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Guest Contributor: Stress Management Tips for Traders (Part 2)

Takeaway: You can take control of your psychological well-being to boost your returns.

By David Rosenblatt, Psy.D., MarketPsych

 

Guest Contributor: Stress Management Tips for Traders  (Part 2) - z tra

 

Working with the criminally insane requires both focus and flexibility.

 

Laughter rings out down the hallways; alarms sound over the loudspeakers. If work is to be done I must choose with care when to fully engage with this maelstrom and when to retreat into my mind to create a plan.

 

The first part in this four-part series on stress management for traders introduced three cognitive realms that can be controlled:

  • focus
  • downtime
  • mental exercise

 

Today we continue to explore how flexible focus can help you take control of your mind and boost your returns.

 

We already learned that varying your eyes’ focal point helps reduces eyestrain and fatigue. Endorsed by the American Academy of Ophthalmology, the nattily named “20/20/20 Rule” suggests that every 20 minutes, take a 20-second break to focus your eyes on something at least 20 feet away. Following this simple rule will also help keep the mind loose and limber.

 

Now let’s address the elephant in the room: screen time. Defined as viewing computer monitors, cell phone screens, or televisions, Americans spend nearly eleven hours a day looking at screens. Too much screen slows processing speed, hurts mood, and degrades eyesight. In the extreme, the brains of teens addicted to Internet gaming have been found to shrink in volume. In short, too much screen time can lead to faulty focus, slowed speed, attenuated attention, and poor judgment.

 

The negatives of too much screen time don’t stop there. A sedentary (seated) lifestyle combined with mindless eating and drinking means weight gain.

 

Sensing shoddier performance, people often turn to caffeine and other psychostimulants. However, these substances can cause jittery nerves and impair sleep. Too much caffeine can make the mind brittle.

 

In addition to the “20/20/20 Rule,” here are some practical ways to deal with the cognitive and physical strain of increased screen time. Every hour take a five-minute break to stretch, go for a walk, or talk with a colleague.

 

The Mayo Clinic recommends stretches at your desk such as:

  1. Pull your arm across your chest
  2. Pull your elbow down your back
  3. Open your arms wide
  4. Roll your head
  5. Stand and touch your toes

 

This 5-minute break will give your eyes and brain a chance to change focus for a while. It will also get your blood pumping and reinvigorate you. The hourly break will combat mindless eating or drinking, helping to maintain healthy caloric intake and reducing the need for caffeine. It all supports focus and mental flexibility.

 

Remember, you can take control of your psychological well-being to boost your returns. In the next article, we’ll learn why it is important to respect the night as a time for relaxation and reality.

EDITOR'S NOTE

This is a Hedgeye Guest Contributor piece written by David M. Rosenblatt Psy.D. Dr. Rosenblatt is an investor coach for MarketPsych, an expert in stress management, and an avid individual investor. Additionally he works with the California Department of State Hospitals treating Mentally Disordered Offenders. He may be contacted with questions or comments at david@marketpsych.com. This piece does not necessarily reflect the opinion of Hedgeye.


Guest Contributor: Mini Mac Trumps the Big Mac

by Benn Steil and Emma Smith

 

Guest Contributor: Mini Mac Trumps the Big Mac - z benn 1

 

The “law of one price” holds that identical goods should trade for the same price in an efficient market.  But how well does it actually hold internationally? The Economist magazine’s famous Big Mac Index uses the price of McDonald’s Big Macs around the world, expressed in a common currency (U.S. dollars), to measure the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose.

 

Big Macs travel badly, however.  Flows of burgers across borders won’t align their prices. So in 2013 we created our own Mini Mac Index that compares the price of iPad minis across countries. Minis are a global product that, unlike Big Macs, can move quickly and cheaply around the world.  As explained in the video below, this helps equalize prices.

