Fwd: Warning signs of the coming financial armageddon, #569

Henry C.K. Liu hliu at mindspring.com
Wed Feb 24 16:13:26 PST 1999


You are right that there are no theories to adequately describe the current market complexities. Yet you then fall back on a zero sum game theory. When future traders log a trading loss, that does not mean they lost money unless they did not executive a counter hedge strategy and that kind of animals simply do exist nowadays. The number of naked speculators are very small. Day traders do not speculate blindly. They aim at neutralizing market inefficiencies and perform a useful market function. They do not bet against each other but against irrationalities in the market. Their main function is to neutralize market manipulation, purposeful or mechanical. The trouble with LTCM was that its got so big that it was neutralizing its own strategy and even then it would not have run into trouble if Greespan/Rubin/Summers had been policy consistent . G/R/S actually believed their own propaganda of free market when every market participant knew it was just ideological propaganda. That was the paradigm shift, from a G/R/S controlled market to a free market and wiped out LTCM.

The NY markets surely will crash before too long, but day traders will continue because most of the strategies are market neutral. Also, the global markets HAVE CRASHED all over the world except in the US and Europe. After 20 months, there is no more crisis, because the pains have been normalized. Even if the DJIA should fall to 4000 in March or October, we will only go back to 1987. Remember IBM at 50? The world did not end and some people got rich picking up cheap assets.


Doug Henwood wrote:

> Enrique Diaz-Alvarez wrote:
> >I think one possible explanation is that a small percentage of day
> >traders, through sophiticated models, intuition, or whatever, have
> >figured out a way to take money from a large majority that start up,
> >lose money, and quit. Not much different from all those "get rich quick
> >dealing in real state" infomercials, although in a much larger scale.
> >But I admit I haven't seen any hard data about daytraders and their
> >profit/losses, beyond self-reported anecdotal evidence. Do you have any?
> Too soon to know for sure. But, given fairly well-established facts like 1)
> 80-90% of amateur futures traders lose money, and 2) the more you trade,
> the worse you do (true of both professional and amateur speculators), I bet
> they're not doing too well. I think you're right that there may be a gang
> of survivors that make their money from all the novices, but whether
> survivorship is the result of luck or skill has yet to be established. My
> bet is that 90% are there because of luck and 10% because of some kind of
> skill, but we won't know for some time, until the professors of finance get
> the time to do some rigorous studies.
> Doug

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