Trading The quotNormal Statequot
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Thread: Trading The quotNormal Statequot

  1. #1
    I read an interesting quote from Allan Feldstein. He's an economics professor at Harvard and the head of the National Bureau of Economic Research. Back in August, he was an attendee and presenter in the Jackson Hole Meeting, as he is every year.

    It was he who called for an immediate 50 basis point decrease in the overnight rate and eventual 100 basis point decline-meaning that he's advocating the fed move another 50. Perhaps it was a coincidence that the fed voted for the 50 on September 18th, or perhaps it was not.

    The NBER is the arbiter of recessions. They've a defination and it is they who basically call when the market is in recession in accordance with their definition. But that isn't what I found to be so significant.

    During the interview, Feldstein said that the regular state of this market is expansion. Obviously if something is normal it is probably in that state for the huge majority of time and if you have a look at the US market during a lengthy period, it is obvioulsy true. The melancholy, the couple recessions and much more frequesnt corrections have represented the same thing: buying opputunities. The longer I thought about this statement, the more profound I realized it is. The impliions of it are really astonishing and you can apply it to trading very readily. And unless the US goes to a prolonged depression, you are gonna thank me 10 years or so, since you're going to be much richer at that point then you are now.

    If you have not discovered, carry trade pairs like GBP/JPY, EUR/JPY are connected at the hip to the US equity markets and equity indexes have been expanding every quarter since the last recession in 2001. There have been a few alterations, most notably in February 2007 and again in August, but overall, the market has been around in its usual state for approximately 6 years now and GBP/JPY has appreciated right along with them.

    Even in the event that you have a look at GBP/JPY this year it's interesting. Let's say you deposited $5000 in the start of the year and exchanged a 2.5 lot standing 2.5 standard lots). At the moment, you are up 100 pips over the year and about 3600 about the interest. That's $6000 to your own $5000 deposit (125 percent ). So far.

    Forget about what the money would be if you would have started back at the end of 2001. You would have about 7000 pips and all that curiosity. And that's if you'd done nothing but leave it alone.

    Woulda, coulda shoulda you are probably saying but if you're, you are missing my point. Bear in mind, this economy's normal state is expansion. Meaning that the normal state of GBP/JPY is appreciation. Meaning that unless the US goes to a multiyear melancholy, the market will exist in its regular state-expansion. Some instances will be fast, other times will likely be slow and corrections will inevitably happen. All that doesn't matter, since the usual state of this economy-and therefore GBP/JPY-is expansion.

    I'm going to expand on Dr. Feldstein's normal state of this market by stating that the normal state of this market is expansion with intermittant bouts of short recessions and even briefer corrections which have represented nothing more then buying oppurtunities whenever they've occurred-and which defination includes the great depression.

    So what I am suggesting is to take some lots on GBP/JPY and leave them there no matter what occurs for a lengthy time. Years. Don't even market on the corrections, just buy more and hold this also. It's workied well before.

  2. #2
    I keep hearing about this dividend as well as the carry trade.
    Can you further explain what this Equity is and the way it actually affect GBPJPY/EURJPY???

  3. #3
    Quote Originally Posted by ;
    In case you haven't noticed, carry trade pairs such as GBP/JPY, EUR/JPY are connected at the hip into the US equity markets and equity indexes have been expanding annually since the previous recession in 2001. There have been a few alterations, most especially in February 2007 and again in August, but overall, the economy has existed in its usual condition for around 6 years now.
    I am confused as to how you're able to compare two unseemingly related events. I believed the GBPJPY expanded due to a week . Given your theory, why didn't the GBPJPY explode during the online bubble. That was arguably among the most rapid expansions in US history.

    Quote Originally Posted by ;
    Even in the event that you look at GBP/JPY this year it's interesting. Let's say you deposited $5000 at the start of the year and exchanged a 2.5 lot standing. Right now, you are up 100 pips on the year and about 3600 on the interest. That's $6500 to your own $5000 deposit (130%). Up to now.
    Assuming you obtained 200:1 margin and exchanged at the start of 2007 and traded 2.5 lots because you suggested you'd only have 114 pips into a margin call. Guess what? You'd have been wiped from the first week in March. You would not even have lived at 400:1. Typical newstrader, you see a significant candle and start fantasizing about what could have been.


    Quote Originally Posted by ;
    Woulda, coulda shoulda you are saying but if you're, you are missing my point. Remember, the normal state of the economy is growth. That means that the normal condition of GBP/JPY is appreciation. That means that unless the US goes to a multiyear depression, the economy is going to exist in its usual state. Some times will be fast, other times will likely be slow and adjustments will inevitably occur. All that does not matter, because the usual condition of the economy-and therefore GBP/JPY-is growth.
    I'm still not making the connection . Please explain.

  4. #4
    Guess I'm more than a bit dubious of anyone who pretends to specify the normal state of this economy and/or especially market worth. It is a bit like using the normal state of this Gulf Coast weather as a reason to go long in New Orleans property prior to Katrina using the Army Corps of Engineers enjoying the role of the Fed.
    Long term? Think about the Crash of 29 - it took something like 25 years for the Dow to recover it's peak - and that's with the boom provided by WWII, waves of post war immigration, and the GI Bill - which supplied the tools to get several young Americans to better their own position. In the event that you were heavily in the market in 29, you probably wouldn't have had the capital to go extended in 34. As for buying and holding - how a lot of those 1929 Dow stocks were on it 25 years later? (Recall that unlike broad averages such as the SP, the DJIA is greatly cooked).
    GBP/JPY? Roughly 30 years ago it had been trading in around 550, even now it's less than half .
    I guess the long and short (haha) is that unless one is ready to keep a sharp eye on both fundamentals and technician, long-term positions (over a couple of years) are extremely iffy. That, in a sense, means that they are really short to mid term positions, just held available for longer...