 

 

As shown in the graphic at the top, the Mini Mac Index suggests that the law of one price holds far better than does the Big Mac Index. Both indexes currently show the dollar overvalued against most currencies.  But the Big Mac Index puts the average overvaluation at 27 percent—a Whopper. Our Mini Mac Index puts it at only 3 percent—Small Fries.

 

The Mini Mac Index also suggests that the dollar has become less overvalued (down from 7 percent) since July. This is despite a 4½ percent rise in the trade-weighted value of the dollar since Trump’s election.  An increase in the local price of iPad minis in over three-quarters of the countries in our sample offset the impact of a more expensive dollar.  This is what we would expect when the law of one price is at work.

 

The Mexican peso has taken a pounding since the election.  This is not surprising, given Trump’s pledges to impose import tariffs, re-open NAFTA, and build a wall.  The peso is now 16 percent undervalued according to the Mini Mac Index, up from 9 percent in July.  But the Russian ruble, which has benefited from Trump’s suggestions that sanctions would be cut and relations improved, is now 18 percent overvalued—double what it was in July.  Both currencies should be volatile in the coming months as Trump’s actual policies take form.

 

EDITOR'S NOTE

This is a Hedgeye Guest Contributor piece written by Benn Steil and Emma Smith and reposted from the Council on Foreign Relations’ Geo-Graphics blog. Mr Steil is director of international economics at the Council on Foreign Relations and author of The Battle of Bretton Woods. It does not necessarily reflect the opinion of Hedgeye.


Guest Contributor: China’s Exorbitant Detriment Is Costing It Dearly

by Benn Steil and Emma Smith

 

Guest Contributor: China’s Exorbitant Detriment Is Costing It Dearly - benn stiel

 

The so-called Exorbitant Privilege of the United States, the power to conjure the world’s primary reserve currency, is reflected in the unique combination of being deeply in debt to the rest of the world (that is, having a massive negative net international investment position, or NIIP) while earning far more income abroad than it pays out in interest (that is, having massive positive annual net investment income, or NII). 

 

The U.S. NIIP averaged negative $7.5 trillion over FY15/16, while its NII was positive $167 billion, as shown in the top left of the graphic above. Basically, foreigners are willing to accept a trivial return to hold dollar-denominated assets.

 

Far less well known is the mirror-image of the Exorbitant Privilege, or what we might call the Exorbitant Detriment. It is, not surprisingly, borne by China. It is, to some extent, the price the country bears as the world’s largest holder of dollar-denominated central bank reserves. Reserves account for half of China’s foreign assets, of which around 40 percent are invested in low-yielding U.S. Treasury securities.

 

But it also reflects the fact that China is lending to the rest of the world at paltry rates. Chinese government institutions lend to Chinese, as well as foreign, firms operating abroad far more cheaply than alternative lenders. This reflects the Chinese government’s efforts both to subsidize its companies and to strengthen economic ties with resource-rich countries in, for example, Africa and Latin America. China’s Exorbitant Detriment is reflected in an NIIP of $1.6 trillion and NII of negative $80 billion in FY15/16.

 

Can China continue supporting its Exorbitant Detriment indefinitely? Not if it wants to prioritize a halt to reserve sales, which have been necessitated by capital outflows. Negative investment income reduces the current account surplus, and therefore the amount of capital that can leave the country before the central bank has to match outflows with reserve sales.

 

If China’s investment income balance had been zero over FY15/16 it would, all else being equal, have been able to absorb an additional $80 billion of capital outflows before having to sell reserves. This is equivalent to 17 percent of the actual decline in reserves over this period. China’s reserves fell to $3 trillion in December and, as we pointed out in an earlier post, could actually fall to what the IMF reserve-analysis rubric would deem dangerously low levels by summer if outflows continue at the pace seen over the last three months. 

 

China can slow this decline by demanding higher returns on its lending abroad, but this will require sacrificing its efforts to subsidize its companies as well as those aimed at putting dollars to the service of geostrategic objectives.

