29 March 2011

Simulating Stimulus

Intervention has a recognizable effect on markets, it is generally characterized by an initial surge which quickly fades, but there may be effects further on.

To maximize its effect one should not sterilize it. Sterilized interventions were commonplace before the crisis.

It seemed then that growth was occurring and that it was necessary to control it and control effects on currency values.

It was like a well regulated machine, that fell apart completely in the crisis to such an extent as the very money markets through which these activities took place ceased to function.

That is sterilization existed then arguably as part of a way to use a structure created to control money flow in such a way as a simulation of growth processes was created.

Now this does not imply intentionality, it is just growth was desired and it was felt that it could be controlled.

Simulation of growth processes though is essentially stimulation by money flow, that is interventions. So what went on could be seen as stimulation.

Now the question is was this causal on the crisis. That is, were assets mis-priced because of this (and re-priced in the crisis).

Probably not, it was more a consequence of this mis-pricing, but it may have led to the enormous breaking of structure characterized by the crisis.

That is the pricing itself of assets was like pricing in money flow events in the market, rather than pricing consequent on companies growing and the re-pricing was like money flow re-pricing to company grounded pricing.

That might suggest the crisis was not a depression but rather a massive retracement to find good pricing levels to grow (suggesting that retracement are part of the growth process itself in markets).

More like a massive re-adjustment than a deep cyclical downturn.

There has been a clear example of the effect of stimulation after stimulation, with no clear support from growth in the very recent past.

Though I believe growth is there and it is a stabilizing force, but one might assume that the ratio of money flow to growth if it could be thus expressed would be abnormally biased towards money flow, relative to any economic conditions.

What are we seeing, we are seeing mini-crises. The effect of cascading money flow is so normalized that one almost expects what would be a most unusual market event, those huge drops followed by surges upwards, which fade rapidly.

This is partly what I mean by a market which does not function for investing, but it may be functioning well for enabling future growth.

One might say well, cannot one ride those waves up and down. Well, the forex market shows what this is like.

Basically it is extremely hard and is a reason many lose money there. It is extremely hard because it is not a ride up or down, that is simply a representation in a chart.

The equity market being like the forex market does not make for easy trading. Without the clear directionality of growth processes at work, one is left with all the elements which make trading only a high risk experience, sudden dramatic changes.

Can one take lessons from the forex market into the equity market. Well, the clear lesson is that money will be lost. The problem is not so much knowing what happens after stimulus, it is more what happens before.

How do you ride waves, you do not, you sink. One needs structure to support one. The problem is that money flow does not provide structure.

However I do believe that the strongest structure to trade on in forex is money flow targeting a new growth process. Thus if QE2 is intermixing with a real growth structure, then this is possible good news.

This provides both momentum and directionality, for an economy this means all the good things, for a market it means tradable moments.

The question could be asked are tradable moments good for the economy, yes because there is an assumption that growth is adding value. This is reflected in traders with different time frames being active to buy and sell.

The suggestion here is that sterilized intervention may have been an structurally enabling factor on the crisis, and may be a functional route for suggesting that maintaining interest rate differentials on an unsound asset base was a major contributing factor.

But it suggests as well that it is entirely reversible and the kind of stimulus since the crisis in effect may actually be reversing it, in tandem with naturally occurring company growth in the United States.

One might suggest that controlling growth is an illusion, one only controls a simulation of growth, at a certain stage the market seems to restore this to what it is, money flow.

The real growth happens no matter what, fortunately. I might suggest as well that not only cannot one control real growth, but one does not need to.

Can one control the way a company is successful. Well one can perhaps see signs of this success in its financial statements. But what actually is behind these figures is not a formal system, it is a creative act, for which the metrics are, the growth of the company.

© 2011 Guy Barry - All Rights Reserved.