact when he saw Bush jr. use Orwellian speak to get us into the wars in Iraq and Afghanistan. (Soros said this in his book "The Crash Of 2008 and What it Means.") He said he was surprised because for the most part we live in a free society with freedom of thought and expression. In the movie 1984 big brother told everyone what to think. Orwellian speak isn't supposed to be able to work in an open society, but it did....big time.
This lead Soros to realize just how powerful the manipulative function really is. I was more surprised that Soros actually said Bush used Orwellian speak to get us into the wars...
Anyway... The theory of Reflexivity states that there's not a distinction between thinking and reality. It says that thinking is part of reality, especially in reflexive situations. The same way ZH's thinking has a two connection between their thinking and the course of events, there's a two way connection between ZH's thinking and the thinking of all the other participants that come into contact with their thinking and views.
The central banks have the advantage of knowing reality can be manipulated and having the best tools to manipulate it with. So, when they read ZH and see something that could be a potential problem they move to cut it off before it becomes that big of a problem. On top of that other market participants who read ZH either refrain from buying stocks, keeping the market from inflating into a bubble and crashing like ZH says it might, or they sell, producing the same result. This makes ZH it's self the reason you can't trade off what you read there.
ZH is one of the reasons why volume is so low in the markets. There's no doubt in my mind that they keep participation down to some extent. (This is good for the trader that understands reflexivity, not many genuinely crowded trades and we'll have someone to sell to when the markets move higher significantly dragging the FOMO crowd in.)
According to Quantcast from 8-4-12 to 9-4-12 ZH had over 170 thousand visitors per day.
In contrast my site get's about 150 visits per day. They have a far reach. Central bankers know this so I think they take ZH seriously and work hard not to make their views come true, or they delay the truth long enough that their views are irrelevant at the time they express them. On top of that ZH, and all market participants have a flawed view of reality. This flawed view, or the lack of realization that we have flawed views leads most to make huge mistakes In their trading.
This brings us to yet another major tenant of The theory of Reflexivity... It's relationship with fallibility.
Soros explanes this relationship like this:
"People are participants not just observers of the market and the knowledge they can acquire is not sufficient to guide them in their actions. [In the market.] They cannot base their decisions on knowledge alone. That is the condition I describe by the word fallibility. Without fallibility there would be no Reflexivity. If people could base their decisions on knowledge the uncertainty that characterizes reflexive situations would be absent. But fallibility isn't confined to reflexive situations. In other words fallibility is a more comprehensive condition and reflexivity is a special case.
He goes on further to say:
"Peoples' understanding is inherently imperfect because they are part of reality and a part cannot fully comprehend the whole. In calling our understanding imperfect I mean that it's incomplete and in ways that cannot be precisely defined, distorted. The human brain cannot grasp reality directly but only from the information it derives from it."
This last part about the human brain only grasping reality from what it derives from it, never directly is some deep shit. And it's the gist of why you can't trade off ZH's articles. The information they derive from reality is doomed and gloomed out and this doesn't reflect the reality of the market. This is why we don't trade events, we trade the markets reaction to events.
My attempted addition to the Theory of Reflexivity..
Reflexivity dictates that the best way to mitigate our flawed perception of reality when trading is to concentrate on objective parts of market reality.
This is what is meant by axioms like "trade what you see, not what you think." unless you understand reflexivity you don't know how important this is. Reflexivity is what killed fundamental analysis. Fundamentals are only as real as market participants' thinking allows them to be. This was proven in the tech bubble. People were buying stocks in companies that didn't have business plans! Fuck profits, they didn't have a business plan and the stocks were soaring!
The tech bubble was a "far from equilibrium" situation brought on by reflexivity.
The most objective things in the markets are price, time, and volume. Price is price. When you say "the $SPX held 1400 on a closing basis since it got back above it" that's a fact not contingent on anyone's thinking or biases. When you say "It's 3:55 pm and volume picked up exponentially the last five minutes of trading" that's a fact. That's not a reflexive statement. It's like saying "It's dark outside." as opposed to saying "it's cold outside." If it's dark outside it either is or it isn't, if you think it's cold outside an Eskimo might say it's hot outside. The latter is a subjective reflexive statement, the former is an objective statement without any reflexivity in it.
A key to Reflexivity is the belief that reality can never fully be known by someone participating in it. This goes back to my post about being wrong a lot in this market. Reflexivity gives me a bunch of certitude in this fact. And it assures me that I'm not the only one, everybody will be wrong... a lot. You need an independently given variable to produce knowledge and neither a participants thinking or actions can qualify as knowledge because they're never independently given.
This means the notion of perfect knowledge is a fairy tale. It also means the notion that markets tend towards equilibrium is false because there's no perfect knowledge, and peoples' thinking doesn't tend towards equilibrium.
Peoples thinking often tends toward extremes more so than equilibrium. So, I don't care how many models you make they will have a flaw. Because everyhing that goes into them isn't independently given. All market data are effected by market participants biasing their actions on imperfect knowledge.
This is not to say all models are useless but the bulk of them are really dangerous in that they give you a false sense of security. It's far better to be nervous about the fact that you know you don't know, than to not know and not even know that you don't know..... If that makes any sense....
$JPM's London whale fiasco happened because VaR models gave them a false sense of security. If you use VaR models your asking for trouble. There are far better and more reliable ways to measure risk.
A prominent economist on twitter once told me that MMT or Modern Monetary Theory was the "Red Pill."
MMT does shine a light on the way money really works in the modern global system. And it clears up a massively widespread misconception about money creation but it's not that far down the rabbit hole.
Reflexivity teaches you how to look for and find the widespread misconceptions that MMT only points out. Shit, that's how I stumbled upon MMT!
Looking through the reflexivity lens made me run through MMT like Neo ran through the drones in The Matrix. Everything slowed down and I could grasp the gist of MMT and except it because I know for a fact that there are these misconceptions and they're held by people the average person wouldn't even think to second guess. You gotta figure it wasn't idiots that said "hey, let's value Greek bonds the same way we value German bonds." No, that was some of the smartest people on earth. And they got it wrong.
So no, the real Red Pill is the Theory of Reflexivity, it can take you further down the rabbit hole than Morpheus!
And if you play Neo then George Soros is the Architect!