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Traders at Work: How the World's Most Successful Traders Make Their Living in the Markets by Tim Bourquin, Nicholas Mango
algorithmic trading, automated trading system, backtesting, commodity trading advisor, Credit Default Swap, Elliott wave, fixed income, Long Term Capital Management, paper trading, pattern recognition, prediction markets, risk tolerance, Small Order Execution System, statistical arbitrage, The Wisdom of Crowds, transaction costs, zero-sum game
When we’re in a bull market, markets will push aside bearish news and continue with the longer-term trend. Remember, Elliott Wave is a picture of the psychology of the markets. Even if an economic report is terrible for the markets, if we’re in a bull market and the wave counts are strong, the market will head higher. Elliott Wave can tell you when we are in a bull market and when the market is willing to push aside poor data. So, yes, we look at fundamentals all day long. But we don’t trade the fundamentals. We’ll trade people’s expected reactions to the fundamentals—and that’s the key difference. Bourquin: That’s fascinating. So what that says to me is that you were so confident in the Elliott Wave that you’re willing to disregard even a huge economic report. You’re willing to trade through it because of what you see on the chart with the Elliott Wave? Gordon: How many times have you seen a report that comes in on the weak side but then the market rallies?
The point is you really need to get more technical to trade FX, because it’s so much more of a chess game than a boxing match with an opponent [the specialist], which is what day trading equities was. Bourquin: I know that at some point you settled on Elliott Wave. When did that happen? Gordon: That happened early in my time at FOREX.com. I had some knowledge of it, and we had access to a bunch of investment bank research. FOREX.com and the other Forex companies within the currency markets would hedge their business with the big investment banks, and we were big clients of companies like UBS, Barclay’s, Goldman Sachs, and Lehman at the time, if you can believe it. Because of this relationship, we would get bank research, and there were a couple guys at each bank that I followed closely. There was a guy at UBS named Jim Short who did Elliott Wave. There was also a guy at Goldman who did Elliott Wave analysis, and I would watch and read their stuff every day. I e-mailed them and bothered them all the time with questions about Elliott Wave.
Bourquin: You mentioned that fundamentals don’t figure much into your trading. When you place a trade based on your Elliott Wave counts, do you care, for instance, that on the day that we’re doing this interview, the nonfarm payrolls [NFP] economic report has come out? Do you care about those events, or do you trade regardless of them? Gordon: I trade through them all day long if the Elliott Wave count is strong enough. For example, today we had a long Australian dollar position that we put on this past Wednesday. We took half our position off for a profit before the announcement. We came into NFP today with a long Aussie dollar position, which would correlate to higher stock prices. Because the Elliott Wave count said we were in the middle of a good wave 3 breakout, I said, “We’re carrying this position through NFP.”
Albert Einstein, Andrew Wiles, asset allocation, availability heuristic, backtesting, Black Swan, capital asset pricing model, cognitive dissonance, compound rate of return, computerized trading, Daniel Kahneman / Amos Tversky, distributed generation, Elliott wave, en.wikipedia.org, feminist movement, hindsight bias, index fund, invention of the telescope, invisible hand, Long Term Capital Management, mental accounting, meta analysis, meta-analysis, p-value, pattern recognition, Paul Samuelson, Ponzi scheme, price anchoring, price stability, quantitative trading / quantitative ﬁnance, Ralph Nelson Elliott, random walk, retrograde motion, revision control, risk tolerance, risk-adjusted returns, riskless arbitrage, Robert Shiller, Robert Shiller, Sharpe ratio, short selling, source of truth, statistical model, systematic trading, the scientific method, transfer pricing, unbiased observer, yield curve, Yogi Berra
Elliott’s Tale The power of a good story may explain the enduring appeal of the Elliott Wave Principle (EWP), one of TA’s more grandiose conjectures. The Elliott Wave Principle holds that price waves express a universal order and form that is found not only in the ﬂuctuations of ﬁnancial markets but throughout the natural world, including the shapes of sea shells, galaxies, pine cones, sunﬂowers, and numerous other natural phenomena. According to EWP, market trends are fractal—a nested hierarchy of waves sharing the same form but ranging in magnitude and duration from microwaves that last only minutes to grand millennial macrowaves that can last for thousands of years.65 This shared form, called the Elliott wave, is an eight-segment conﬁguration of rising and falling price movements. In fact this universal pattern of growth and decay is alleged to describe not only the evolution of prices in ﬁnancial markets; it is also manifested in the evolution of trends in mass psychology, the rise and fall of civilizations, cultural fashions, and other social trends.
In fact this universal pattern of growth and decay is alleged to describe not only the evolution of prices in ﬁnancial markets; it is also manifested in the evolution of trends in mass psychology, the rise and fall of civilizations, cultural fashions, and other social trends. The theory claims to describe just about anything that goes through cycles of growth and change. Even the business career of Elliott wave’s leading advocate Robert Prechter, according to Prechter himself, has followed a series of ups and downs that conform to the Elliott Wave Principle. This The Illusory Validity of Subjective Technical Analysis 61 all ties in with a sequence of numbers called the Fibonacci series and the golden ratio phi, which does have many fascinating mathematical properties.66 However, that which purports to explain everything explains nothing. The Elliott Wave Principle, as popularly practiced, is not a legitimate theory but a story, and a compelling one that is eloquently told by Robert Prechter.67 The account is especially persuasive because EWP has the seemingly remarkable ability to ﬁt any segment of market history down to its most minute ﬂuctuations.
Gann analysis, among others. For example, the Elliott Wave Principle is based on an elaborate causal 70 METHODOLOGICAL, PSYCHOLOGICAL, PHILOSOPHICAL, STATISTICAL FOUNDATIONS explanation invoking universal forces that shape, not only the physical world, but mass psychology, culture, and society as well. Moreover, it has high retroﬁt power. By employing a large number of nested waves that can vary in both duration and magnitude, it is possible to derive an Elliott wave count (i.e., ﬁt) for any prior segment of historical data. However, except for one objective version95 of Elliott waves, the method does not generate testable/falsiﬁable predictions. Let’s consider the ﬁrst element, an elaborate causal explanation. TA methods that are based on intricate causal stories are able to withstand empirical challenges because they speak to the deeply felt human need to make sense of the world.
Trade Your Way to Financial Freedom by van K. Tharp
asset allocation, commodity trading advisor, compound rate of return, computer age, Elliott wave, high net worth, margin call, market fundamentalism, pattern recognition, prediction markets, random walk, risk tolerance, short selling, statistical model, transaction costs
As a result, they want to catch market turning points. In addition, it’s a highly marketable idea to sell to the public. There are a number of different types of theories involving market order, including Gann, Elliott Wave, astrological theories, etc. I elected to write this party of this chapter myself because (1) someone who is an expert ins one market-orderliness theory is not The first concept says that the markets are a function of human behavior and that the motives of human beings can be characterized by a certain structure. The most well-known structure of this type is Elliott Wave theory. Here one assumes that the impulses of fear and greed follow a distinct wave pattern. Basically, the market is thought to consist of five up waves followed by three corrective waves. For example, the major upthrust of the market would consist of five waves up (with waves 2 and 4 being in the opposite direction) followed by three waves down (with the middle wave being in the opposite direction).
For example, the major upthrust of the market would consist of five waves up (with waves 2 and 4 being in the opposite direction) followed by three waves down (with the middle wave being in the opposite direction). Each wave has a distinct characteristic, with the third major wave in the series of five being the most tradable. However, the theory gets much more complex because there are waves within waves. In other words, there are Elliott Waves of different magnitudes. For example, the first wave of the major movement would consist of another whole sequence of five waves followed by three corrective waves. Elliott, in fact, decided that there were nine categories of magnitude of waves, ranging from the Grand Supercycle to the subminuette waves. Certain rules aid the Elliott Wave theoretician in making decisions about the market. There are also variations to the rules in that waves may be stretched or compressed and there are some pattern variations. The nature of those rules and variations is beyond the scope of this discussion, but the rules do allow you to arrive at market turning points that are tradable.
Thus, if you are a trend follower, you need to find markets that trend well-be they stocks that show good relative strength or futures markets that typically show good trends several times each year. When the market typically has met your trading criteria in the past, it probably will do so again. The same goes for any other criteria you may be trading. If you follow seasonal patterns, then you must trade markets that show strong seasonal tendencies-agriculture products or energy products. If you follow Elliott Wave, then you must follow those markets for which Elliott Wave seems to work best. Whatever your trading criteria seem to be, you must find the markets that best meet those criteria. 7. Selection of a portfolio of independen? markets. This topic is somewhat beyond the scope of this introductory book on devel- 170 PART 3 Understanding the Key Parts of Your System oping a system. However, I would suggest that you look at the independence of the various markets you select.
A Mathematician Plays the Stock Market by John Allen Paulos
Benoit Mandelbrot, Black-Scholes formula, Brownian motion, business climate, butterfly effect, capital asset pricing model, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, intangible asset, invisible hand, Isaac Newton, John Nash: game theory, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Myron Scholes, Nash equilibrium, Network effects, passive investing, Paul Erdős, Paul Samuelson, Ponzi scheme, price anchoring, Ralph Nelson Elliott, random walk, Richard Thaler, Robert Shiller, Robert Shiller, short selling, six sigma, Stephen Hawking, survivorship bias, transaction costs, ultimatum game, Vanguard fund, Yogi Berra
To the extent there is one, it most likely derives from psychology, perhaps in part from the Keynesian idea of conventionally anticipating the conventional response, or perhaps from some as yet unarticulated systemic interactions. “Unarticulated” is the key word here: The quasi-mathematical jargon of technical analysis seldom hangs together as a coherent theory. I’ll begin my discussion of it with one of its less plausible manifestations, the so-called Elliott wave theory. Ralph Nelson Elliott famously believed that the market moved in waves that enabled investors to predict the behavior of stocks. Outlining his theory in 1939, Elliott wrote that stock prices move in cycles based upon the Fibonacci numbers (1, 2, 3, 5, 8, 13, 21, 34, 55, 89, . . . , each successive number in the sequence being the sum of the two previous ones). Most commonly the market rises in five distinct waves and declines in three distinct waves for obscure psychological or systemic reasons.