  5. #5
    Quote Originally Posted by ;
    I'm confused as to how you can compare two unseemingly associated events. I believed the GBPJPY enlarged because of a week . Given your theory, why did not the GBPJPY explode during the internet bubble. That was arguably among the most rapid expansions in US history.

    Assuming you have 200:1 margin and exchanged at the beginning of 2007 and traded 2.5 lots because you suggested you'd only have 114 pips into a margin call. Guess what? You'd have been wiped out from the first week in March. You would not even have lived at 400:1. Normal newstrader, you find a significant candle and start fantasizing about what could have been.

    I'm still not making the connection here. Please clarify.
    US GDP has doubled since 1983,so where expansions are quantified from can really make a difference. I'm using the entire background of the DOW as a proxy for US GDP.

    Interest rates were different then and GBP/JPY doesn't really track the NASDAQ anyhow, but it really monitors the SP 500. The BoJ will probably be lucky to increase interest rates at all-Goldman Sachs says that they may be tottering on the brink of recession. And even if you believe what they say about needing to normalize their rate, the fact is that in the sport called globalization, the object of the game is to up your productivity (to keep inflation low) and devalue your currency vs your major trading partners. But even if they do go to .75%, that's not going to stop the carry trade anyway.

    Nobody should ever trade with 200:1 margin. Actaully, 2007 is a good example of what I'm talking about-dips to buy on.

    The equity/carry trade connection isn't my theory, it's what happening in currency and has existed for a long moment. Do some research and you'll see what I'm talking about.

    And now being even a casual observer of those markets, becoming out of GBP/JPY during (not before) both corrections was actually fairly easy, because great reasons existed for the corrections. There certainly were enough signs in August and back in February, when global markets corrected off the Chinese market, the correction was fairly easy to visit.



    Catch some charts of the DOW SP 500 and carry trade pairs like GBP/JPY or even AUD/JPY. Take a look at the DOW from even. The standard state of the market is growth.

  6. #6
    Quote Originally Posted by ;
    Guess I am more than a little dubious of anyone who wants to specify the normal state of the market and/or especially market worth. It's somewhat like using the regular state of the Gulf Coast weather as a reason to go long in New Orleans property prior to Katrina using the Army Corps of Engineers playing the role of the Fed.
    Long term? Think about the Crash of 29 - it took something like 25 years for the Dow to regain it is summit - and that's with the boom provided by WWII, waves of post war immigration, and the GI Bill - that provided the resources for several young Americans to better their own position. In the event that you were heavily in the market in 29, you likely wouldn't have had the capital to go extended in 34. In terms of buying and holding how a lot of those 1929 Dow stocks were still on it 25 years later? (Recall that unlike broad averages such as the SP, the DJIA is greatly cooked).
    GBP/JPY? Roughly 30 years ago it was trading at over 550, even now it is less than half that.
    I guess the long and short (haha) is that unless one is prepared to maintain a sharp eye on both the fundamentals and tech, long term rankings (over a couple of years) are very iffy. Which, in a feeling, means that they are really short to mid term rankings, only held open for longer....
    You can be skeptical, but it isn't me that's defining the normal state of the market. Or simply have a peek at the DOW thru-out its own history. The vast quantity of the time, it is expanding, as is U.S. GDP. Many times are faster or slower, but the melancholy and every recession since WWII is nothing more then a buying oppurtunity.

  7. #7
    Quote Originally Posted by ;
    You can be dubious, but it is not me that is defining the standard condition of the market. Or just have a look at the DOW thru-out its history. The huge quantity of the moment, it's expanding, as is U.S. GDP. Some times are quicker or slower, but each recession since WWII has been more then a buying oppurtunity.
    Ha ha Parrondo's Paradox, if ever there was one.

    Game A = Dow

    Game b1 = Recessions

    Game b2 = Interest Rate differentials like currencies such as Gbpjpy

  8. #8
    Quote Originally Posted by ;
    Ha ha Parrondo's Paradox, if ever there was one.
    Parrondo's paradox is a http://en.wikipedia.org/wiki/Paradox in http://en.wikipedia.org/wiki/Game_theory and is frequently described as: A losing egy that wins. It's named after its creator http://en.wikipedia.org/wiki/J._M._R._Parrondo, a http://en.wikipedia.org/wiki/Spain http://en.wikipedia.org/wiki/Physicist. Mathematically a more concerned announcement is provided as:
    Given two games, each with a greater probability of losing than winning, it is possible to build a winning egy by enjoying the games alternately.

    You'll have to show me evidence that the regular state of the market is not growth before I could except that.

    I want to Discover a way to use this into a casino. All games that there have a greater probability of losing then winning. The cause of this is because each game pays chances that are lower the the natural result.

    For example, the odds of rolling the dice and hitting a 7 are 6:1. The casino will only pay you 4:1 if the 7 hits. Over time, the casino has to win.

  9. #9
    Http://www.sciencenews.org/articles/...4/mathtrek.asp

    Here is a much better description. I recall reading this again in 2000 in my Science News magazine.

    Of course I am being somewhat facetious, because the 3 games do not have the exact same ratio of win and lose, but the concept holds true. And exlpains the relationship, of the three

  10. #10
    Quote Originally Posted by ;
    http://www.sciencenews.org/articles/...4/mathtrek.asp

    Here is a better description. I remember reading this again in 2000 in my Science News magazine.
    Looks great, but let us stick to the topic. Prove to me that the normal state of this economy is not growth.

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