“Appear to be managing” is more important than “managing”. Confidence breaks if people think xyz cannot manage situation. By orienting to such thinking, humans are inviting troubles.
With this introduction, I come to the main point; Dollar Index.
Subject to certain events, I completely rule out collapse of Dollar Index to 41 as some Elliot wave theorists are predicting. This statement is subject to commodities remain priced in dollars.
If somehow China manages to price commodities in other currency, then dollar index can fall to 41. In addition, if China floats Yuan and Yuan is made part of dollar index then also dollar index can fall to 41. Either of these things not happening, dollar index will remain range bound. Readers will know that any such thing will be preceded by social turmoil or even war. Remember also that USA is successful in giving “Appear to be managing” impression.
Coming to EURO, some people were of the opinion that Greece be allowed to go bankrupt. In their opinion, that would strengthen EURO. If you glance at first paragraph, you will note that EURO would have collapsed if Greece was allowed to go bankrupt. EURO would have slowly disintegrated. “Appear to be managing” is more important to generate confidence among traders. In longer run, you pay for mistakes.
As dollar index is unlikely to fall to 41, current rise in indices is likely to be short lived.
In this paragraph, I take a quick look at inflation in US. Some knowledgeable people are claiming that real inflation is much more than headline inflation. To prove there point, people show charts of grains/vegetables over the last two years. To clear doubts for the last time, I am putting up USA CPI weight (figures are rounded of); Food- 15% , Housing- 42%, Transportation- 16%, Medical Care- 6%, Clothing- 4%, Education- 6%, Recreation- 6%, and Others- 5%.
Now even if food prices go up by 100%, inflation will change by approximately 5%. This rise in food prices will be more than offset by fall in house prices. After all, in my monthly budget, I spend more on my mortgage than food.
Since all other countries simply copy and paste “USA”, their CPI weights are likely to be same.
-Shrihas Pandharkar
© Copyright. No reproduction, please.
DYOR.
Wednesday, 27 October 2010
Saturday, 23 October 2010
New World Currency
If China says return our dollars then US will say take your dollars and do not export anything to us. Who will be the loser? Answer is China. Chinese currency will lose value if it stops exports to USA. What if china boosts domestic demand? To boost demand, it will need oil and other raw material. All such raw material is priced in US dollars. Therefore, it will need US dollars to import.
How can China preserve value of its currency? How can USA arrest fall in asset prices, which is root cause of the problem in USA? How can rest of the world survive from currency fluctuations? Answer in three steps;
Step 1: China amass about 5-7 tonnes of gold secretly. USA knowingly ignores.
Step 2: Bring resolution in IMF for new world currency in which gold will have 20% weight. Remaining 80% weight will be based on top 5 world economies. Top 5 world economies will be based on output. For example; if China makes 30 ipads and US makes 30 ipads, value will be same. Another example; One kilogram of rice will have same value for computational purpose in deciding top 5 world economies. Values will be assumed same for computational purpose only. Computations shall be done at the end of each year and reserves shall be adjusted accordingly.
Step 3: Price all commodities in new world currency.
This will also benefit developed economies as their currencies will fall and asset prices in developed countries will go up.
-Shrihas Pandharkar
© Copyright. No reproduction, please.
DYOR.
How can China preserve value of its currency? How can USA arrest fall in asset prices, which is root cause of the problem in USA? How can rest of the world survive from currency fluctuations? Answer in three steps;
Step 1: China amass about 5-7 tonnes of gold secretly. USA knowingly ignores.
Step 2: Bring resolution in IMF for new world currency in which gold will have 20% weight. Remaining 80% weight will be based on top 5 world economies. Top 5 world economies will be based on output. For example; if China makes 30 ipads and US makes 30 ipads, value will be same. Another example; One kilogram of rice will have same value for computational purpose in deciding top 5 world economies. Values will be assumed same for computational purpose only. Computations shall be done at the end of each year and reserves shall be adjusted accordingly.
Step 3: Price all commodities in new world currency.
This will also benefit developed economies as their currencies will fall and asset prices in developed countries will go up.
-Shrihas Pandharkar
© Copyright. No reproduction, please.
DYOR.