(Biorhythm theory is the idea that various aspects of one’s life follow rigid periodic cycles that begin at birth and are often connected to the numbers 23 and 28, the periods of some alleged male and female principles, respectively.) It also brings to mind the ancient Ptolemaic system of describing the planets’ movements, in which more and more corrections and ad hoc exceptions had to be created to make the system jibe with observation. Like most other such schemes, Elliott wave theory founders on the simple question: Why should anyone expect it to work? For some, of course, what the theory has going for it is the mathematical mysticism associated with the Fibonacci numbers, any two adjacent ones of which are alleged to stand in an aesthetically appealing relation. Natural examples of Fibonacci series include whorls on pine cones and pineapples; the number of leaves, petals, and stems on plants; the numbers of left and right spirals in a sunflower; the number of rabbits in succeeding generations; and, insist Elliott enthusiasts, the waves and cycles in stock prices.
The ratio of any Fibonacci number to its predecessor is close to the golden ratio of 1.618 . . . , and the bigger the numbers involved, the closer the two ratios become. Consider again, the Fibonacci numbers, 1, 2, 3, 5, 8, 13, 21, 34, 55, . . . . The ratios, 5/3, 8/5, 13/8, 21/13, . . . , of successive Fibonacci numbers approach the golden ratio of 1.618 . . . ! There’s no telling how an Elliott wave theorist dabbling in currencies at the time of the above exchange rate coincidence would have reacted to this beautiful harmony between money and mathematics. An unscrupulous, but numerate hoaxer might have even cooked up some flapdoodle sufficiently plausible to make money from such a “cosmic” connection. The story could conceivably form the basis of a movie like Pi, since there are countless odd facts about phi that could be used to give various investing schemes a superficial plausibility.
Walk Away by Douglas E. French
Elliott wave, forensic accounting, full employment, Home mortgage interest deduction, loss aversion, McMansion, mental accounting, mortgage debt, mortgage tax deduction, negative equity, New Journalism, Own Your Own Home, Richard Thaler, Robert Shiller, Robert Shiller, the market place, transaction costs, unbiased observer, wealth creators
Taking on too much debt to live in more house than a person needs (McMansions as they were called in the boom) is a waste of capital. Mortgage debt is unproductive debt. Robert Prechter, owner of the Elliott Wave International writes in his book Conquer the Crash that the lending process for businesses “adds value to the economy,” while consumer loans are counterproductive, adding costs but no value. The banking system, with its focus on consumer loans, has shifted capital from the productive part of the economy, “people who have demonstrated a superior ability to invest or produce (creditors) to those who have demonstrated primarily a superior ability to consume (debtors).” Prechter made the point in the November 2009 edition of the Elliott Wave Theorist that banks have lent sparingly to businesses for the past 35 years. Businesses report that since 1974, ease of borrowing was either worse or the same as it was the prior quarter, meaning that—at least according to business owners—loans have been increasingly hard to get the entire time.
Index A | B | C | D | E F | G | H | I | J K | L | M | N | O P | R | S | T | U V | W | Z 13 Bankers, 51 60 Minutes, 1 A Acorn, 33 Advances In Behavioral Economics, 69 American Individualism, 20 Architect’s Small House Service Bureau, 20 Are Home Prices The Next Bubble, 36 Ariely, Dan, 72 Aristotle, 46 Assets and the Poor, 32 Atlantic, The, 50 Austrian Business Cycle Theory, 66 Austrian Economics: An Anthology, 6 B Babcock, Fredrick, 26 George Babbitt, 26 Bank of America, 11, 16, 17, 49, 56 Barnes, Alyson, 8 Barron’s, 42 Bernanke, Ben, 36, 39 Better Homes in America Movement, 20 Beyond Greed and Fear, 71 Blackstone Group, 8 Bloomberg News, 8 Bourgeois Utopias, 298 Building for Babbitt, 20 Building Suburbia, 11 Building the Dream, 21 Bureaucracy, 75 Bush, George W., 36 C Caldwell, Phyllis, 50 Carmon, Ziv, 72 Casey, Doug, 60 CBS, 1 Cisneros, Henry, 33 CNBC, 3, 16 congressional loan conduit, 31 chart Conquer the Crash, 60 Courson, John, 10 Cutaia, Susan and Anthony, 39, 41 D De Coster, Karen, 5 Discriminating Risk, 31, 54 Duebel, Achim, 22 E Edelman, Ric, 42 Einhorn, David, 56 Elliott Wave Theorist, 60 Empowerment Network, The, 32 Ethics of liberty, The, 46, 54 Ethics of Money Production, The, 61 Exotic Preferences, 70 Expanding the Opportunities, 32 Equity Office Properties, 8 F Fannie Mae Bank of America, 16–17 CEO James Johnson, 37 conventional mortgages, 31 expanded government role, 52 FDR created, 28 HUD, 30 industry centralization, 34 locking out borrowers, 59 loosened loan criteria, 33 losses, 13 no incentive to negotiate, 49 Rothbard view, 48 underwater houses, 76–77 Fair Housing Act, 30 FDIC, 35, 39, 48 Federal Home Loan Banking System, 22 Federal Housing Administration, 22, 23, 29 Federal Reserve, 4, 5, 35, 36, 39, 42 Financial Times, 53 FIREA, 32 First American Core Logic, 3 Fishman, Robert, 28, 29 For a New Liberty, 54 Freddie Mac bond losses, 17 congressional authorization, 31 entrepreneurial risk, 56 expanded government role, 52 industry centralization, 34 loosened loan criteria, 33 Mortgage Electronic Registration System, 13 mortgages back to tenders, 16 Rothbard view, 48 G Geithner, Tim, 53, 57 Genesove, David, 69 Ginnie Mae, 30–31 Goodman, Laurie, 49 Goodman, Peter S., 36, 37, 39 Government National Mortgage Asssociation, 3, 52 Grant’s Interest Rate Observer, 46 Great Depression, 4, 26, 52 Greenspan, Alan, 35 Gross, Bill, 52 Guiso, Luigi, 45 H Hagerty, James R., 49 Hayden, Dolores, 22, 28 history of home values, 2 chart Home Depot, 5 Home Modernization Bureau, 20 Hoover, Herbert, 4, 20, 21, 36 HOPE, 32 Housing Advisory Council, 26 Hudson, Kris, 9 Hülsmann, Jörg Guido, 61, 62 Hutchinson, Janet, 20, 27–28 I Indiviglio, Daniel, 50 J Johnson, James, 37 Johnston, Joseph F., 8 journal, Association for Financial Counseling, 41 journal of Financial Planning, 41, 42 journal of Markets & Morality, 8 K Kemp, Jack, 32–33 Kudlow, Larry, 16 Kwak, James, 52 L La Valle, Nye, 14 Langone, Ken, 5 Las Vegas, 3, 49, 50, 57, 71, 79 Las Vegas Review journal, 50 Legal Studies Discussion Paper, 1 Levitin, Adam, 12 Levitt, William, 20 Lewis, Sinclair, 26 LewRockwell.com, 5 Lira, Gonzalo, 12–14 Lowenstein, George, 70 Lowenstein, Roger, 11, 62 Luth, Don, 62 M Macerich Co., 9 Market For Liberty, The, 56 Marketing and Financing Home Ownership, 19 Mauldin, John, 14 Mayer, Christopher, 69 McCarthy, Jonathan, 36 Miami Beach, 3 Mind of the Market, The, 71 Mises, Ludwig von, 6, 75 Moffett, James, 26 Morgan Stanley, 8, 9 Morgenson, Gretchen, 16 MSNBC, 16 Murin, Joseph, 3, 5 Murphy, Larry, 50 N Naked Capitalism, 14 National Association of Real Estate Boards, 20 National Association of Realtors, 31 National Homeownership Strategy, 33–34 Natural law and the fiduciary duties, 8 New Deal, 23 New York Times, iv, 16, 51 O Obama, Barack Hussein, 14 OFHEO, 32 Otis, James, iii Own Your Own Home, 4, 19, 20 P Past Due, 36 Paulson Jr., Henry M., 10 Peach, Richard W., 36 Phoenix, 3, 51 PIMCO, 52, 53 Pines, Michael, 16 Pinto, Edward, 33 Powell, Michael, 51 Power and Market, 57 Prechter, Robert, 60 Predictably Irrational, 72 Prelec, Dražen, 70 private property, iii, 24–25, 27–28, 47 Pruitt, A.
New Market Wizards: Conversations With America's Top Traders by Jack D. Schwager
backtesting, beat the dealer, Benoit Mandelbrot, Berlin Wall, Black-Scholes formula, butterfly effect, commodity trading advisor, computerized trading, Edward Thorp, Elliott wave, fixed income, full employment, implied volatility, interest rate swap, Louis Bachelier, margin call, market clearing, market fundamentalism, money market fund, paper trading, pattern recognition, placebo effect, prediction markets, Ralph Nelson Elliott, random walk, risk tolerance, risk/return, Saturday Night Live, Sharpe ratio, the map is not the territory, transaction costs, War on Poverty
Beyond confidence in their own success, what are some of the other characteristics of successful traders? Another important element is that they have a perceptual filter that they know well and that they use. By perceptual filter I mean a methodology, an approach, or a system to understanding market behavior. For example, Elliott Wave analysis and classical chart analysis are types of perceptual filters. In our research, we found that the type of perceptual filter doesn’t really make much of a difference. It could be classical Charles Faulkner / 429 chart analysis, Gann, Elliott Waves, or Market Profile—all these methods appear to work, provided the person knows the perceptual filter thoroughly and follows it. I have an explanation as to why that may be the case. I’d certainly be interested in hearing it. I believe a lot of the popular methodologies are really vacuous.
Within about a week, I had lost about one-third of my gains. Normally, when I surrender a meaningful percentage of my profits, I put on the brakes, either trading only minimally or ceasing to trade altogether. Instinctively, I seemed to be following the same script on this occasion, as my positions were reduced to minimal levels. At this time, I received a call from my friend Harvey (not his real name). Harvey is a practitioner of Elliott Wave analysis (a complex the- 6 / The New Market Wizard ory that attempts to explain all market behavior as part of a grand structure of price waves).* Harvey often calls me for my market opinion and in the process can’t resist telling me his. Although I have usually found it to be a mistake to listen to anyone else’s opinions on specific trades, in my experience Harvey had made some very good calls.
