and the predictions or writings of those who follow such
arguments is, therefore, unlikely to lead to any great financial
success, for two main reasons:
1. The analysis provided may well be based on flawed economic
principles in the first place.
2. The analysis provided is subject to, and influenced by,
market movement itself. Warrior traders recognize that it
is often the recent direction of the price movement that
drives the tone of the fundamental research provided by
the major houses, rather than the other way around, as
they would have us believe.
Ultimately, objectivity is lost.
This is not to say that all market commentaries should be
ignored—there are some excellent examples of winning research
writers out there. You have to do some mining to find these diamonds,
however. One cannot assume that just because the bank
or house name is impressive and distinguished the research will
be right more often than it is wrong, and good research needs to
do just that and in a manner that encourages profitable trading
activity. These winning research writers tend not to be mainstream,
preferring instead to utilize additional principles in
deriving their market view. The mainstream commentaries have
value in providing a guide as to how most of the market is thinking
(or will be thinking). They remain a force to be reckoned
with, and, indeed, no trend will be sustained without this contributing
activity—albeit, usually in the middle or toward the
end of a trend, as the crowd catches up and the arguments begin
to be justified and revised.
Further, there is a significant time delay between an event on
the ground, such as a shift in consumer purchasing or an overrun
in production, and that event becoming apparent in the
released data stream. In most cases, the data can lag by three or
more months. This time lag is so significant that, although surprises
in economic data may already have corrected themselves
at ground level, the discussions of what was happening months
ago—an aberration—may still be in progress. Broad consensus
views can therefore be far behind reality.
Some would argue that the current data stream is the best we
have to work with and, therefore, that is how we should proceed.
The problem is that the market generally has no true
comprehension of this data-reality gap, and therefore makes
assumptions based on data that have a far greater variability
than is initially recognized. This means that if you rely on economic
data for a view on an economy, or a market, you are working
with dated tools.
Admittedly, this is an overly simplistic description of the enormous
and deservedly respected art of economics, but it is done
to make a point. There are quite capable economists out there
who lift their eyes from the textbooks and data in an effort to
get an understanding of what is happening in real time, but
they are in the minority. It can be difficult for them to be heard.
They are often shouted down by the economist masses who
think of their university textbook as a bible and tend to sing in
unison, thus drowning some of the more talented independent
voices.
To my mind, the majority of economists are like meteorologists
who don’t look out the window. If they are heavily absorbed in
the stream of data and charts on their desks, using proven techniques
of reasonable success rates in deriving future weather
patterns that enable a forecast, but they fail to look out the window
as they put pen to paper, then they risk getting it very
wrong indeed. If the meteorologist says, “It is going to be raining
heavily for most of the day,” and then you, yourself, look out
to see that the skies are clear, do you grab your umbrella if you
are only going for a short walk? No. Why then do so many
traders staunchly follow the market forecasts of economists who
are operating in an environment that is essentially art rather
than science? Because most traders just read the research presented
to them on a daily basis without bothering to look out the
window for themselves. Warrior traders sit on the roof and get a
feel for the real-world environment for themselves, as well as
absorbing the commentaries of proven market artisans.
Read More: The Failings of Fundamental Economics
