Monday, February 06, 2006

Predicting the Future

I first want to say thank you again to everyone who has sent in comments. Many of them are quite intelligent and thought-provoking, and I encourage readers of this blog to check them out.

I'll briefly remark on the handful of "un-American" comments (e.g. those stating I must hate America because of my bearish outlook). This is the same kind of anti-bear nonsense that's been tossed about for years. My goal here isn't to praise America or bash America. It is simply to be a profitable trader. And if my analysis tells me that the stock markets are going to go down, and I take advantage of that observation, it doesn't mean I hate America. What piffle!

I've also received some comments doubting that charts can predict what's going to happen in the future. I don't pretend to understand why charts work the way they work - - I simply strive to interpret them. And I realize that one can get caught up in philosophical questions (like predeterminism) if it's suggested that something as basic as a line graph can state what the future holds decades hence. But I still believe it.

I have found over the years that the markets have almost an uncanny sense about what is going to happen before it happens. For instance, what are two of the biggest surprises to hit the markets in the twenty years? The Iraqi invasion of Kuwait and the events of 9/11/2001 spring to mind.

Below is the chart for crude oil futures leading up to the August 2nd invasion of Kuwait in 1990. The chart makes sense......with crude oil rising. But note this - - the chart ends on August 1st! Oil is making a major move upward before anyone outside Iraq new of this surprise invasion.

A similar example is the horrible events of September 11, 2001. Look at the graph of the S&P below, as the market accelerates downward. The last bar shown is for September 10th.

I'm sure many people will think of these as simply coincidences. But to me, they illustrate the eerie power of the markets to anticipate what's coming over the horizon before individuals are conscious of it.


weeklybull said...

The reason charts work is because there are very few well-kept secrets. How many generals at the Pentagon or CIA intelligence experts knew that Iraq was preparing for an invasion of Kuwait. How many politicians with rich contributors were told. Six degrees of separation then takes hold.

Regarding the Sept. 10 chart, remember that even Al Quaida has financiers.

Tim Knight said...

I'm inclined to agree. I don't want to get into mysticism here......I think in a worldwide market, those in the know (even if they're not inclined to put US in the know!) express themselves with cash as well.

Anonymous said...

I agree with Trader Tim. Let's keep politics out of this discussion. The only thing that we care about here is making money.

Regarding TA, my experience has been that it has some predictive value but not all. In order for a major move to occur, there has to be fundamental reasons. I think in the present situation, there are 3 major fundamental reasons for a bear market. 1. Wage growth for American workers has been lagging the inflation rate. 2. There is inflation in the system. 3. PE for the market is high for peak earning.

Anonymous said...

Why are the market's so complacent? Will everything be alright? It looks like the US is going to crumble under the massive indebtedness it owes to the rest of the world. Will other countries let the USA off the hook just because they have the most guns? If that's the case then what ever happened to capitalism. If capitalism is to survive, the US imbalances need to be corrected. The only way to correct them is to have a lower US dollar and lower stock prices, NOT the other way around such as 'super-bull' would have you believe. The Asian have thrown us a life line by buying US paper, when their appetite wanes, who on this earth will replace it? The Arabs? Muslims? Europeans? As you can see, there is no one left to hold the bag (except the poor retail investor) Ce la vie!

Tim Knight said...

An interesting article by the very cool and inimitable Ben Stein:

Anonymous said...

Well, let's engage in an intellectual discussion regarding the future course of the US economy. I think the US economy is doing rather well right now and I expect it will continue to do well in the future. Regarding the three bearish fundamental points cited above. Although the wage growth lags the inflation rate slightly I think it is only temporary. The core inflation rate is still rather low by historical standard. The statement "The PE of the market is high for peak earning" is true if and only if the current earning is the peak earning which is not true at all. Earnings will continue to growth in low double digit for the foreseeable future. Yes, foreigners are buying lots of US treasury but so what. Where do they get the money? By learning and using US technology and know-how, they manufacture quality products that are consumed by us. But we pay low prices for them. Take iPods as example. Apple designs and markets the products to the US consumers and gets paid high margin for them while the Chinese manufactures make them for low single digit margin. Enough said.

USA #1 said...

Dear 'Super-Bull'

you would be wise to read the article recommended by Tim (it's right above your blog)Basic economics dictate that something has to give. Foreign creditors have been more than willing to give so far. The wage rate in the US is hardly growing, if at all and it will probably contract in order to stay competitive with the rest of the world. It takes more than iPods to keep USA going, a whole cultural shift must take place if we are to emerge victorius. Borrowing only to consume makes no sense, short term or otherwise. If the US economy relies on the consumer for 70% of it's GDP, then we will be facing crunch time very soon. Tougher banruptcy laws, higher monthly minimum credit card payments, increasing short-term interest rates and a peaked housing market foretells a significantly weaker consumer ahead. Ignore the third lowest savings rate in history at your own peril. It will come to a point that no matter how cheap you sell things, buyers will not be found. You will have your 'super-bull' nmarket after this adjustment has taken place, but it will not be painless!