 

EDITOR'S NOTE

This is a Hedgeye Guest Contributor piece written by Benn Steil and Emma Smith and reposted from the Council on Foreign Relations’ Geo-Graphics blog. Mr Steil is director of international economics at the Council on Foreign Relations and author of The Battle of Bretton Woods. It does not necessarily reflect the opinion of Hedgeye.


Guest Contributor: 3 Tips for Stressed-Out Traders To Bolster Financial Success (Part 1)

By David Rosenblatt, Psy.D., MarketPsych

 

Guest Contributor: 3 Tips for Stressed-Out Traders To Bolster Financial Success (Part 1) - stress2

I’m a psychologist in a hospital for the criminally insane. 

 

You might wonder why I’m writing about financial markets.

 

Most traders acknowledge there is a “soft” side to trading. Yet it is anecdotal and generally ill-defined. I assert that that soft side is all about how we handle uncertainty in a rapidly changing environment.  In other words, stress management.

 

Traders’ need for stress management surged last year. The plot below shows the price of the S&P 500 and Stress about the S&P 500 expressed in social media (a 500-day average represented by the blue line). Data is provided by the Thomson Reuters MarketPsych Indices and covers financial social media such as tweets, message boards, and blogs.

 

Guest Contributor: 3 Tips for Stressed-Out Traders To Bolster Financial Success (Part 1) - rosenblatt image

 

Data show that stress about the S&P 500 expressed in social media hit a two-year high last year, despite the bullish environment for stocks.

 

Working in the hospital environment I became a specialist in stress management. Success required navigating uncertainty, managing risk, and following a plan. In short, making the unpredictable predictable.

 

And my stress reaction to a patient’s glare is the same – biologically speaking – as a trader’s stress response to investment uncertainty. The reaction can be visceral and distracting. However, predicting the unpredictable is best done with a clear mind.

Dealing with Stress: Identify What Can You Control

In this 4-article series I will share what I’ve learned about stress management that can be of benefit to traders. To illustrate this point, I’ll share a story about an incarcerated young man with whom I worked named John.

 

John came from a broken home and he spent most of his time on the streets where he assaulted numerous people. Once locked up, he had difficulty adjusting. All day he scanned people and the surroundings for danger. All night he was tormented by visions of his maimed victims. Conversation was difficult because his mind was either racing or blank. Once he could trust me, he tried a few simple stress-management techniques.

 

Guest Contributor: 3 Tips for Stressed-Out Traders To Bolster Financial Success (Part 1) - rosenblatt callout

 

John learned that to manage his stress. He needed to take control.  Being incarcerated, however, he could not control his environment. So, what could he control?  Features of his thought process and specific behaviors.

 

This is also true for traders in the market. Traders cannot control prices, but they can intervene in their thought processes and take specific actions. Domains where they can take control include directing focus, managing downtime, and engaging in deliberate mental exercises.

3 Tips For A Stronger Mind, Stronger Trades

First, focus needs to be flexible. To help keep the mind loose and limber, vary the eyes’ focal point a few times an hour. Look away from the screen, to the wall near you, then gaze out the window.  Setting a periodic alarm as a reminder to look away can be helpful to break unhelpful thought patterns that form during a day of looking at screens.

 

Second, quality sleep is paramount to health. With constant scanning and thinking, the mind becomes a runaway train. Sleep is a station blown past. A winding-down ritual cues the mind and body that sleep is the destination. To slow that mental momentum, dim the lights, make some herbal tea, and jot down a few light-hearted ideas.

 

Third, and paradoxically, one way to take control is to let go of control. A clear mind allows one to choose the contents. To create clarity, find a quiet space, close the eyes, and focus on breathing for two minutes.

 

So, what happened to John? He’s still in prison. But once he learned to manage his mind, he was able to obtain a formal education and get a job. He could read for pleasure. His sleep improved.

 

You can take control of your psychological well-being to bolster financial success. This article is a brief introduction into taking control. I’ll follow up with three articles that further explore each mental dimension - focus, sleep, and mindfulness.

