Essence of Trading: Modern Financial Economics Is Just Alchemy In Disguise

Economics Is Social Science

Many people confuse economics as a science like physics or medical science. Economics is part of social science. It is not the kind of science that can produce precise projection or accurate forecast. In this sense, most of the theories you have come to hear about in economics have no practical value in trading. If cars are made by economists with their economic theories, the cars will explode and burn the moment you drive them, even though the car never moved.

Financial Economics takes the nonsense one step further. As all human with any common sense know, the price of anything that is determined through market mechanism is controlled by the buyers and sellers. They can do whatever they want but their actions are mainly goal driven. The goal for any normal participant in a market is to make money. Yet economists assume price movement in our markets to be random without even checking if reality matches their assumption at all. When the most fundamental component in the study of financial economics, price movement, is not even properly examined at all, how can anyone believe it has any practical value?

Economics Is Alchemy In Its Present Form

With this understanding, it is no surprise that predictions and projections generated under the labels of the above disciplines are always contradictory among its practitioners. There is almost always no agreement among economists where the stock markets is heading. Financial analysts almost always giving completely diverged opinions where a stock is heading. And worst of all, these supposed leaders in the field of economics all failed to tell that the 2008 financial crisis was going to happen.

One has to realize that economics, in its present form, is no different from alchemy. Many of these so call economists or analysts are just very bad alchemists. They do not really know what they are doing. They just guess, imagine, and b#llsh*t to make their livings. All kinds of theories with all sort of bizarre analysis techniques are invented by these guys – from collecting economic data, studying corporate financial statements, to analyzing historical prices. These techniques, often borrowed from other scientific disciplines, are created to see if they can explain what happens in a market or economy as a whole. Due to the origin of these techniques, these analysis look so complicated that people assume they are legit. No, they are not because these fancy things cannot produce consistent results that match what happen in the real world.

Outside of the academia, there are very good analysis techniques developed over the years by people whom are affected most by the markets – the participants like traders and market makers. These techniques focuses on what matters most – where price is likely going. An interesting fact about these techniques is that they are practical. Their work (or trading methods) do not have fancy theories behind so there is no glamour nor talking point in parties. What these trading methods offer are consistent trading results that enable these participants to stay profitable in the markets year after year.

During Medieval Times, those alchemists who figured out how to determine the metal content in the ores, or those who figured out how to extract metals from the ores, would keep the techniques to themselves so that they could serve the powerful warlords. They might not fully understand what they were doing (and in our eyes they might actually get the concepts completely messed up). But the most important thing was that these individuals had developed repeatable processes and methods which produced consistent results.

See the parallel there?

Alchemy Is Not All Bad

For western alchemy, most of it was eventually purged and disappeared. Some part of alchemy that works becomes the foundation of modern chemistry. Process like distillation was invented by alchemists. Those bad alchemists who did voodoo things and boost magic theories are now condemned forever in history. Those alchemists who did actual investigative work with scientific (or practical) mindset leaving us with useful knowledge are praised as pioneers in modern science.

The good sign is that we are seeing improvements in the study of economics in recent years. Academics finally succumb to their failures as they are ridiculed by not just the more successful market participants but also the public in general how stupid and useless they are. The younger generations of economists have started questioning the foundation of the accepted theories in economics. New branches like behaviour economics tackle the concepts of economics from a different angle and has been showing a lot of promises.

Economic Theories And Trading Don’t Mix

Understanding the limitation of economic theories in its present form tells you how dangerous it is to shape your trading ideas from these concepts. I know it is difficult to put a block in your head to separate your trader self from your economist self (don’t we all having an opinion where the economy is going?) but it has to be done. Do not make any financial decisions based on just big picture ideas because that will definitely hurt your bottom line.

Remember the main reason why economic theories fail in reality is that they do not produce precise projections into the future.

The predictions made by well-known economists are doing worse than the weather forecast you get daily from your local weather man. If these “experts” in economics cannot produce consistent forecast with their expertise, how can you expect to do anything useful with their theories?

