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Broken Market Economics - Part 1

How does an ecosystem or a simple system survive? If you are  a believer in evolution and survival of the fittest, explained in a very simple way, the system survives by encouraging good and beneficial changes, while discouraging bad and damaging changes / actions. As long as these encouragement and dis-encouragement plays out, we can be sure in long run the system will survive with new and better players.

Now lets take the case of markets in past few months. The market is completely broken. When people say market it broken, then necessarily imply the feedback loop that once encouraged good and smart players, are now aimed at encouraging the uninformed players. A caveat here is, that there is no right or wrongs here, and no differentiation as to who should be encouraged and who discouraged. Hence, the market may still be turning correctly, and the so called smart players may find themselves having made a mistake at the end of the game.

Given the hard facts that stare at our faces, and the profile of the traders who state the markets are broken (just as a broken watch or a compass, which may be running and turning, but it is unsure if they are pointing to the correct time or directions) imply that these ‘accusations’ be studied.

The current market scenario is highly ‘rigged’ i.e. encouraging the bad behavior while punishing the good behavior, the sensibility and the experience of decades and even centuries are being brought to nothing. However, it has to be stated that markets can be temporarily out of place and that is routine for it, in other words its is perfectly normal for the markets to fall out of the equilibrium to identify a better breed of players for its next cycle of evolution.

All the good traders, most of whom are on sidelines, or trading small or losing money, are playing to the experience that dictates the markets should be functioning in a method that it should function – given all things remain constant. However, just like in early last decade, the things are not constant, and how it will impact is completely random seen from the perspective of facts and data.

The market is currently encouraging a set of wrong trading and investment practices that will only make a trader weaker. However, that is a personal opinion. Every trader / investor has strategies that are personalized to them, and hence generalizations are impossible though large bucketing can be attempted. It is important for the trader, learning or eager to be good, or to maintain their sanity and experience, is to remember their experience that all indicators and facts ultimately come correct. Facts can be glossed over for a short period of time, and which can be stretched to maximum possible duration, however, facts have to be compensated in a rule of natural justice. It is unlikely that government and central bank driven incompetency-lottery being dished out to learn and opt for corrupt trading practices will help the traders in the long run.

In the long run, these practices are more harmful than helpful. When good traders – macro or technical – are consistently in the losing side, all due to one overriding reason of interventions, it is time to take notice. The periods when the not-smart people are living a comfortable life while the smartest hedge fund managers and like are closing up their investment profiles, is a testament for the risks embedded in the markets and which is currently been understood by them. Ignoring the risks, of what is good for the long term, is never a good strategy. And it is not about having a stop-loss, every person knows any markets can be traded with a stop loss. However, when the markets’ and market players’ natural edge is blunted it does not make sense for that person to deep-dive into the markets in such situation. Present, is such a situation.

As any natural justice, this too will revert to its correct position at some point in future. It is impossible to predict or time when this shift may occur. However, for the people riding the broken train should be well aware this carries immense risks. Until then, you will have a so called once-upon-a-time smart people staying in sidelines, closing up or losing money.

Part 1


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