 

EDITOR'S NOTE

This is a Hedgeye Guest Contributor piece written by David M. Rosenblatt Psy.D. Dr. Rosenblatt is an investor coach for MarketPsych, an expert in stress management, and an avid individual investor. Additionally he works with the California Department of State Hospitals treating Mentally Disordered Offenders. This piece does not necessarily reflect the opinion of Hedgeye.


Guest Contributor: The Fed’s Impending Inflation Disaster? (Part 2)

by Dr. Daniel ThorntonD.L. Thornton Economics

 

Guest Contributor: The Fed’s Impending Inflation Disaster? (Part 2) - Inflation cartoon 07.22.2014

 

I have had a couple of responses to my impending-inflation-disaster essay suggesting that I’m the “boy who cried wolf.” They note that I (here) and others have been concerned about the potential inflation effects of the Fed’s QE policy for some time. But there’s been little smoke and no fire.

 

I am aware of the fact that the empirical relationship between money and inflation has been essentially nonexistent since the early 1980s. Indeed, early last year I argued (here) that neither the Phillips curve theory nor the monetary theory of inflation has credible empirical support.


Nevertheless, I am inclined to be concerned about inflation when money is growing abnormally fast; especially, when the rapid growth is the consequence of central bank monetary policy. The reason is the theoretical link between money and inflation is strong. Specifically, the price level is the price of goods and services in terms of money, so there is a direct link between money and prices.


According to the Phillips curve theory, inflation is related to the output gap (the gap between actual and potential output). The theory is based on the idea that there is a limit to how much an economy can produce or how fast an economy can grow. Hence, prices would rise whenever people tried to purchase more output than the economy could provide. Whether such limits exist and what they would be is an interesting metaphysical investigation.

 

Guest Contributor: The Fed’s Impending Inflation Disaster? (Part 2) - thornton figure 2

Economists have no idea what these limits are or how to measure them.

 

But, they try. No matter how potential output is estimated it turns out to be little more than a trend measure of real output. Hence, when output goes substantially above its previous trend for a period of time, as it did during the period 1995-2007 (see Figure 2 above), estimates of potential are ratcheted up. Because output has been significantly below estimates of potential since 2007, estimates of potential have been ratcheted down annually (see Larry Summers, Figure 1 below).

 

Guest Contributor: The Fed’s Impending Inflation Disaster? (Part 2) - summers figure 1

This doesn’t bother true believers.

The Phillip curve theory is nearly always wrong about inflation, but it’s never wrong! It’s a tautology. If the output gap is small and inflation accelerates, believers say “this proves the Phillip curve theory.” If the output gap is small and inflation decelerates, believes say, “the output gap is bigger than we thought.” With this kind of logic, you can never be wrong!


So here is the bottom line of this essay. I don’t know if the massive increase in M1 will ultimately result in an inflation disaster, that’s why the titled of the essay had a question mark. The relationship between M1 and inflation since the early 1980s suggests it won’t. Nevertheless, I believe it is reasonable to sound the alarm because:

  

  1. There is a direct theoretical link between central bank created money and prices
  2. The increase in M1 that has occurred is unprecedented, and
  3. M1 will continue to grow rapidly so long as the Fed’s balance sheet remains large.

EDITOR'S NOTE

This is a Hedgeye Guest Contributor research note written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy. This piece does not necessarily reflect the opinion of Hedgeye.


Guest Contributor: Current Market Psychology Reminiscent of 2005 Housing Bubble

Takeaway: An easy money Fed encouraged investors to blindly buy stocks. Passive index funds benefited. Active funds lost. That may be changing.

by Mike O'RourkeJonesTrading

 

Guest Contributor: Current Market Psychology Reminiscent of 2005 Housing Bubble - blindfolded man

 

We started highlighting the trend towards “Blind Buying” back in 2013 and over the course of 2016, the trend reached new heights. In general, we are referencing behavior in which individual stock analysis plays little or no role in the investment process. In short, equities are purchased for exposure to the asset class as opposed to purchasing a company’s shares based upon the individual growth and value prospects of its business.