Results Oriented Thinking

Then what tools should we use in trading or making financial decisions?

The various methods people are using right now that has been producing consistent results.

Make no mistakes, these methods, be that chart reading, market breadth analysis, or tape reading, are also a form of alchemy.

Comparing to accepted economic theories that always fail to forecast anything correctly, some of these methods and techniques are showing consistencies in their ability to produce better trading and projection results. These are the good methods just like the good alchemy stuff. Even though we may not know the underlying reasons why these techniques work, as long as they are producing consistent results, it makes more sense to use them over the inferior economic theories.

You know these techniques are far from perfect. In fact, you know most of them are borderline alchemy stuff. Hence, you use them in your trading decision process only after you carefully experiment with the methods (i.e. backtesting and/or manual chart verification depending on your preference) and can confirm that you can get good results.

Techniques that are not giving you consistent results should be dropped.

Most important of all, never trust a trading method 100% even though it has been working well for you over a long period of time. As traders, not only that we do not marry to our positions, we do not marry to the trading methods as well.

The Focus Of Bank, Personal and Financial Economic Check Ups

Finance economics looks at the allocation of capital, labor, and material over time. We live in in an uncertain environment. It examines how money is traded now to create money in the future. It tries to gauge the amount of money transferred into the future, based on uncertainty and risk. It looks at how one party of the transaction can make a decision to affect the future outcome of the money transfer. Last, but not least, it examines how certain knowledge of the future can reduce uncertainty. Their safety ratings and bank checks seemed reasonable, so they led us to believe.

One could also argue the government is taking the necessary steps to get the economy back on track, according to numerous theories of macro economics. However, the blinders were on for many of the nation’s most respected economists and it’s going to take some progressive solutions to bring redemption to this tarnished profession.

Financial economics focus on the fair values of assets, how much risk is in the asset, which discount rates should be applied, what cash flows will come from a transaction and which events cash flow or assets are dependent upon. Therefore, it has a combative role with behavioral economic theory. Stocks, bonds, commodities, derivatives, money market, financial institutions, regulations; these are all the language of bank and finance economics.

Behavioral economists, on the other hand, take a more psychological approach to finance. They examine how economic decisions by borrowers, consumers and financial institutions affect market prices, returns, allocation of resources and values. Bubbles, market trends, crashes, socioeconomic and market trends, prospect theory; this is some of the terminology used in that discipline, which tends to consider more microeconomics theories. However, on the personal economic front, catching a break from high prices is attention getting. Purchasing cheap checks online are a practical way to benefit from online sources that have found a more efficient way to market their product. Saving 50% off what financial institutions would charge, cheap personal checks online is a direct add on to anyone’s bottom line.

Finance economics experts have a lot of work to do. Bubbles in the market are often the result of government influence on banks in that they impose artificial constraints on lending practices, they must figure out how to manage those contingencies and limit the scope of the damage. They must learn how liquid markets can suddenly dry up and determine which policies or actions could keep cash flowing freely and purchasing power strong.

A purer form of capitalism would solve most problems, but the socialist agendas prevent such implementation. They must look at how special interest government regulation (or lack thereof) played a part in the current crisis and make intelligent recommendations for the future. They need to find new models for calculating systemic risk and help bank institutions look at the cause and effect picture in management economics to make more informed decisions.

Relying on Government to Solve a Financial Economic Crisis – Ridiculous

Many Americans have been duped into believing that President Obama’s Administration and his band of Merry Men can bring us out of the recession, that’s laughable. First, the government cannot do much of anything right, can you name one thing they do efficiently or well? Secondly, it’s the government’s fault we are in this mess in the first place; their policies caused it; it’s all due to the law of unintended consequences.

The economy will recover as it always does, and as it does it will begin to go back up, not because of anything they government does, but rather in spite of what it does. That’s right in spite of its bad policies and shock doctrine approach to control what it clearly doesn’t understand. It’s obvious the government is inept, and it hardly matters which side of the political spectrum.

