A reader asks; Are my sources of information varied enough to overcome my biases?

What sources do you read that help you make decisions ? And do you make them varied enough to help avoid confirmation bias ? I have found your incites very helpful.

PW

Here was my response;

I look to everywhere to determine if what I am saying makes sense. I have no predetermined source that guides me.

We initially develop our theories, then we confirm them with reality

As an observer of the financial markets since 1985, I know certain realities in how these markets function. For instance, a few weeks ago, I called you all to get out of the growth and SPAC plays we traded and held overnight for easy gains. Why? Once the 10-year UST rose above the 100-120 bps level, and the Fed was not concerned about it, I warned all to listen and take cover. I didn’t read an article that decided that for me. I said this because I never saw an instance going back 35 years where those stocks didn’t fall in a rising interest rate environment. Now, I can make that 36 years.

In the immediate term, I am concerned about rising bond yields here. In the pre-2008 world, it played less of an immediate role. In the post-2008 world, low rates are vital. We now have 12 years of observations to figure this out.  All this stimulus demand is generated with debt that will have to be serviced in the future, and it will always be on the aggregate balance sheet for future generations. If we saw true everlasting inflation, then the velocity of money would be rising.

What I am trying to say here is simple; I can comprehend the laws and theories of Economics and Mass Psychology to know the most likely outcomes. I don’t read the news of the day to determine my theories. I am guided by my theories and look to see how the governments and monetary authorities are acting, and how they are guiding the people’s minds.

Today’s recipients of social largess are the suckers at the poker table

This is where my Economics, Finance, and Mathematics background serves me well. Also, My study of the Bible helps in this regards as it reveals to me how humans really act. The knowledge I gain from reading the Bible also helps me to clear out the noise and clutter of political correctness that has permeated the last 40 years of mankind’s existence.

The mindset of the people is even worse than in Jesus’s time, because humans today have been conditioned to believe they are better, more virtuous, and more open minded. Unfortunately, humanity today is even worse than the Pharisees and Sadducees that crucified Jesus and killed the early Christians. This is easily verifiable. The people today are so full of themselves that they become the easiest suckers at the poker table. As the people get dumber with money, the elites have developed a whole new genre of behavioral economics and psychology studies to help them fleece the public. It operates like a clock. These experts win the Nobel prizes now.

Guided by my broad framework of theories, I have developed a set of principles that I use to analyze the markets. For instance, in the post-2008 world, a set of ever-lower interest rates is needed to keep this system going. I am concluding here that eventually, rates will have to fall again. How they get there is yet to be determined. I warned the readers all throughout 2018 that the Fed needed to stop its tightening policies lest the USD and bond market derail the entire global system. I warned in 2019 about the overnight market meltdown and that the Fed would have to start QE again. It relented on both occasions and the meltdowns were averted. It eventually relents whenever the markets began to tank in earnest, while ZeroHedge warns of continual collapse.

Look back 2.5 years at the Fed action. I recall it vividly. We are being set up again for another showdown. This time, with my comprehension of how this works, the Fed will have to tighten and the government will have to stop its massive fiscal spending (the opposite) because bond yields must not rise to previous levels.

The asset markets will become unglued if the Fed doesn’t respond properly, but real estate should hold up better as mortgage rates were not allowed to drop to the levels that the UST yields sank, and inflation will help rents, etc. Even at a 3% 10-year UST, mortgage rates are still low by historical standards, and if inflation rises (I doubt it longer term, because of the overwhelming offsetting debt burdens generated) it will be temporary. Recall my theories on social spending. It all gets sucked into the Financial and RE shell by the top 10% who fleece the bottom 90%. This money is more effectively sterilized.

I am not concerned about inflation. Rather, I am concerned about what the bond market is saying about Fed policy. I stay focused on what matters here. if I was constantly looking for inflation and calling the Fed stupid, I would be redirecting my energies into a false dilemma. I only care how the bond markets are reacting. I don’t want to emphasize a problem that may never arise. The ZeroHedge readers can obsess over inflation data. I instead wonder why the Fed is acting the way it is.

Earlier, I referred my readers to a CNN article discussing the former Fed’s Bill Dudley’s comments, because it was the only outlet that reported on it at the time.  Mr. Dudley’s views are important to me in this instance, because he was the President of the New York Fed branch from 2009-2018, and in his role, he was responsible for executing Fed policy in the open markets.  This in no way means that I am a CNN supporter. CNN just happened to report on something I deemed to be worthy of note.

My conclusion is stark; the Fed needs to respect the bond market in this centrally-managed post-2008 world. The Fed didn’t respect it in 2018, nor in 2019, until it started cracking, and they are acting the same way three years later. They are pretending we are operating in the PRE-2008 world, but that system is long gone. I just take note on this, and focus on what matters. I actually think the Fed acts like this, so they can pretend that the world is still operating under the old set of assumptions.

My concern here with the Biden regime has nothing to do with politics. I am concerned with how it’s spending and where the money is going. All this domestic spending will render the United States economy on par with any other socialist nation. You may like that, but the propagandized MSM are already warning us that higher housing and living costs are coming soon; but that it’s good for you.

I don’t need to read all the stories out there to determine this stuff. To me, this is all just common sense, and this practicality and pragmatism has served me well. Over the years, I have been jettisoning anything that alludes to the formation of a subjective confirmation bias. In the economic and financial markets it’s much easier to measure my success in this endeavor; I ask myself, did the markets respond the way I thought they would? If they don’t, I figure out why I was wrong. It’s a process that takes a lifetime, but it’s worth the effort.

