Four Critical Questions

By: Doug Wakefield | Thu, Mar 6, 2008
Print Email

by Doug Wakefield with Ben Hill

Does tracking the major US equity markets give us a full grasp of the amount of risks in our capital markets?

What do you think is one of the biggest risks to traders and investors right now?

In science, we call these rare events fat tails. We know they're out there, but because they happen so infrequently, most people don't spend time studying fat tail events or their similarities. Those that do could be labeled as "gloom or doomers" by their colleagues. But, when we study nature, fat tails are almost always occurring somewhere on some level. As long as we live in Idaho, Katrina is just a news story. But if we run a business in New Orleans, it's our life.

What do you think is the root problem of all of this?

Without realizing that the foundation upon which our money is built has changed every few decades, since the creation of the Federal Reserve in 1913, many bulls and bears mistakenly believe that the Fed is all-powerful. Specifically, it appears that most people have come to believe that the Fed will always be able to "print" more money to get us out of our current crisis. To them, every rate cut or short-term loan is a sign that inflation will continue unabated into the foreseeable future. Thinking that the Fed will always take care of any problems we encounter, millions of bulls have been lulled into thinking that studying monetary and banking history is useless. And though the bears are typically more aware of monetary history, they have come to believe that central bankers' expansionary policies will continue with no end in sight. We fail to recognize the markets' signals since July of 2007, suggesting that the rate cuts and government bailouts are not working. As we look at various capital and debt markets over the last eight months, do we see signs of more or less confidence? Are we seeing smoother monetary flows between buyers and sellers in our debt markets, or a breakdown - literally at the operational level - in some of our debt markets? Is this normal? If we study market history, how often does this type of action precede major downward moves in equity prices? If consumers and businesses continue to reduce spending and cut debt, what effect will cutting rates and offering short term loans have on the markets? What will happen when the current petrodollar, just like the gold exchange dollar prior to August 1971, no longer exists?

While some might look at all this with more than a bit of skepticism, I draw my conclusions from vast amounts of reading. And from what I've read, it is obvious that those at the highest levels of finance, central banking and politics have given this a great deal of thought. This is not to suggest that we should all go back to sleep and leave the "driving to...them." Rather, as quickly as possible, we should start learning about how to place the odds in this financial game more in our favor. After spending more than 8000 hours researching, reading, and writing, since 2003, I am convinced that the structural problems we have noticed in our markets and economies in the last few months are endemic. I would say that the odds of a significant downward adjustment in global equity prices during the next 90 to 180 days are extremely high. Science, history, and crowd psychology show hundreds of parallels to previous moments in history.

What would you encourage every investor to do right now?

Clinging to false ideas of investing and history proved detrimental during the 2000 to 2002 decline, not only crushing my clients and my portfolios, and my income, but my image of myself. From studying historic declines what grieves me the most, is knowing that as equity markets re-price themselves to correspond with the real world of banking, real estate, and retail spending, thousands of professionals are going to suffer a similar fate. So, until they understand where we are in history, I encourage advisors and investors to find the safest havens of cash to hold their funds.

Traders must remember that all the major equity markets around the world are below their 2007 highs. All good traders know that trends come to an end. So if you have recently been making money rapidly from areas of the markets that have been moving almost straight up, would it not make sense to develop an exit strategy to lock in gains at some point? Shouldn't we be watching for the end of the trend and developing our strategies accordingly?

If you're interested in what various experts, from a variety of disciplines, have to say about finance, you should consider becoming a part of The Investor's Mind and benefiting from the research and views of some of the most experienced individuals in the world of money. To get a feel for the educational material we've presented to our readers since January of 2006, click here. We continue to gain recognition for our 154-page industry paper on short selling, Riders on the Storm: Short Selling in Contrary Winds, which can be obtained with a subscription to The Investor's Mind. To learn more about our mission, as well as our educational and advisory services, visit our website.



Doug Wakefield

Author: Doug Wakefield

Doug Wakefield,
Best Minds Inc., A Registered Investment Advisor

Best Minds, Inc is a registered investment advisor that looks to the best minds in the world of finance and economics to seek a direction for our clients. To be a true advocate to our clients, we have found it necessary to go well beyond the norms in financial planning today. We are avid readers. In our study of the markets, we research general history, financial and economic history, fundamental and technical analysis, and mass and individual psychology.

Copyright © 2005-2017 Best Minds Inc.

All Images, XHTML Renderings, and Source Code Copyright ©