So I said (I still cringe at the recollection), “OK Harvey, I’ll follow you on this trade. But I must tell you that from past experience I’ve found listening to other opinions disastrous. If I get in on your opinion, I’ll have no basis for deciding when to get out of the trade. So understand that my plan is to follow you all the way. I’ll get out when you get out, and you need to let me know when you change your opinion.” Har- * The Elliott Wave Principle, as it is formally called, was originally developed by R. N. Elliott, an accountant turned market student. Elliott’s definitive work on the subject was published in 1946, only two years before his death, under the rather immodest title: Nature’s Law—The Secret of the Universe. The application of the theory is unavoidably subjective, with numerous interpretations appearing in scores of volumes.
algorithmic trading, asset allocation, automated trading system, backtesting, Black Swan, Brownian motion, business continuity plan, compound rate of return, Edward Thorp, Elliott wave, endowment effect, fixed income, general-purpose programming language, index fund, John Markoff, Long Term Capital Management, loss aversion, p-value, paper trading, price discovery process, quantitative hedge fund, quantitative trading / quantitative ﬁnance, random walk, Ray Kurzweil, Renaissance Technologies, risk-adjusted returns, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, systematic trading, transaction costs
Constructing a trading strategy is essentially a matter of determining if the prices under certain conditions and for a certain time horizon will be mean reverting or trending, and what the initial reference price should be at any given time. (When the prices are trending, they are also said to have “momentum,” and thus the corresponding trading strategy is often called a momentum strategy.) Some people like to describe the phenomenon that prices can be both mean reverting and trending at the same time as the “fractal” nature of stock prices. Technical analysts or chartists like to use the so-called Elliott wave theory to analyze such phenomena. Still others like to use the discipline of machine learning or artificial intelligence (in particular, techniques such as hidden Markov models, Kalman filter, neural networks, etc.) to discover whether the prices are in a mean-reverting or trending “regime.” I personally have not found such general theories of mean reversion or momentum particularly useful. (See, however, the section on regime switching, which describes an apparently successful attempt to predict regime switch for one particular stock.)
See Seasonal trading strategies Capacity, 27, 158 Capital availability, effect on choices, 15 Capital allocation, optimal, 95–103 Capital IQ, 136 Chicago Mercantile Exchange (CME), 16 Clarifi, 35 CNBC Plus, 76 Cointegrating augmented Dickey-Fuller test, 128 Cointegration, 126–133 forming a good cointegrating pair of stocks, 128–130 Compustat, 136 Contagion, financial, 104–105 Correlation, 131 Covariance matrix, 97 CSIdata.com, 37 CRSP.com, 37 D Dark-pool liquidity, 71, 73, 88 Data mining, 121 Databases, historical, 37 Data-snooping bias, 25–27, 52–60, 91 out-of-sample testing, 53–55 sample size, 53 sensitivity analysis, 60 and underperformance of live trading, 91 Decimalization of stock prices, 91, 120 Printer: Yet to come INDEX Deleveraging, 152 Despair, 110 Disasters, physical or natural, 108 Discovery (Alphacet), 35, 36, 55, 85, 122–126 charting application, 125 Dollar-neutral portfolio, 43–44 Dow Jones, 36, 75 Drawdown, 20, 21–22, 43, 95 maximum, 21 calculating, 48–50 maximum duration, 21 calculating, 48–50 DTN.com, 37 Dynamic data exchange (DDE) link, 80, 81–82, 83, 84, 85 E ECHOtrade, 70 Econometrics toolbox, 168 The Economist, 10 Elite Trader, 10, 74 Elliott wave theory, 116 E-mini S&P 500 future, 16 Endowment effect, 108–109 Equity curve, 20 Excel, 3, 21, 32, 51, 163 dynamic data exchange (DDE) link to, 80, 81–82, 83, 84, 85 using in automated trading systems, 80, 81, 83, 84, 85 using to avoid look-ahead bias, 51 using to calculate maximum drawdown and maximum drawdown duration, 48 using to calculate Sharpe ratio for long-only strategies, 45–46, 47 P1: JYS ind JWBK321-Chan October 2, 2008 14:7 Printer: Yet to come 177 Index Execution systems, 79–94 automated trading system, advantages of, 79–87 fully automated trading system, building a, 84–87 semiautomated trading system, building a, 81–84 paper trading, testing your system by, 89–90 performance, divergence from expectations, 90–92 transaction costs, minimizing, 87–88 Exit strategy, 140–143 F Factor exposure, 134 Factor models, 133–139 principal component analysis as an example of, 136–139 Factor return, 134 FactSet, 35, 36 Fama-French Three-Factor model, 134–135, 153 Financial web sites and blogs, 10 G GainCapital.com, 37 GARCH toolbox, 168 Gasoline futures, seasonal trade in, 148–151 Gaussian probability distributions, 96, 105 derivation of Kelly formula in, 112–113 Generalized autoregressive conditional heteroskedasticity (GARCH) model, 120 Genesis Securities, 70, 73, 82 Global Alpha fund (Goldman Sachs), 104 Greed, 110–111 H “Half-Kelly” betting, 98, 105–106 High-frequency trading strategies, 151–153 transaction costs, importance of in testing, 152 High-leverage versus high-beta portfolio, 153–154 High watermark, 21, 48 Historical databases errors in, 117 finding and using, 36–43 high and low data, use of, 42–43 split and dividend-adjusted data, 36–40 survivorship bias, 40–42 HQuotes.com, 37, 81 Hulbert, Mark (New York Times), 10 I Information ratio.
bank run, banking crisis, Ben Bernanke: helicopter money, Berlin Wall, Bernie Madoff, Bretton Woods, British Empire, Buckminster Fuller, California gold rush, currency manipulation / currency intervention, Deng Xiaoping, diversified portfolio, Elliott wave, fiat currency, fixed income, Fractional reserve banking, housing crisis, If something cannot go on forever, it will stop - Herbert Stein's Law, index fund, Lao Tzu, margin call, market bubble, McMansion, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, oil shock, peak oil, pushing on a string, reserve currency, rising living standards, road to serfdom, Ronald Reagan, Saturday Night Live, short selling, Silicon Valley, transaction costs
Williams also makes a good deal of his background material and reporting on flawed economic data available in open material for nonsubscribers on his Web site. Highly informative, highly recommended. Information at www.shadowstats.com. The Elliot Wave Theorist Robert R. Prechter, Jr., is president of Elliott Wave International, which publishes analysis of global stock, bond, currency, metals, and energy markets based on swings in market psychology from extremes of pessimism to optimism. He has been publishing The Elliott Wave Theorist since 1979. I consider his descriptions of the long-term trends in public and investor moods to be superior. Published twelve times a year; $20 per month. www.elliottwave.com. The High-Tech Strategist Fred Hickey edits this monthly newsletter. As the name implies, he covers the high-tech industry and its stocks, but he has a good understanding of the fundamental economic issues and has been heavily positioned in gold, and shorts the tech market when necessary. $140 per year; $60 for a three-month trial subscription.
The Land Grabbers: The New Fight Over Who Owns the Earth by Fred Pearce
Asian financial crisis, banking crisis, big-box store, blood diamonds, British Empire, Buy land – they’re not making it any more, Cape to Cairo, carbon footprint, clean water, corporate raider, credit crunch, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy security, farmers can use mobile phones to check market prices, index fund, Jeff Bezos, land reform, land tenure, Mahatma Gandhi, market fundamentalism, megacity, Mohammed Bouazizi, Nikolai Kondratiev, offshore financial centre, out of africa, quantitative easing, race to the bottom, Ronald Reagan, smart cities, structural adjustment programs, too big to fail, urban planning, urban sprawl, WikiLeaks
While that apocalyptic vision might suggest a threat to Emergent’s African assets, Murrin figures that in the run-up to war there will be a lot of profit as commodity scarcity causes prices to soar. He embraces other threats, too. “Climate change means some places in Africa will be drier and others will be wetter. We’ll be looking to take advantage of that,” he says. Murrin also claims to keep ahead of the game by exploiting the Elliott Wave theory of long-term cycles in public mood, alternating between optimism and pessimism. This idea took root when he was in Papua New Guinea, and he discusses it at length in his book, Breaking the Code of History. He says: “There is a tradition that history is about the detail, but I have always believed instead that it is determined on a vast scale, by a specific set of dynamics. Moreover, its apparent randomness is only an illusion: once the sequence of events that we call ‘history’ is shown to be governed by certain behavioural algorithms, we can then discern, with clarity, the degree to which our lives are bound up in numerous interrelationships.”
Moreover, its apparent randomness is only an illusion: once the sequence of events that we call ‘history’ is shown to be governed by certain behavioural algorithms, we can then discern, with clarity, the degree to which our lives are bound up in numerous interrelationships.” Phew. Payne’s presentations, meanwhile, often include a scary graph showing something called the Kondratiev Cycle, after Nikolai Kondratiev, the Russian economist who invented it. I’m not clear how the Elliott Wave and the Kondratiev Cycle relate, if at all. But her graph shows U.S. commodity prices since 1800, rising and falling in a long cycle with spikes roughly every fifty years. Some have claimed that the supposed cycle is created by technological innovations. Others suggest credit cycles or demographics. Payne proposes a link to conflicts. Her graph captions the spikes as linked to the Napoleonic wars in Europe, the American Civil War, the First World War, and the Vietnam War.