Wednesday, 20 October 2010
GDP Growth rate
Let us assume that I represent a country. Let us say my personal expenses, investment etc. constitute my GDP.
In the first year, I spend 1000 pounds and let this be my GDP. Assume for a time being that my income is stagnant.
In the next year, if I want to show 2% growth given my stagnant income, I will have to borrow 2% of 1000, which is 20 Pounds.
Third year, I am faced with same problem, so I borrow, 2.5% of 1020 (note that my GDP last year is 1020 and not 100 pounds) which is about 25.5 Pounds. To make it convenient for readers, I put this in table above.
Last row shows sum of my total borrowings. This sum is 1023 Pound equalling to my yearly GDP. This shows that if I borrow equal to my GDP, I can show consistent growth in my GDP for 18 years. There are other things like GDP deflator, interest on borrowings etc...but I am keeping it simple. Now in the last step, I replace my name with “United States of America”.
Looking at these facts, should I sell all my stocks? Answer is NO (why?)
-Shrihas Pandharkar
DYOR
© Copyright. No reproduction, please.
Thursday, 14 October 2010
Conflicts of Opinions
A year before, A came on TV and said “Gold can touch 1400-2000”.
Reporter asked B for his reaction on A’s statement. B said “It is stupid (utter nonsense) to think of gold touching 1400-2000”.
Someone reading B’s statement would have shorted gold. But, why one went wrong? Next paragraph sheds some light.
Economists are economists and they look at correlations, regressions etc and predict future (B is an economist). Traders are traders and they have an eye on what economists are saying and what markets are saying (A is a trader). Very rarely, economists will understand pulse of markets. Traders will understand pulse of markets for some time and then go wrong somewhere and become history. Traders come and go but economists remain. However, that does not happen with all traders. One in a million traders hangs on until death.
In this battle between A and B, small investors reading financial articles are losers. Should they believe A or believe B?
Now let us say, A has gone right. Leaderless crowd reads in financial magazines (that A has gone right) and follows A. Sometime later, A goes wrong and some other trader goes right. This time, leaderless crowd abandons A and follows the other trader until he goes wrong. Once this other trader goes wrong, Leaderless crowd follows some other trader. In the process, this small investor loses all the money and abandons market forever.
-Shrihas Pandharkar
DYOR.
© Copyright. No reproduction, please.
Reporter asked B for his reaction on A’s statement. B said “It is stupid (utter nonsense) to think of gold touching 1400-2000”.
Someone reading B’s statement would have shorted gold. But, why one went wrong? Next paragraph sheds some light.
Economists are economists and they look at correlations, regressions etc and predict future (B is an economist). Traders are traders and they have an eye on what economists are saying and what markets are saying (A is a trader). Very rarely, economists will understand pulse of markets. Traders will understand pulse of markets for some time and then go wrong somewhere and become history. Traders come and go but economists remain. However, that does not happen with all traders. One in a million traders hangs on until death.
In this battle between A and B, small investors reading financial articles are losers. Should they believe A or believe B?
Now let us say, A has gone right. Leaderless crowd reads in financial magazines (that A has gone right) and follows A. Sometime later, A goes wrong and some other trader goes right. This time, leaderless crowd abandons A and follows the other trader until he goes wrong. Once this other trader goes wrong, Leaderless crowd follows some other trader. In the process, this small investor loses all the money and abandons market forever.
-Shrihas Pandharkar
DYOR.
© Copyright. No reproduction, please.
Tuesday, 12 October 2010
HFT 2
I briefly introduced HFT in my earlier post. My earlier article explains HFT in three sentences. If it is so easy then why do Investment banks pay high salaries to someone in HFT?
Programming is not a secret. The secret is correlation among variables, volumes traded, Fibonacci levels...and the list is endless...
Let me take a real world example; Person A working in Investment bank Z resigned (note that this is real world example). Before resigning, he took printouts of HFT codes (I call this “intellectual bankruptcy” as such acts bring your career to dead-end in investment banking. Investment banks have more CCTV than number of people in the city. Your activities on PC/printer are also logged. Investment banks also look at your credit report even before they call you for an interview. I do not want to appear paranoid but you cannot discuss investments with your friends/family members, as someone could be recent recruit of FBI. Note also that Wall Street likes team players, I scratch your back and you scratch mine.). Taking this story further, After A resigned, he received calls from many investments banks, as he was important. Probably, he mentioned it to someone (HR manager of some bank) about HFT codes that he printed. Next call came from FBI agent posing as recruitment consultant and the rest is history.