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12 thoughts on “A reader asks; Are my sources of information varied enough to overcome my biases?

  1. Answer to Greg…

    The timing is strange. We can never prove anything and the trading desks just get commands to do this or that. I have seen this many many times over the decades. It works well on Fridays, since the US closes last and people feel good going into the weekend. It sets the tone for the next week’s trade. Let’s hope for some carry through.

    All part of the centrally managed theme.

    1. While I doubt there are Wall Street traders and veterans actually running these discounted cash flows, the veterans and experienced ones know how these formulas work and understand how interest rates adversely affect stock prices when yields rise. Conversely, they understand that when yields fall, stock prices tend to rise. The stocks in which their cash flows are determined to be further out over a time frame will be discounted more heavily than ones in which their cash flows are more predictable in the near-term.

      1. Still think OEG is a worthy long-term investment? It’s getting beat down pretty bad though it seems to have decent prospects.

        FULL DISCLOSURE: I’m the worst investor on earth.

        1. It’s just a learning experience. Just don’t lose more than you can handle.

          The problem with OEG is pretty simple here. They had two secondary offerings that I thought were poorly priced. The first one was for about 1.88 and the second one was for roughly 3.50. In low rate environment, these can work themselves out and prices can continue to rise. In the current environment, there are 15 to 20 million shares that were recently issued at lower prices. When a retracement comes, the purchasing shareholders of those secondary offerings have a low cost basis and with that many shares from those offerings still above the purchase price, it would be profitable for those existing shareholders to sell all the way down to the offering prices. I’m not saying it’s going to get there but in an adverse environment that we are in, this becomes more likely.

          Given the bullish news that came out a couple months ago regarding this stock and it’s new business partners, I told the listeners that they would have to go back in and raise more capital. I estimated they would need at least a hundred fifty million dollars of capital on their balance sheet. They currently only have about 40 to 45 million. Shortly after I had estimated this, the firm then registered that S3 filing for a $150mm mixed shelf offering. That is something hanging over the stock, and eventually they’re going to have to issue shares or even worse; warrants and/or convertibles. In the downdraft that we are in, a firm like this is not able to time the offerings well. This is why I was very disappointed with the $3.50 offering they made two or three months ago. It is now coming back to bite them. Where it stands now, is simple. We are confronted with a regime of rising interest rates and this firm is going to be punished more than others. Furthermore, the traders on the street already know that they are itching to go back into the secondary market.

          I’m not telling you to sell at this point, but I would probably hold and wait to see how interest rates and internal company announcements flesh out.

          Maybe you could add a little, but I wouldn’t go too crazy on that and would wait until they priced the next offering. It goes to show how higher interest rates can be a big burden. This is something that I’ve learned over the decades.

          This type of cycle will happen again, it happened in the second half of 2018 and I’m sure it will happen over the next 2-3 years. Keep in mind that if you have cash on the sidelines and interest rates start to move lower, then I would be bullish on these types of growth stock stories. We live and we learn. I always err on the side of conservativism.

        2. If you added shares this morning then you are a pro. The price had a great recovery. I bought a few hundred shares in the upper 3s, but sold out for
          25 cents gain. I should have held. The PPT came in after Europe closed and drove up the indexes.

          1. I noticed many stocks across the board sold off until 11:30am est today then went up. Was that when the PPT came in? Something happened at that timeframe?

  2. Have you been looking at the oil stocks? I know in the past you used to report on them. They are doing very well as oil prices rise.

    1. I am growing concerned on why the Fed is acting the way it is and though energy stock and especially oil are doing well, I don’t hold them over night. The XOP is performing well and it is finally breaking out of its resistance from the covid crash, but I am only scalping on the more liquid plays. I have stayed away from all the penny plays. The OTC regulatory is looking at these stocks with a more scrutinizing eye. I follow Zman energy brain and he has been good with his oil picks. He writes for seeking alpha as well.

      To be honest, since I put out the trading warning a few weeks ago, I have been kind of sitting on my hands and concentrating on other things. I like to trade when the potential is easier. If Powell says anything bond bullish, I will jump back in. Powell’s taciturn stance is what concerns me. The bond market is going to test him.

    1. I believe the narrative is shifting from monetary stimulus to fiscal stimulus. The Fed is acting as if monetary stimulus is not working or not enough and that it’s time for fiscal stimulus. So the government needs to spend trillions on “stimulus packages” that will mostly go to the pockets of insiders. Then, the Fed will suddenly announce that we need more monetary stimulus via yield curve control, allowing insiders to buy a depressed market with their trillions in stimulus.

      What would your advice be to someone who did not heed your warnings a few weeks ago? Do you sense a bottom is approaching for tech stocks or is it a long ways away?

      1. I just posted an article regarding how stocks are valued. Look at the comment I posted regarding discounting cash flows, and why tech and growth stocks get hit the worst in a rising interest rate environment. Notice that the stocks with lots of earnings and dividends tend to hold up the best. I keep looking at XOM as that jettisoned former Dow stock is shining. If we think interest rates are going to continue rising then the former Robinhood momentum plays are still going to get hit and their time is done for now.

        It depends all on what the Fed and the Federales with their fiscal spending dictate. If the Fed comes out and says they’re concerned of the rising yield curve or the Biden regime decides to get frugal, the yield curve can shift lower and stocks can begin moving higher. But I seen either neither imminent. Biden continues to stump for more and more social welfare and Powell is remarkably taciturn when asked about rising yields.

        Though the Dow stocks will always hold up better, they still get affected as yields rise.

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