Henry), 142 Cambodia, 32, 35, 36, 168, 187–96, 200, 201, 205; economic land concessions, 189, 194 Cambodian League for the Promotion of Human Rights (LICADHO), 192 camels, 219, 283, 285, 286 Cameroon, 21, 88–89, 204, 263–264 Campo Aberto, Brazil, 115, 119 Canada, 27, 110–11, 132, 159, 167, 289; investors in Africa, 48, 73, 90, 238, 241, 246, 248, 249 Carbon Planet, 267 Cargill, 8, 110, 117, 121, 123, 125, 159, 202, 294 Casaccia, Jose Luis, 138 Casado, Carlos, 136 Cayman Islands, 90, 97, 202 Center for International Forestry Research (CIFOR), 178, 250, 268 Central African Republic, 265 Central Equatoria Teak, 47 Central Intelligence Agency (CIA), 43, 143 cerrado, 112, 115–17, 129, 130, 161, 202, 205, 295; colonization since 1960s, 116–17, 123–24; indigenous people and slavery, 117, 119, 122–23; wildlife and biodiversity, 115–16, 118, 120–21, 124, 126 Chaco, 129–39, 150, 154; Brazilian ranchers, 129–31, 134–35; indigenous groups, 133, 134–35, 137–39; wildlife and conservation, 129–31, 134, 135–37, 138–39 Changhae Tapioka, 184 Chavez, President Hugo, 141 Chernobyl, Ukraine, 110 Chicago, vii, 19–20, 116 Chicago Board of Trade (CBOT), 19–20, 25, 27 chiefs, authority of, 11, 33, 45–46, 63, 65, 66, 99–100, 174, 235, 249–50 Chile, 150–51, 153–54 China, vii, 30, 109, 123, 133, 167–68, 170, 172, 178, 199–205, 234, 280, 292; in Africa, 75, 88, 202–4, 234, 265, 175–76, 277, 279, 280; in Asia, 110, 181, 185, 192, 199–201, 202, 205; in Australasia, 159–60; consumer demand, 22, 67, 181, 200–2; future war with West, 95, 201; land grabbing in, 202, 203; in Latin America, 126, 127, 202 China State Farms Agribusiness Corporation, 204 Cholmondeley family, 217 Chongqing Grain Group, 127, 202 Citadel Capital, 48 climate change, viii, x, 22, 95, 130, 243, 267, 291, 292 Club 21, 226–67 cocoa, 27, 84, 97 coffee, 7, 20, 25, 41, 101, 115, 118, 142, 143, 256 Collier, Paul, 291–95, 301 Colombia, vii, 142, 145–47 Coming Anarchy, The (Robert Kaplan), 43 commodity markets, 23, 26, 27, 100, 202, 293 commons, tragedy of the, x, 285 Commonwealth Development Corporation (CDC), 47, 101 Complant International Sugar, 202 Congo-Brazzaville, 88, 89, 227, 234, 264, 265 Congo, Democratic Republic of (DRC), 85, 88, 89, 90, 203, 227 Congolaise Industrielle des Bois (CIB), 265 Congo River, 85, 89 Conservation International (CI), 74, 117, 118, 126, 229 Conservation refugees, 229–30 Conway, Gordon, 295 corruption, 38, 45, 53, 74, 141, 144, 171, 174–75, 194, 257, 267 Costa Rica, 135, 142 Costello, Peter, 192 Cote d’Ivoire (Ivory Coast), 21, 68, 88, 89, 239, 274 Cotton, 37, 199, 202, 236, 238, 256, 265, 275; in Australia, 159–60; in Brazil, 115, 118–19, 124–25, 131; in Ethiopia, 5, 7 Crafar Farms, New Zealand, 160 Craig, David and Ian, 218–19 credit crunch, 20, 24–27, 37, 82, 101 Cuba, 142, 143 Curran, Bryan, 229–30 Daewoo, 205 dairy industry, 57, 59, 111, 126, 133, 189, 202, 224, 260, 283, 285, 298–300; in Gulf, vii, 29–32; in India, 7, 300; in New Zealand, 160, 203 Dangote, Aliko, 239 Danzer Group, 264 Defensores del Chaco, Paraguay, 131, 135 Deng, David, 42–43 Denton, Tim, 101–2 derivatives, financial, 20, 25–26, 93, 96, 100 desertification, 285, 298 Desmond Holdings, 99 Dexion Capital, 110 Dinka, 42, 49 Diouf, Jacques, 34 Doan Nguyen Duc, 200 Doe, Samuel, 66–67, 76, 78 Dominican Republic, 142 Dominion Farms, 53–63 Douglas, Howard Eugene, 44–46 drug trade, 136, 141, 143–44, 146–47, 192 Dubai, 34–35, 37, 83, 157, 211, 231 Edmonds, Phil, 97, 246–47, 258 Egypt, 21, 30, 32, 37, 48–49, 86, 240, 266 Elliott Wave theory, 95 Emergent Asset Management, 93–95, 201, 237 “empty” lands, x, 9, 11, 44, 54, 76, 103, 115–16, 134, 149, 248, 260, 288 Energem, 246 Equatorial Palm Oil (EPO), 81–85, 87, 89–90 Estonia, 109 Ethanol. See biofuels Ethiopia, 3–16, 44, 47, 228–29, 239, 244, 248, 286, 300 European Bank for Reconstruction and Development, 110 European Union (EU), 26, 108, 109, 116, 250; Everything But Arms, 195–6; market for forest products, 69, 177, 185; market for sugar, 187, 195–96, 238 Evans, M.P., 158 Ex-Im Bank, 109, 204 famine, 9, 16, 22, 24, 44, 103, 291, 293 Far East Agricultural Investment, 32–33 Farm Lands of Guinea, 99 Fauna and Flora International, 217 FELDA Holdings, 157 Ferguson, Richard, 291–92, 295 Fernando Po, 66 Feronia Inc., ix, 90 Filadelfia, Paraguay, 133–34 Filer, Colin, 182–86 Finland, 47, 167, 168, 177 Firestone, 66, 69–73, 75, 77, 79, 84 Flora EcoPower, 248 Fonterra, 160, 203 food: export bans, 32, 103, 204; price of, vii, 5, 31–32, 37, 38, 75, 95, 101, 195, 238, 291, 297; 2008 price spike, 19–27, 34, 96, 293; security, 22, 34, 37, 96, 112, 280, 293–94, 296; self-sufficiency, 21, 29–30, 32, 277 Forest Peoples Programme, 229 Forest Stewardship Council, 173, 177 Formosa do Rio Preto, Brazil, 121–22, 124 Fortress conservation, 224, 228, 230 France and French, vii, 30, 103, 109, 193, 201, 217, 273, 274, 299; and timber trade, 67, 88, 263–65 Frayne, Michael, 81–82, 84, 87–88 Friends of the Earth, 176, 245 Friends of Yala Swamp, 62 Fulani, 272, 274–76, 281 Fundacion Tierra, 145 Gabon, 88, 229, 235, 263–65 Gaddafi, Colonel Muammar, 67, 109, 277 Gambella, Ethiopia, 3–16, 44, 47, 49, 239, 244, 288, 289 Garamba National Park, DRC, 226, 227 Georgia, 237 Germany and Germans, 24, 30, 58, 78, 83, 167, 213, 243, 259; German land grabbers, 160, 218, 264, 265; Germans in South America, 117, 131, 132, 134, 138 Getty family, 81–82, 84, 231 Gezira project, Sudan, 37 Ghana, 89, 249–50, 274, 288 Global Witness, 68 goats, 59, 159, 272, 277, 281, 284, 286, 296 Gold, Dan, 97 Golden Agri, 85, 88 Goldman Sachs, vii, 21, 24–25, 93, 97, 110, 111, 154, 158, 203, 237, 240; Goldman Sachs Commodity Index, 25 Gold Star Farms, 249 Grapes of Wrath (John Steinbeck), ix, 123 Great Limpopo Transfrontier Park, 227, 247 Green Advocates, 76 Greenleaf Global, 98 Greenpeace, 263 Green Resources, 48 green revolution, 22, 295, 296 Greenworld BVI, 98 Groundnut Scheme, Tanganyika, 103–4 Grumeti game reserve, Tanzania, 209–210, 259 Grzimek, Bernhard, 213, 230 Guarani, 145 Guatemala, 142–44 Guinea, vii, 21, 75, 76, 99 Guinea Bissau, 204 Guinea Savannah Zone, 9 Guyra Paraguay, 130, 136–37 Haes, Charles de, 223–25 Haiti, 22, 300 Hall, Ruth, 235, 237 Hands, Guy, 97, 158 Hanks, John, 227 Hardin, Garrett, 285 Hasan, Mohamad “Bob,” 172 Hassad Food, 36, 159 Hazim Hazim Chehade, 263 Heart of Darkness (Joseph Conrad), ix, 85, 264 hedge funds, vii, 24, 37, 73, 90, 96, 97, 100, 109, 110, 114, 210, 245 Heilberg, Philippe, 41–45 Herakles Farms, 89 Hickey, Liam, 74–75, 77 hippo grass.
The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg
3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bretton Woods, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, global village, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Kenneth Rogoff, late fees, liberal capitalism, mega-rich, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, post-oil, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, Ronald Reagan, short selling, special drawing rights, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, working poor, zero-sum game
This paragraph is based on historical analysis and insights from Herman Daly and John Cobb. See Herman Daly and John Cobb, For the Common Good (Boston: Beacon Press, 1994), pp. 97–120. 11. For a further discussion of this point see Daly and Cobb, op. cit. 12. A periodically updated discussion of the business cycle from various points of view is available at Wikipedia. 13. Though not according to economists who subscribe to the Elliott Wave theory. See A. J. Frost and Robert Prechter, Elliott Wave Principle: Key to Market Behavior (Gainesville, GA: New Classics Library, 2006). 14. This appears to be the opposite of what is happening now — money is tight but interest rates are low. The current situation exists because the Federal Reserve is deliberately keeping interest rates low to stimulate economic activity. 15. See Bruce Jansson, The Sixteen-Trillion-Dollar Mistake (New York: Columbia University Press, 2002). 16.
asset allocation, Bernie Madoff, Cass Sunstein, Credit Default Swap, David Brooks, delayed gratification, diversification, diversified portfolio, Donald Trump, Elliott wave, en.wikipedia.org, estate planning, financial innovation, Flash crash, game design, greed is good, high net worth, impulse control, income inequality, index fund, London Whale, Mark Zuckerberg, money market fund, mortgage debt, oil shock, payday loans, pension reform, Ponzi scheme, quantitative easing, Ralph Nader, RAND corporation, random walk, Richard Thaler, Ronald Reagan, Saturday Night Live, too big to fail, transaction costs, Unsafe at Any Speed, upwardly mobile, Vanguard fund, wage slave, women in the workforce, working poor, éminence grise
It costs, of course, but what’s a little bit of money when a guru is guaranteeing you a spot in a lifeboat being lowered from the economic Titanic? Almost all sellers of doom are excellent marketers. Many send out almost daily e-mail blasts, like Robert Prechter, whose company promotes the impossibly complicated Elliott Wave, a creation of a Depression-era accountant that plots public mood in numerical waves, using the patterns to predict stock market returns. If you are wondering, the Elliott Wave most recently predicted that the Dow would fall to one thousand and oil to $10 a barrel. There is also a conference circuit, including the almost forty-year-old New Orleans Investment Conference (founded in 1973) and more recent entrants such as Agora Financials annual July gathering in Vancouver, which offers up “actionable investment ideas.”
