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“And, for an instant, she stared directly into those soft blue eyes and knew, with an instinctive mammalian certainty, that the exceedingly rich were no longer even remotely human.”
                                                      William Gibson

Commentary & Analysis
The wheel is turning at the Concept Café…

One of our Members wrote to me yesterday, basically telling me I was “full of it” if I thought the US dollar was going to do anything but maybe bounce at best, and only because it is so oversold; then it is headed into the dust pin. He is saying there is absolutely nothing that can change that inevitability.

Now, whether or not I am “full of it” is an open question, I realize that. But, since I have answered this Member before, providing several basic fundamental rationales as to why the dollar trend might change, which have not panned out as we all know, I wanted to write back and say this: If you can find absolutely no reason why the dollar could rally it likely means there are a bunch of people out there that hold the same view. To me that suggests we are close to a sentiment extreme.

Sentiment extremes and one-way bets apply to all markets. But they apply especially to currencies because there is so much confusion as to the real drivers. It is the raw material of overshoot–that process by which at some point with the gift of hindsight we all look back and say, “Geeze, that currency was so far over or undervalued relative to its fundamentals–that’s just crazy.

Thus, 20/20 vision makes us almost as smart as those guys who show up on TV who are mostly wrong but always exceedingly confident. Those guys may be right for a long time, confusing a trend and their brains, but when someone in the investment world exudes such confidence you might want to consider keeping your hand on your wallet.

But instead of covering our wallets, we plunge in–confidence in a trend and rationales that validate the trend is what sells. Most people in this world want to be validated in some form or another. That is human nature. Problem is, validation in the financial world makes us intellectually laze and open to being fooled at the worst possible time. And that is what the glad-handing confident analyst who peers deeply and confidently into his crystal ball does to his believers each day. He validates them. No different than Professor Marvel’s relationship with Dorothy in The Wizard of Oz. After leafing through her belongings, and getting a bead on what she wanted to here, Professor Marvel validated her beliefs.

But ultimately, and often unconsciously, because some analysts really are good guys doing their best, our crystal-gazing analyst has his ego completely tied up into being right, so he doubles-down on his confidence building and we are fooled most at the precisely the wrong time.

The reality is we never know until after the fact why it is that markets turn. We can guess ahead of time, and I do; but they are only best guesses with historical information that will constantly be changing in the future–it’s changing right now. Efficient prices always change–there is no such thing as an equilibrium price. There may be some degree of tendency toward equilibrium, but that is the most and best one can say. If you like equilibrium pricing, you would have loved standing in the bread line in Soviet Russian knowing just how much that loaf would be, but hoping and praying (silently because the State frowns on such things) there would be any left when you made it to the front of the line.

It seems, for some odd reason, market participants believe the fundamental rationales they so love and have bought into are solid and lasting and shining little cities on the hill. Well, sorry to disappoint you boys, but fundamental rationales are just as fleeting as those flimsy technical ones often pooh-poohed by the smart guys.

Thus, when one says, just give it time, “something will come up.” There is a lot more wisdom embedded there than you realize. The person is saying reality changes, expectations change, and that I know. But he is also saying he is not smart enough to know which of the hundreds or thousands or millions of possible reasons for a change will occur.

So, when you start saying you can’t think of any possible reason why X-Y-Z will stop going down, or A-B-C will stop going up, you may want to not only check your premises, but check your mental framework–you are the proverbial crowd. That’s the kind of view that led to 401Ks sinking 70-80-90% after what Woody Dorsey calls the “E-Greed” years, aka the Nasdaq bubble.

At the time, I did a brief stint (thank God) on the active trader desk as a broker for Schwab at one of their call centers. The rationales all made sense–it was a new era. Everything even remotely related to this thing called the internet were going to completely destroy all brick and mortar business. No matter these companies had no infrastructure, no inventory, no depth of management, and made no money–“it’s all good.” Regular people, with money, nice people, used to call to place trades at the time, the conversations went something like this: Customer: “Buy me 2,000 shares of at the market.” Me: “Sir, you are filled at 35.50 on 2,000 shares of” Customer: “Great! By the way, can you tell me what the company does? I just saw an analysts recommend it on CNBC and wanted to get in early.” Me: “Well, sir, I don’t. I have never heard of them, but I can look it up and read off the company description, or email it if you would like.” Customer: “Oh that’s okay, I’ll just check it later.” Me: “Okay, thank you sir.” Customer: “Oh, I have another question…ah, I’ve been doing so well with my picks–day trading in this market–I was thinking of quitting my real job and trading full-time. What do you think?” Me: “Well sir, I can’t really comment on whether or not that makes sense for you. I just know, the trading game is a lot harder than it may appear now.”

This was not an unusual conversation at the time. In fact, I would occasionally get big orders from customers, only to have them call back, or even recognize it after I gave them the fill, that they made a mistake on the stock symbol. It was, dang, it was that guy on CNBC just recommended. True story…

Now I bet these people thought there was only one way for stocks to go. I bet these people fell quite in love with their rationales and the rationales of the really smart guys who confused a trend with their brilliant analysis. And so the wheel turns over and over and over…same wheel, different day!

“Where can we find all the latest cultural concepts and Investment Themes? It turns out that if we want to get a glimpse of market culture, we have to go to the concept café. At this kind of café, we don’t order the soup du jour, we listen for the stories du jour. To really understand this we may need to play the part of a flaneur. A flaneur is a gentleman of leisure who frequents cafes and observes the spectacles of street life purely for pleasure. His observations and inferential focus is an apt metaphor for the process of determining the Investment Themes, or the Mind component of Triunity Theory [mood, mind, and body of the market]. A flaneur may be in the crowd of the city but is not of the crowd. The life of the street, the culture of the city, and the concerns of the citizens are seen as an opera or a story to be both observed and savored. Everything the flaneur sees, every vignette is an open investigation. The flaneur detects everything while no one detects him. The Concept Café is where Investment Themes, or the ephemeral and fickle stories circulating in the market, can be seen and heard. Most people believe that fundamentals are real, solid, authentic, reliable, and durable reasons we can count on to explain the market; however, the flaneur, or behavioral trader, knows differently. In fact, we have to take into account the reality that the marketplace is full of propaganda or what we call spin. Spin has been an aspect of human behavior from the beginning.”
                                                      Woody Dorsey

The four major crowd beliefs we garner from the Concept Café:

  1. The US dollar IS going lower…
  2. Stocks ARE going higher…
  3. Bond prices ARE going lower…
  4. And the BIG one; gold is GUARAN-DAMN-TEED to go higher….
  5. Hmmm…maybe this time it really is different! But I still like the odds on the turning of the wheel and something new coming up.