Coming back to the main story, let us say, Investment bank Y has written HFT codes that generate buy (or sell) signal if some conditions are met. If I know variables that this investment bank is using, then I can replicate HFT codes in my laptop. With those codes, I play along the bank and make money. Note that I am forced to play with bank because I am powerless. You can imagine such codes falling in the hands of competitor and Competitor bank will not be powerless as I am. Now, you see why HFT people are paid higher and why there is a secrecy.
Is it difficult for individual to write HFT codes? No, it is not. Only problem is accurate data. Once, you have data, then construct a code and back test using econometric principles. However, to get to that level, you will need to put in thosuands of man-weeks. For back testing, you can use smaller quantities to begin with.
In addition, one needs to act fast and not sip coffee as in my earlier post. PCs execute all buy/sell order automatically instead of waiting for human to act.
-Shrihas Pandharkar
DYOR.
© Copyright. No reproduction, please.
Programming is not a secret. The secret is correlation among variables, volumes traded, Fibonacci levels...and the list is endless...
Let me take a real world example; Person A working in Investment bank Z resigned (note that this is real world example). Before resigning, he took printouts of HFT codes (I call this “intellectual bankruptcy” as such acts bring your career to dead-end in investment banking. Investment banks have more CCTV than number of people in the city. Your activities on PC/printer are also logged. Investment banks also look at your credit report even before they call you for an interview. I do not want to appear paranoid but you cannot discuss investments with your friends/family members, as someone could be recent recruit of FBI. Note also that Wall Street likes team players, I scratch your back and you scratch mine.). Taking this story further, After A resigned, he received calls from many investments banks, as he was important. Probably, he mentioned it to someone (HR manager of some bank) about HFT codes that he printed. Next call came from FBI agent posing as recruitment consultant and the rest is history.
Coming back to the main story, let us say, Investment bank Y has written HFT codes that generate buy (or sell) signal if some conditions are met. If I know variables that this investment bank is using, then I can replicate HFT codes in my laptop. With those codes, I play along the bank and make money. Note that I am forced to play with bank because I am powerless. You can imagine such codes falling in the hands of competitor and Competitor bank will not be powerless as I am. Now, you see why HFT people are paid higher and why there is a secrecy.
Is it difficult for individual to write HFT codes? No, it is not. Only problem is accurate data. Once, you have data, then construct a code and back test using econometric principles. However, to get to that level, you will need to put in thosuands of man-weeks. For back testing, you can use smaller quantities to begin with.
In addition, one needs to act fast and not sip coffee as in my earlier post. PCs execute all buy/sell order automatically instead of waiting for human to act.
-Shrihas Pandharkar
DYOR.
© Copyright. No reproduction, please.
Saturday, 9 October 2010
HFT (High Frequency Trades)
HFT, A scary word for investors, isn’t it?
Like SIVs (Structured Investment Vehicles) were enigma few years earlier, HFT is an enigma now. However, it is simple and not complicated as one thinks.
I can educate people only to certain level on this public forum. Briefly, correlation among variables is found out based on past data and theories developed. Simple program is written to flash signals when real time correlation deviates for any stock price, index or commodity.
Someone sipping a cup of coffee has to take position based on such signals. Off course, there is something more to it but I am trying to keep it simple.
-Shrihas Pandharkar,
DYOR.
© Copyright. No reproduction, please.
Like SIVs (Structured Investment Vehicles) were enigma few years earlier, HFT is an enigma now. However, it is simple and not complicated as one thinks.
I can educate people only to certain level on this public forum. Briefly, correlation among variables is found out based on past data and theories developed. Simple program is written to flash signals when real time correlation deviates for any stock price, index or commodity.
Someone sipping a cup of coffee has to take position based on such signals. Off course, there is something more to it but I am trying to keep it simple.
-Shrihas Pandharkar,
DYOR.
© Copyright. No reproduction, please.
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