Present Shock: When Everything Happens Now by Douglas Rushkoff
algorithmic trading, Andrew Keen, bank run, Benoit Mandelbrot, big-box store, Black Swan, British Empire, Buckminster Fuller, cashless society, citizen journalism, clockwork universe, cognitive dissonance, Credit Default Swap, crowdsourcing, Danny Hillis, disintermediation, Donald Trump, double helix, East Village, Elliott wave, European colonialism, Extropian, facts on the ground, Flash crash, game design, global supply chain, global village, Howard Rheingold, hypertext link, Inbox Zero, invention of agriculture, invention of hypertext, invisible hand, iterative process, John Nash: game theory, Kevin Kelly, laissez-faire capitalism, Law of Accelerating Returns, loss aversion, mandelbrot fractal, Marshall McLuhan, Merlin Mann, Milgram experiment, mutually assured destruction, negative equity, Network effects, New Urbanism, Nicholas Carr, Norbert Wiener, Occupy movement, passive investing, pattern recognition, peak oil, price mechanism, prisoner's dilemma, Ralph Nelson Elliott, RAND corporation, Ray Kurzweil, recommendation engine, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, Skype, social graph, South Sea Bubble, Steve Jobs, Steve Wozniak, Steven Pinker, Stewart Brand, supply-chain management, the medium is the message, The Wisdom of Crowds, theory of mind, Turing test, upwardly mobile, Whole Earth Catalog, WikiLeaks, Y2K, zero-sum game
More recently, in early 2010, the world’s leading forecaster applying fractals to markets, Robert Prechter, called for the market to enter a decline of such staggering proportions that it would dwarf anything that has happened in the past three hundred years.16 Prechter bases his methodology on the insights of a 1930s economist, Ralph Nelson Elliott, who isolated a number of the patterns that seem to recur in market price data. They didn’t always occur over the same timescale or amplitude, but they did have the same shape. And they combined to form larger and larger versions of themselves at higher levels, in a highly structured progression. Prechter calls this progression the Elliott Wave. We may as well call it fractalnoia. For not only is the pattern supposed to repeat on different scales and in progressively larger time frames; it’s also supposed to be repeating horizontally across different industries and aspects of human activity. Prechter titled his report on fractals and the stock market “The Human Social Experience Forms a Fractal.” And, at least as of this writing, the biggest market crash since the South Sea Bubble of 1720 has yet to occur.
See also specific topic Disney theme parks, 186–88 DNA, 85, 258 Doctorow, Cory, 217 Domeier, Rick, 94 drone pilots, 7, 120–22 drugs, 92, 98, 99, 103, 124 Dulles, John Foster, 89 Dunbar, Kevin, 204 Duncan Yo-Yo, 108 Dungeons & Dragons (game), 60–61, 60n Dyson, Freeman, 133, 135, 141 Earth, first photographs of, 223–24 Eastern-Westerner comparison, Nisbett’s, 234–35 economy/economics: behavioral, 5–6; cashless societies and, 184; change and, 167; digiphrenia and, 97; expansion of, 170–80; fractalnoia and, 206, 226, 227, 228–29; global, 206; new “now” and, 3, 4, 5–6; overwinding and, 136, 145–49, 161, 163–65, 167–68, 171, 184–85; stages in human development and, 80; storage-based, 184; time and, 80. See also consumers; money/ currency Edelman, Richard, 50 efficiency, 81, 82, 95, 188 Eisner, Michael, 186, 187, 188 elections of 2008, 18 Elliott, Ralph Nelson, 229 Elliott Wave, 229–30 email, 2, 69–70, 99, 117–18, 119–20, 143–45, 264 emergence concept, 227, 262, 263 empathy, 236, 237 end/endings: apocalypto and, 7, 247, 250, 252, 253–54, 261, 262; fractalnoia and, 199; games and, 59, 61–62, 67; hardest part of living in present shock and, 247; narrative collapse and, 34, 56, 59, 61–62, 66, 67; new “now” and, 4; of time, 250, 252, 253–54, 262; traditional storytelling and, 62 Energy Department, U.S., 54 energy, renewable, 189–91 entertainment, 21.
accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Big bang: deregulation of the City of London, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, Exxon Valdez, forensic accounting, global reserve currency, high net worth, index fund, inflation targeting, intangible asset, interest rate derivative, interest rate swap, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, purchasing power parity, Real Time Gross Settlement, reserve currency, Right to Buy, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond
Computer software enables the technical analyst to switch from one chart type to another. Technical analysis caters also for those who shun simplicity. William D Gann was a technician with a unique, highly mathematical form of technical analysis linking price and time proportionately, with lashings of special numbers and astrological inferences. Courses in Gann theory tend not to come cheap. Elliott Wave Theory is another tough nut to crack. It ﬁnds that the market always rises in ﬁve waves and falls in three, and so assumes a perpetual long-term bull market. The proportional relationship of the waves is linked to Fibonacci numbers, which have a mathematical relationship claimed to be deep-rooted in nature. Many equities professionals in the City regard technical analysis as a somewhat fringe activity, but others take it more seriously.
Index 419 fraud 204 9/11 terrorist attacks 31, 218, 242, 243, 254, 257 Abbey National 22 ABN AMRO 103 accounting and governance 232–38 scandals 232 Accounting Standards Board (ASB) 236 administration 17 Allianz 207 Alternative Investment Market (AIM) 44–45, 131, 183, 238 Amaranth Advisors 170 analysts 172–78 fundamental 172–74 others 177–78 Spitzer impact 174–75 technical 175–77 anti-fraud agencies Assets Recovery Agency 211–13 City of London Police 209 Financial Services Authority 208 Financial Crime and Intelligence Division 208 Insurance Fraud Bureau 209 Insurance Fraud Investigators Group 209 International Association of Insurance Fraud Agencies 207, 210, 218 National Criminal Intelligence Service 210 Serious Fraud Ofﬁce 213–15 Serious Organised Crime Agency 210–11 asset ﬁnance 24–25 Association of Investment Companies 167 backwardation 101 bad debt, collection of 26–28 Banco Santander Central Hispano 22 Bank for International Settlements (BIS) 17, 27, 85, 98, 114 bank guarantee 23 Bank of Credit and Commerce International (BCCI) 10, 214 Bank of England 6, 10–17 Court of the 11 credit risk warning 98 framework for sterling money markets 81 Governor 11, 13, 14 history 10, 15–16 Inﬂation Report 14 inﬂation targeting 12–13 interest rates and 12 international liaison 17 lender of last resort 15–17 Market Abuse Directive (MAD) 16 monetary policy and 12–15 Monetary Policy Committee (MPC) 13–14 Open-market operations 15, 82 repo rate 12, 15 role 11–12 RTGS (Real Time Gross Settlement) 143 statutory immunity 11 supervisory role 11 Bank of England Act 1988 11, 12 Bank of England Quarterly Model (BEQM) 14 Banking Act 1933 see Glass-Steagall Act banks commercial 5 investment 5 Barclays Bank 20 Barings 11, 15, 68, 186, 299 Barlow Clowes case 214 Barron’s 99 base rate see repo rate Basel Committee for Banking Supervision (BCBS) 27–28 ____________________________________________________ INDEX 303 Basel I 27 Basel II 27–28, 56 Bear Stearns 95, 97 BearingPoint 97 bill of exchange 26 Bingham, Lord Justice 10–11 Blue Arrow trial 214 BNP Paribas 145, 150 bond issues see credit products book runners 51, 92 Borsa Italiana 8, 139 bps 90 British Bankers’ Association 20, 96, 97 building societies 22–23 demutualisation 22 Building Societies Association 22 Capital Asset Pricing Model (CAPM) see discounted cash ﬂow analysis capital gains tax 73, 75, 163, 168 capital raising markets 42–46 mergers and acquisitions (M&A) 56–58 see also ﬂotation, bond issues Capital Requirements Directive 28, 94 central securities depository (CSD) 145 international (ICSD) 145 Central Warrants Trading Service 73 Chancellor of the Exchequer 12, 13, 229 Chicago Mercantile Exchange 65 Citigroup 136, 145, 150 City of London 4–9 Big Bang 7 deﬁnition 4 employment in 8–9 ﬁnancial markets 5 geography 4–5 history 6–7 services offered 4 world leader 5–6 clearing 140, 141–42 Clearing House Automated Payment System (CHAPS) 143 Clearstream Banking Luxembourg 92, 145 commercial banking 5, 18–28 bad loans and capital adequacy 26–28 banking cards 21 building societies 22–23 credit collection 25–26 ﬁnance raising 23–25 history 18–19 overdrafts 23 role today 19–21 commodities market 99–109 exchange-traded commodities 101 ﬂuctuations 100 futures 100 hard commodities energy 102 non-ferrous metals 102–04 precious metal 104–06 soft commodities cocoa 107 coffee 106 sugar 107 Companies Act 2006 204, 223, 236 conﬂict of interests 7 consolidation 138–39 Consumer Price Index (CPI) 13 contango 101 Continuous Linked Settlement (CLS) 119 corporate governance 223–38 best practice 231 Cadbury Code 224 Combined Code 43, 225 compliance 230 deﬁnition 223 Directors’ Remuneration Report Regulations 226 EU developments 230 European auditing rules 234–35 Greenbury Committee 224–25 Higgs and Smith reports 227 International Financial Reporting Standards (IFRS) 237–38 Listing Rules 228–29 Model Code 229 Myners Report 229 OECD Principles 226 operating and ﬁnancial review (OFR) 235– 36 revised Combined Code 227–28 Sarbanes–Oxley Act 233–34 Turnbull Report 225 credit cards 21 zero-per-cent cards 21 credit collection 25–26 factoring and invoice discounting 26 trade ﬁnance 25–26 credit derivatives 96–97 back ofﬁce issues 97 credit default swap (CDS) 96–97 credit products asset-backed securities 94 bonds 90–91 collateralised debt obligations 94–95 collateralised loan obligation 95 covered bonds 93 equity convertibles 93 international debt securities 92–93 304 INDEX ____________________________________________________ junk bonds 91 zero-coupon