 

While the strategies come in many forms – asset allocation, automated, correlation driven, factor driven, social media driven – none has been more influential than the shift away from active investing towards passive investing. That has become one of the key themes of the market over the past year.

 

Guest Contributor: Current Market Psychology Reminiscent of 2005 Housing Bubble - orourke callout 1 5

 

It was three decades ago when the seminal research by Brinson, Hood and Beebower was published indicating that asset allocation is the overwhelming determinant of returns in comparison to market timing and stock selection. Over the past three decades, this point has been debated countless times. 

 

Subsequent research has noted that the high correlation reported is the result of “aggregate market movement,” i.e. they are all invested in stocks. This is often referred to as the "rising tide lifts all boats" argument.

The 9-Year Bull Market: Active vs. Passive Funds

Regardless, there are numerous arguments and examples of passive funds outperforming active funds. One can understand how those arguments have reached a fever pitch as we head into the ninth year of a bull market, a bull market that has been fostered by unconventional accommodative policy.

 

This is a policy that has included 9+ years of one or more major central banks always buying assets and concurrent zero or near zero interest rate policies. In such an environment, it becomes very easy to outsource the decision making and let the market (and the central banks) do all of the work.

 

It is a one size fits all approach. The leading rationalization behind riding the rising tide has been the fact that equities are “relatively” inexpensive in comparison to Treasuries (which are very expensive), even after the bond market selloff over the past 6 months.

 

Interestingly, that Fed Model relationship moved dramatically during the Treasury selloff and equities are now the most expensive they have been versus Treasuries since 2010 (chart below), which is the year earnings began to recover.

 

Guest Contributor: Current Market Psychology Reminiscent of 2005 Housing Bubble - fed model

 

Considering both stocks and bonds are very expensive, comparing them to one another is a dangerous proposition. A more realistic approach is to measure how expensive stocks and bonds are together - relative to history. One can add the S&P 500 earnings yield and the 10 year Treasury yield, essentially inverting the Fed Model.

 

One can go one step further and multiply the S&P 500 earnings yield by 60% and the Treasury yield by 40% to create the theoretical historic valuation for a 60% equity/40% fixed income portfolio mix (chart below). The readings for both metrics over the past year, especially the past 6 months, rank in the most expensive percentile of readings dating back to 1962.

Why do active managers exist?

They exist so investors can differentiate their returns. In different environments, different stocks, industries, sectors and assets perform better than others. When the two main assets reach their most expensive levels in 56 years, one can understand why investors are not looking to differentiate.

 

Furthermore, the static monetary policy environment that is almost a decade old has accentuated and elongated this trend. When policy is static, investors don’t need to worry about how policy will influence their holdings and “one size fits all” appears to work.

 

When monetary and fiscal policy change and the static environment comes to an end, investors will once again need to look to differentiate. Apparently, this is not happening overnight, but as each gradual shift occurs, the gradual pressure will grow into an unsustainable weight.

 

Since inflation has been rising for over a year and it’s on pace to continue, now is not the time to argue that low inflation justifies a higher multiple. Many will be caught off guard because it has been way too easy to “set it and forget it” in recent years.

Bottom Line

The psychology associated with simply being invested in the “market” has become so pervasive that it is reminiscent of the 2005-2006 housing bubble arguments that “US Home prices have never declined year over year” - until they did. One size fits all makes sure you are wearing something, but it may not be the right thing.

 

Guest Contributor: Current Market Psychology Reminiscent of 2005 Housing Bubble - 60 40 model

 

Guest Contributor: Current Market Psychology Reminiscent of 2005 Housing Bubble - disclaimer

EDITOR'S NOTE

This is a Hedgeye Guest Contributor research note written by Michael O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.


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