bonds 93 credit rating agencies 91 Credit Suisse 5, 136, 193 CREST system 141, 142–44 dark liquidity pools 138 Debt Management Ofﬁce 82, 86 Department of Trade and Industry (DTI) 235, 251, 282 derivatives 60–77 asset classes 60 bilateral settlement 66 cash and 60–61 central counterparty clearing 65–66 contracts for difference 76–77, 129 covered warrants 72–73 futures 71–72 hedging and speculation 67 on-exchange vs OTC derivatives 63–65 options 69–71 Black-Scholes model 70 call option 70 equity option 70–71 index options 71 put option 70 problems and fraud 67–68 retail investors and 69–77 spread betting 73–75 transactions forward (future) 61–62 option 62 spot 61 swap 62–63 useful websites 75 Deutsche Bank 136 Deutsche Börse 64, 138 discounted cash ﬂow analysis (DCF) 39 dividend 29 domestic ﬁnancial services complaint and compensation 279–80 ﬁnancial advisors 277–78 Insurance Mediation Directive 278–79 investments with life insurance 275–76 life insurance term 275 whole-of-life 274–75 NEWICOB 279 property and mortgages 273–74 protection products 275 savings products 276–77 Dow theory 175 easyJet 67 EDX London 66 Egg 20, 21 Elliott Wave Theory 176 Enron 67, 114, 186, 232, 233 enterprise investment schemes 167–68 Equiduct 133–34, 137 Equitable Life 282 equities 29–35 market indices 32–33 market inﬂuencers 40–41 nominee accounts 31 shares 29–32 stockbrokers 33–34 valuation 35–41 equity transparency 64 Eurex 64, 65 Euro Overnight Index Average (EURONIA) 85 euro, the 17, 115 Eurobond 6, 92 Euroclear Bank 92, 146, 148–49 Euronext.liffe 5, 60, 65, 71 European Central Bank (ECB) 16, 17, 84, 148 European Central Counterparty (EuroCCP) 136 European Code of Conduct 146–47, 150 European Exchange Rate Mechanism 114 European Harmonised Index of Consumer Prices 13 European Union Capital Requirements Directive 199 Market Abuse Directive (MAD) 16, 196 Market in Financial Instruments Directive (MiFID) 64, 197–99 Money Laundering Directive 219 Prospectus Directive 196–97 Transparency Directive 197 exchange controls 6 expectation theory 172 Exxon Valdez 250 factoring see credit collection Factors and Discounters Association 26 Fair & Clear Group 145–46 Federal Deposit Insurance Corporation 17 Federation of European Securities Exchanges 137 Fighting Fraud Together 200–01 ﬁnance, raising 23–25 asset 24–25 committed 23 project ﬁnance 24 recourse loan 24 syndicated loan 23–24 uncommitted 23 Financial Action Task Force on Money Laundering (FATF) 217–18 ﬁnancial communications 179–89 ____________________________________________________ INDEX 305 advertising 189 corporate information ﬂow 185 primary information providers (PIPs) 185 investor relations 183–84 journalists 185–89 public relations 179–183 black PR’ 182–83 tipsters 187–89 City Slickers case 188–89 Financial Ombudsman Service (FOS) 165, 279–80 ﬁnancial ratios 36–39 dividend cover 37 earnings per share (EPS) 36 EBITDA 38 enterprise multiple 38 gearing 38 net asset value (NAV) 38 price/earnings (P/E) 37 price-to-sales ratio 37 return on capital employed (ROCE) 38 see also discounted cash ﬂow analysis Financial Reporting Council (FRC) 224, 228, 234, 236 Financial Services Act 1986 191–92 Financial Services Action Plan 8, 195 Financial Services and Markets Act 2001 192 Financial Services and Markets Tribunal 94 Financial Services Authority (FSA) 5, 8, 31, 44, 67, 94, 97, 103, 171, 189, 192–99 competition review 132 insurance industry 240 money laundering and 219 objectives 192 regulatory role 192–95 powers 193 principles-based 194–95 Financial Services Compensation Scheme (FSCS) 17, 165, 280 Financial Services Modernisation Act 19 ﬁnancial services regulation 190–99 see also Financial Services Authority Financial Times 9, 298 First Direct 20 ﬂipping 53 ﬂotation beauty parade 51 book build 52 early secondary market trading 53 grey market 52, 74 initial public offering (IPO) 47–53 pre-marketing 51–52 pricing 52–53 specialist types of share issue accelerated book build 54 bought deal 54 deeply discounted rights issue 55 introduction 55 placing 55 placing and open offer 55 rights issues 54–55 underwriting 52 foreign exchange 109–120 brokers 113 dealers 113 default risk 119 electronic trading 117 exchange rate 115 ICAP Knowledge Centre 120 investors 113–14 transaction types derivatives 116–17 spot market 115–16 Foreign Exchange Joint Standing Committee 112 forward rate agreement 85 fraud 200–15 advanced fee frauds 204–05 boiler rooms 201–04 Regulation S 202 future regulation 215 identity theft 205–06 insurance fraud 206–08 see also anti-fraud agencies Fraud Act 2006 200 FTSE 100 32, 36, 58, 122, 189, 227, 233 FTSE 250 32, 122 FTSE All-Share Index 32, 122 FTSE Group 131 FTSE SmallCap Index 32 FTSE Sterling Corporate Bond Index 33 Futures and Options Association 131 Generally Accepted Accounting Principles (GAAP) 237, 257 gilts 33, 86–88 Giovanni Group 146 Glass-Steagall Act 7, 19 Global Bond Market Forum 64 Goldman Sachs 136 government bonds see gilts Guinness case 214 Halifax Bank 20 hedge funds 8, 77, 97, 156–57 derivatives-based arbitrage 156 ﬁxed-income arbitrage 157 Hemscott 35 HM Revenue and Customs 55, 211 HSBC 20, 103 Hurricane Hugo 250 306 INDEX ____________________________________________________ Hurricane Katrina 2, 67, 242 ICE Futures 5, 66, 102 Individual Capital Adequacy Standards (ICAS) 244 inﬂation 12–14 cost-push 12 deﬁnition 12 demand-pull 12 quarterly Inﬂation Report 14 initial public offering (IPO) 47–53 institutional investors 155–58 fund managers 155–56 hedge fund managers 156–57 insurance companies 157 pension funds 158 insurance industry London and 240 market 239–40 protection and indemnity associations 241 reform 245 regulation 243 contingent commissions 243 contract certainty 243 ICAS and Solvency II 244–45 types 240–41 underwriting process 241–42 see also Lloyd’s of London, reinsurance Intercontinental Exchange 5 interest equalisation tax 6 interest rate products debt securities 82–83, 92–93 bill of exchange 83 certiﬁcate of deposit 83 debt instrument 83 euro bill 82 ﬂoating rate note 83 local authority bill 83 T-bills 82 derivatives 85 forward rate agreements (FRAs) 85–86 government bonds (gilts) 86–89 money markets 81–82 repos 84 International Financial Reporting Standards (IFRS) 58, 86, 173, 237–38 International Financial Services London (IFSL) 5, 64, 86, 92, 112 International Monetary Fund 17 International Securities Exchange 138 International Swap Dealers Association 63 International Swaps and Derivatives Association 63 International Underwriting Association (IUA) 240 investment banking 5, 47–59 mergers and acquisitions (M&A) 56–58 see also capital raising investment companies 164–69 real estate 169 split capital 166–67 venture capital 167–68 investment funds 159–64 charges 163 investment strategy 164 fund of funds scheme 164 manager-of-managers scheme 164 open-ended investment companies (OEICs) 159 selection criteria 163 total expense ratio (TER) 164 unit trusts 159 Investment Management Association 156 Investment Management Regulatory Organisation 11 Johnson Matthey Bankers Limited 15–16 Joint Money Laundering Steering Group 221 KAS Bank 145 LCH.Clearnet Limited 66, 140 letter of credit (LOC) 23, 25–26 liability-driven investment 158 Listing Rules 43, 167, 173, 225, 228–29 Lloyd’s of London 8, 246–59 capital backing 249 chain of security 252–255 Central Fund 253 Corporation of Lloyd’s 248–49, 253 Equitas Reinsurance Ltd 251, 252, 255–56 Franchise Performance Directorate 256 future 258–59 Hardship Committee 251 history 246–47, 250–52 international licenses 258 Lioncover 252, 256 Member’s Agent Pooling Arrangement (MAPA) 249, 251 Names 248, one-year accounting 257 regulation 257 solvency ratio 255 syndicate capacity 249–50 syndicates 27 loans 23–24 recourse loan 24 syndicated loan 23–24 London Interbank Offered Rate (LIBOR) 74, 76 ____________________________________________________ INDEX 307 London Stock Exchange (LSE) 7, 8, 22, 29, 32, 64 Alternative Investment Market (AIM) 32 Main Market 42–43, 55 statistics 41 trading facilities 122–27 market makers 125–27 SETSmm 122, 123, 124 SETSqx 124 Stock Exchange Electronic Trading Service (SETS) 122–25 TradElect 124–25 users 127–29 Louvre Accord 114 Markets in Financial Instruments Directive (MiFID) 64, 121, 124, 125, 130, 144, 197–99, 277 best execution policy 130–31 Maxwell, Robert 186, 214, 282 mergers and acquisitions 56–58 current speculation 57–58 disclosure and regulation 58–59 Panel on Takeovers and Mergers 57 ‘white knight’ 57 ‘white squire’ 57 Merrill Lynch 136, 174, 186, 254 money laundering 216–22 Egmont Group 218 hawala system 217 know your client (KYC) 217, 218 size of the problem 222 three stages of laundering 216 Morgan Stanley 5, 136 multilateral trading facilities Chi-X 134–35, 141 Project Turquoise 136, 141 Munich Re 207 Nasdaq 124, 138 National Strategy for Financial Capability 269 National Westminster Bank 20 Nationwide Building Society 221 net operating cash ﬂow (NOCF) see discounted cash ﬂow analysis New York Federal Reserve Bank (Fed) 16 Nomads 45 normal market share (NMS) 132–33 Northern Rock 16 Nymex Europe 102 NYSE Euronext 124, 138, 145 options see derivatives Oxera 52 Parmalat 67, 232 pensions alternatively secured pension 290 annuities 288–89 occupational pension ﬁnal salary scheme 285–86 money purchase scheme 286 personal account 287 personal pension self-invested personal pension 288 stakeholder pension 288 state pension 283 unsecured pension 289–90 Pensions Act 2007 283 phishing 200 Piper Alpha oil disaster 250 PLUS Markets Group 32, 45–46 as alternative to LSE 45–46, 131–33 deal with OMX 132 relationship to Ofex 46 pooled investments exchange-traded funds (ETF) 169 hedge funds 169–71 see also investment companies, investment funds post-trade services 140–50 clearing 140, 141–42 safekeeping and custody 143–44 registrar services 144 settlement 140, 142–43 real-time process 142 Proceeds of Crime Act 2003 (POCA) 211, 219, 220–21 Professional Securities Market 43–44 Prudential 20 purchasing power parity 118–19 reinsurance 260–68 cat bonds 264–65 dispute resolution 268 doctrines 263 ﬁnancial reinsurance 263–64 incurred but not reported (IBNR) claims insurance securitisation 265 non-proportional 261 offshore requirements 267 proportional 261 Reinsurance Directive 266–67 retrocession 262 types of contract facultative 262 treaty 262 retail banking 20 retail investors 151–155 Retail Prices Index (RPI) 13, 87 264 308 INDEX ____________________________________________________ Retail Service Provider (RSP) network Reuters 35 Royal Bank of Scotland 20, 79, 221 73 Sarbanes–Oxley Act 233–34 securities 5, 29 Securities and Futures Authority 11 self-regulatory organisations (SROs) 192 Serious Crime Bill 213 settlement 11, 31, 140, 142–43 shareholder, rights of 29 shares investment in 29–32 nominee accounts 31 valuation 35–39 ratios 36–39 see also ﬂotation short selling 31–32, 73, 100, 157 Society for Worldwide Interbank Financial Telecommunications (SWIFT) 119 Solvency II 244–245 Soros, George 114, 115 Specialist Fund Market 44 ‘square mile’ 4 stamp duty 72, 75, 166 Sterling Overnight Index Average (SONIA) 85 Stock Exchange Automated Quotation System (SEAQ) 7, 121, 126 Stock Exchange Electronic Trading Service (SETS) see Lloyd’s of London stock market 29–33 stockbrokers 33–34 advisory 33 discretionary 33–34 execution-only 34 stocks see shares sub-prime mortgage crisis 16, 89, 94, 274 superequivalence 43 suspicious activity reports (SARs) 212, 219–22 swaps market 7 interest rates 56 swaptions 68 systematic internalisers (SI) 137–38 Target2-Securities 147–48, 150 The Times 35, 53, 291 share price tables 36–37, 40 tip sheets 33 trading platforms, electronic 80, 97, 113, 117 tranche trading 123 Treasury Select Committee 14 trend theory 175–76 UBS Warburg 103, 136 UK Listing Authority 44 Undertakings for Collective Investments in Transferable Securities (UCITS) 156 United Capital Asset Management 95 value at risk (VAR) virtual banks 20 virt-x 140 67–68 weighted-average cost of capital (WACC) see discounted cash ﬂow analysis wholesale banking 20 wholesale markets 78–80 banks 78–79 interdealer brokers 79–80 investors 79 Woolwich Bank 20 WorldCom 67, 232 Index of Advertisers Aberdeen Asset Management PLC xiii–xv Birkbeck University of London xl–xlii BPP xliv–xlvi Brewin Dolphin Investment Banking 48–50 Cass Business School xxi–xxiv Cater Allen Private Bank 180–81 CB Richard Ellis Ltd 270–71 CDP xlviii–l Charles Schwab UK Ltd lvi–lviii City Jet Ltd x–xii The City of London inside front cover EBS Dealing Resource International 110–11 Edelman xx ESCP-EAP European School of Management vi ICAS (The Inst. of Chartered Accountants of Scotland) xxx JP Morgan Asset Management 160–62 London Business School xvi–xviii London City Airport vii–viii Morgan Lewis xxix Securities & Investments Institute ii The Share Centre 30, 152–54 Smithﬁeld Bar and Grill lii–liv TD Waterhouse xxxii–xxxiv University of East London xxxvi–xxxviii
More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby
Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, John Meriwether, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, market clearing, market fundamentalism, merger arbitrage, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, pattern recognition, Paul Samuelson, pre–internet, quantitative hedge fund, quantitative trading / quantitative ﬁnance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs
Kondratiev’s teachings had helped Cilluffo to anticipate the crash of 1973, which presumably meant that the next cataclysm was not due until 1997; yet in 1987 Jones nonetheless believed that the theory reinforced the case that “total rock and roll” was imminent. Jones was even more enamored of Elliott wave analysis, as expounded by an investment guru named Robert Prechter. The guru asserted with great confidence that stocks would experience one last upward explosion before plunging at least 90 percent: It would be the greatest crash since the bursting of the South Sea bubble in England in 1720. Jones told one interviewer, apparently in all sincerity, “I attribute a lot of my own success to the Elliott Wave approach.”11 But Prechter’s predictions of disaster were wildly overblown, and even Jones agreed that Prechter had no way of pinpointing when the crash would happen.12 The truth was that Jones’s trading profits came from agile short-term moves, not from understanding multidecade supercycles whose existence was dubious.
For the same reason, he’ll probably be long at the all-time top.” Laing, “Trader with a Hot Hand.” 13. The quote comes from the Trader documentary. Jones also said, “I consider myself a premier market opportunist. That means I develop an idea on the market and pursue it from a very low risk standpoint until I have repeatedly been proven wrong, or until I change my viewpoint.” See Schwager, Market Wizards, p. 129. Putting Jones’s theorizing about Elliott waves further into perspective, Jones says, “The whole concept of the investment manager sitting up there and making all these incredible intellectual decisions about which way the market’s going to go. I don’t want that guy running my money because he doesn’t have the competitive nature that’s necessary to be a winner in this game.” 14. Elaborating on how he would write a script for the market, Jones says, “I put myself in the mental position of being short the market, and I think how I would react emotionally to different events and see what it would take to get me to take my position off.
Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael W. Covel
Albert Einstein, asset allocation, Atul Gawande, backtesting, beat the dealer, Bernie Madoff, Black Swan, buy low sell high, capital asset pricing model, Clayton Christensen, commodity trading advisor, computerized trading, correlation coefficient, Daniel Kahneman / Amos Tversky, delayed gratification, deliberate practice, diversification, diversified portfolio, Edward Thorp, Elliott wave, Emanuel Derman, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, fiat currency, fixed income, game design, hindsight bias, housing crisis, index fund, Isaac Newton, John Meriwether, John Nash: game theory, linear programming, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, mental accounting, money market fund, Myron Scholes, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Renaissance Technologies, Richard Feynman, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, survivorship bias, systematic trading, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, volatility arbitrage, William of Occam, zero-sum game
They can neither fathom the concept of sunk costs nor admit that buy-and-hold might not work. So they buy and hold no matter what happens in the mean time. There is the old trading parable about fishing and revenge. You are out at the fishing hole. The big one gets away, and you throw You will run out of money before a guru runs out of indicators. Neal T. Weintraub 234 There is little point in exploring the Elliott Wave Theory because it is not a theory at all, but rather the banal observation that a price chart comprises a series of peaks and troughs. Depending on the time scale you use, there can be as many peaks and troughs as you care to imagine.7 Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets your hook back in. Are you only after the one that got away? Of course not, you throw the hook back in to catch a big fish—any big fish.
• Trend trader Charlie Wright states: “It took me a long time to figure out that no one really understands why the market does what it does or where it’s going. It’s a delusion to think that you or any one else can know where the market is going. I have sat through hundreds of hours of seminars in which the presenter made it seem as if he or she had some secret method of divining where the markets were going. Either they were deluded or they were putting us on. Most Elliott Wave practitioners, cycle experts, or Fibonacci time traders will try to predict when the market will move, presumably in the direction they have also predicted. I personally have not been able to figure out how to know when the market is going to move. And you know what? When I tried to predict, I was usually wrong, and I invariably missed the big move I was anticipating, because it wasn’t time.
How Markets Fail: The Logic of Economic Calamities by John Cassidy
Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative ﬁnance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game
That evening taught me a couple of lessons about Wall Street I haven’t forgotten: things aren’t always what they seem; and the interests of financial insiders often differ from those of regular investors. In retrospect, the size of the fall in the market wasn’t very surprising, only its rapidity. The Dow had more than doubled in three years, prices had shot well ahead of earnings, and a number of commentators, such as Elaine Garzarelli, of Shearson Lehman, and Robert Prechter, of The Elliott Wave Theorist newsletter, had issued sell warnings. To the economics profession, though, the crash came as a thunderbolt. According to the efficient market hypothesis, which was then at the zenith of its popularity, big market moves happen only in response to news that has major implications for corporate earnings. There was no such news on or before Black Monday. The previous week, Congress had moved to eliminate a tax break for corporate takeovers, and the August trade deficit came in higher than expected, adding to worries that the Fed might raise interest rates, but neither of these things could conceivably have accounted for a 22.6 percent fall in the value of corporate America.
Easterbrook, Frank eBay Ebbers, Bernie Ebenstein, Lanny École Normale Supérieure Econometrica Economic Consequences of the Peace, The (Keynes) “Economics and Knowledge” (Hayek) Economics Club of New York Economics of Welfare, The (Pigou) Economist, The Economy.com Edgeworth, Francis Ysidro Edinburgh University Edison, Thomas efficient market hypothesis Lucas’s adoption for entire economy of Mandelbrot’s strictures on speculative bubbles and discrediting of Eichengreen, Barry Einstein, Albert Eisenhower, Dwight D. Eisner, Michael Elements of Pure Economics (Walras) Elizabeth II, Queen of England Elliott Wave Theorist newsletter Ellison, Glenn Ellsberg, Daniel Emory University Engels, Friedrich England: enclosure of common lands in street markets in; see also United Kingdom Enron Environmental Protection Agency (EPA) Equifax equilibrium, theory of, see general equilibrium theory Erasmus, Desiderius Erhard, Ludwig Euromoney European Central Bank European Union “Existence of an Equilibrium for a Competitive Economy” (Arrow and Debreu) externalities; see also spillovers Extraordinary Popular Delusions and the Madness of Crowds (Mackay) Exxon Exxon Mobil Facebook Failure of Capitalism, A (Posner) Fama, Eugene Fatal Conceit, The (Hayek) Federal Bureau of Investigation (FBI) Federal Deposit Insurance Corporation (FDIC) Federal Home Loan Mortgage Corporation (Freddie Mac) Federal National Mortgage Association (Fannie Mae) Federal Reserve and Black Monday stockmarket crash derivatives markets and Division of Monetary Affairs Friedman on role in Great Depression of funds rate cuts by housing bubble and loans to banks from Lucas on Minsky on regulation of banks by Open Market Committee (FOMC) regional banks of and shadow banking system and subprime mortgages and Wall Street bailouts Federal Reserve Act (1913) Federal Trade Commssion FICO scale Fidelity Independent Adviser Fidelity Investments Magellan Fund Financial Accounting Standards Board Financial Analysts Journal Financial Markets, Money and the Real World (Davidson) Financial Services Modernization Act (1999) Financial Services Regulatory Relief Act (2006) Financial Shock (Zandi) Financial Times Finland First Franklin Loan Services FirstPlus Financial Group First Union Bank Fisher, Carl Fisher, Irving Fisher, Richard Fitch Ratings Flaubert, Gustave Flood, Merrill Foley, Duncan Fons, Jerome S.
Why Stock Markets Crash: Critical Events in Complex Financial Systems by Didier Sornette
Asian financial crisis, asset allocation, Berlin Wall, Bretton Woods, Brownian motion, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, global village, implied volatility, index fund, information asymmetry, intangible asset, invisible hand, John von Neumann, joint-stock company, law of one price, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, market design, market fundamentalism, mental accounting, moral hazard, Network effects, new economy, oil shock, open economy, pattern recognition, Paul Erdős, Paul Samuelson, quantitative trading / quantitative ﬁnance, random walk, risk/return, Ronald Reagan, Schrödinger's Cat, selection bias, short selling, Silicon Valley, South Sea Bubble, statistical model, stochastic process, Tacoma Narrows Bridge, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, Tobin tax, total factor productivity, transaction costs, tulip mania, VA Linux, Y2K, yield curve
The many kinds of structures observed on stock price trajectories, such as trends, cycles, booms, and bursts, have been the object of extensive analysis by the scientists of the social and ﬁnancial ﬁelds as well as by professional analysts and traders. The work of the latter category of analysts has led to a fantastic lexicon of these patterns with colorful names, such as “head and shoulder,” “doublebottom,” “hanging-man lines,” “the morning star,” “Elliott waves,” and so on (see, for instance, ). Investments in the stock market are based on a quite straightforward rule: if you expect the market to go up in the future, you should buy (this is referred to as being “long” in the market) and hold the stock until you expect the trend to change direction; if you expect the market to go down, you should stay out of it, sell if you can (this is referred to as being “short” of the market) by borrowing a stock and giving it back later by buying it at a smaller price in the future.
., 382 demand, 43–44, 85, 87, 90, 101–102, 119, 127, 183, 217, 221, 236, 256–257, 282–283, 341, 377–378 derivatives, 6, 86, 89, 251 420 Derman, E., 136 discounting, 93, 140, 144 distribution of returns, 34, 52, 55, 64, 75, 133; student, 67–68, 326–327 dividend, 6, 20–21, 41, 46, 86, 88, 140–148, 151, 185, 220, 243, 269–270 DNA, 17, 41 double-bottom, 33 Dow Jones Industrial Average (DJIA), 27–31, 49, 61, 69, 229, 233, 240–241, 266–268, 332, 337, 346, 355, 363, 368, 370 drawdown, 52–77, 287–289, 297–299 efﬁcient market, 38 Elliott waves, 33 emergence, xv, 86–87, 122, 137, 217, 241, 279 equilibrium theory, 83–88, 131, 137, 170 Erdös, P., 174 expectation, 21–22, 43, 46, 87, 102–103, 135, 234, 270, 272, 315, 321; rational, 85–86, 131, 137–141, 150–154, 159, 164, 166–167, 170, 180, 210, 236, 253–254, 258–259, 268, 284, 332, 334, 346–347 exponential distribution, 34–35, 51, 56–63, 66-67, 72, 75, 77; and decay, 198, 238; and faster-than-exponential growth, 160, 356, 361–366, 375, 378–382; and growth, 28, 218, 231, 271, 335, 356, 361, 369; and stretched, 35, 75 extreme events, xv, 15–19, 57–59, 77–79, 185, 280, 321 Farmer, J.
additive manufacturing, Atul Gawande, backtesting, Benoit Mandelbrot, buy low sell high, Checklist Manifesto, computerized trading, deliberate practice, diversification, Elliott wave, endowment effect, loss aversion, mandelbrot fractal, margin call, offshore financial centre, paper trading, Ponzi scheme, price stability, psychological pricing, quantitative easing, random walk, risk tolerance, short selling, South Sea Bubble, systematic trading, The Wisdom of Crowds, transaction costs, transfer pricing, traveling salesman, tulip mania, zero-sum game
A new market cycle guru emerges in almost every major stock cycle, once every 4 years. A guru's fame tends to last for 2 to 3 years. The reigning period of each guru coincides with a major bull market in the United States. A market cycle guru forecasts rallies and declines. Each correct forecast increases his fame and prompts even more people to buy or sell when he issues his pronouncements. A market cycle guru has a pet theory about the market. That theory—cycles, volume, Elliott Wave, whatever—is usually developed several years prior to reaching stardom. At first, the market refuses to follow an aspiring guru's pet theory. Then the market changes and for several years comes in gear with the guru's calls. That is when the guru's star rises high above the marketplace. Compare this to what happens to fashion models as public tastes change. One year, blondes are popular, another year, redheads.
Elliott, Ralph Nelson, Nature's Law (1946) (Gainesville, GA: New Classics Library, 1980). Engel, Louis, How to Buy Stocks (1953) (New York: Bantam Books, 1977). Freud, Sigmund, Group Psychology and the Analysis of the Ego (1921) (London: Hogarth Press, 1974). Friedman, Milton, Essays in Positive Economics (Chicago: The University of Chicago Press, 1953). Frost, A. J., and R. R. Prechter, Jr., Elliott Wave Principle (Gainesville, GA: New Classics Library, 1978). Gajowiy, Nils, Personal communication, 2012. Gallacher, William, Winner Takes All—A Privateer's Guide to Commodity Trading (Toronto: Midway Publications, 1983). Gann, W. D., How to Make Profits in Commodities (Chicago: W. D. Gann Holdings, 1951). Gawande, Atul, The Checklist Manifesto: How to Get Things Right (New York: Henry Holt and Company, 2011) Gleick, James, Chaos: Making a New Science (New York: Viking/Penguin, 1987).
The Misbehavior of Markets by Benoit Mandelbrot
Albert Einstein, asset allocation, Augustin-Louis Cauchy, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black-Scholes formula, British Empire, Brownian motion, buy low sell high, capital asset pricing model, carbon-based life, discounted cash flows, diversification, double helix, Edward Lorenz: Chaos theory, Elliott wave, equity premium, Eugene Fama: efficient market hypothesis, Fellow of the Royal Society, full employment, Georg Cantor, Henri Poincaré, implied volatility, index fund, informal economy, invisible hand, John Meriwether, John von Neumann, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market microstructure, Myron Scholes, new economy, paper trading, passive investing, Paul Lévy, Paul Samuelson, Plutocrats, plutocrats, price mechanism, quantitative trading / quantitative ﬁnance, Ralph Nelson Elliott, RAND corporation, random walk, risk tolerance, Robert Shiller, Robert Shiller, short selling, statistical arbitrage, statistical model, Steve Ballmer, stochastic volatility, transfer pricing, value at risk, Vilfredo Pareto, volatility smile
Bubbles are dramatic—but the tendency of markets to deceive and confuse is an everyday affair. Consider chartists, who try to spot patterns in the market. The sophistication of these techniques varies greatly. Some are mere eyeball hunches: A pattern in an index or price chart looks like one that has happened before, and so you bet the chart will keep moving in the same way. Others are more elaborate. The best-known example is the Elliott Wave. Ralph Nelson Elliott was a Kansas-born accountant who spent much of his working life reorganizing railroads and state finances in Central America and who, during a debilitating illness, devised a new charting methodology. Investor psychology, he felt, moves in waves of optimism and pessimism; and these waves can be seen in the stock market again and again, at different times and at different time-scales.
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel
3Com Palm IPO, accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, backtesting, beat the dealer, Bernie Madoff, BRICs, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, money market fund, mortgage tax deduction, new economy, Own Your Own Home, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond
Prechter became interested in the parallels between social psychology and the stock market while a Yale undergraduate. After college, Prechter spent four years playing drums in a rock band, after which he joined Merrill Lynch as a junior technical analyst. There Prechter stumbled on the work of an obscure accountant, R. N. Elliott, who had devised an arcane theory which he modestly entitled the Elliott wave theory. Elliott’s premise was that there were predictable waves of investor psychology and that they steered the market with natural ebbs and flows. By watching them, Elliott believed, one could call major shifts in the market. Prechter was so excited about this discovery that he quit Merrill Lynch in 1979 to write an investor newsletter from the unlikely location of Gainesville, Georgia. Prechter’s initial predictions were uncannily accurate.
Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin
Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional
Estimates by Shadow Government Statistics. Bob McTeer, “The Fed’s Balance Sheet,” Forbes, October 29, 2008. Paul Comly French, “$3,000,000 Bid for Fascist Army Bared,” Philadelphia Record, November 20, 1934. Jules Archer, The Plot to Seize the White House (New York: Hawthorn Books, 1973), 139. Ibid., 9. Franklin Roosevelt, Executive Order Number 6102, April 5, 1933. Robert R. Prechter, Conquer the Crash (Gainesville, GA: Elliott Wave International, 2002), 213. Historical Statistics of the United States: Colonial Times to 1957, Series X 285– 298 Currency in Circulation, by Kind: 1860–1957 (U.S. Department of Commerce, 1960), 648. Specie in 1925 was $718 million compared to M2 of $42 billion. Historical Statistics of the United States: Colonial Times to 1970, Series X 410– 419 Money Stock-Currency Deposits, Bank vault Cash, and Gold: 1867– 1970 (U.S.