Oh sure, the latest neo-liberal-socialists are a disaster waiting to happen, but the mistakes of the past are not anything to write home about either. Do people really believe in this president that much, a man who has never run a business before? An ivy league politically correct trained Constitutional trained lawyer – that’s absurd.

How can destroying capitalism and bringing about “Change” in the form of socialism help the United States remain the strong point in global economic might and recover from the recession (labeled a depression)? Exactly how is that suppose to help the economy?

If you are waiting for the government to solve the financial economic crisis by way of committee, legislation, law making, more regulation, and throwing trillions of dollars of debt spending at the problem then you must be smoking something, and thus, probably believe that California can solve its budget crisis by legalizing marijuana and taxing it? Whatever.

The Global (Financial) Economic Crisis

Contrary to popular belief and what most of mass media is feeding the world’s citizenry, the global (financial) economic crisis did not come as a sudden phenomenon, which besets most, if not all, the countries in the world today.

The advent of the global financial crisis started around the late 1990’s to the first couple of years of the new millennium. With the recent shift towards more of a credit card-driven purchasing system of marketing and advances in Internet protocols which resulted to a heightened viability and practicality of e-commerce and the increase in use of credit cards thereof, consumerism has been upped several notches even to the point that an individual reaches a particular point where he or she is so much indebted that he or she can no longer manage to pay his dues on time. There maybe collaterals in credit and pre-need services but such cannot suffice for the millions even billions and possibly even trillions worth of funds outsourced to support consumer spending and extravagant lifestyle.

Such a scenario posted and continues to post an alarming difference between the rate at which funds are outsourced from banks and other pre-need and lending institutions such as mortgage, memorial plans and the like and the respective returns of investment. This creates stagnation in the economy in that the aforesaid entities cannot anymore bankroll the demands of their customers since their funds are slowly drained due to the wide gap between fund outsourcing and return of investment. In effect, an economic downturn ensues since the money or capital that is supposed to circulate around the market is left in the hands of either the banks and financial institutions or their myriads of customers, many of whom have not yet serviced the credits they owe the lending or pre-need institutions they ascribe to.

The Global Financial Crisis and the Plight of the Filipino Worker

Though it may not be readily seen or felt in the country the global financial crisis is bit by bit drowning the country’s economy since many Overseas Filipino Workers (OFW’s), who are easily the biggest contributors to foreign exchange and dollar reserves via their remittances, are laid-off and find it hard to look for employment elsewhere. They are then forced to go back to their native soil and join the ranks of the millions of unemployed Filipinos or seek other jobs that are most of the time not in line with their training and skills.

How does this happen?

The points illustrated in the general outlook or view with regard to the global financial crisis may and will explain most, if not all, the events that precede thereunto which basically start from more of a credit card, fund outsourcing-driven economy or exchange. Filipino migrants and overseas workers are affected in that the companies or firms they are employed in are either cost-cutting and thereby laying off some of the auxiliary, “not so important,” “can be done with fewer members” part of the production line, trimming down working hours to the basic minimum or even closing on certain days of the week or worst, are going bankrupt and choosing to close shop entirely. These firms then go and invest their capital elsewhere where labor is cheaper as in the case of China and its people. Many companies nowadays flock to China since labor is relatively cheaper and the market is a lot bigger. It is the country with the largest population after all which only means a larger market and then again a larger return of investment and flourishing of enterprise-for further development and later expansion.

Since our country specifically our labor force is largely dependent on other countries for investment vis-à-vis employment we are then subject to the business tactics of big foreign companies and even small and medium foreign investors and are at the mercy of our employers-whether they choose to lay-off some workers, cut down on working hours or close shop entirely and invest their capital in countries with lesser labor compensation and ever detail that goes with it. The primary examples of such occasions that happened in the country fairly recently are that of FedEx and Intel. The former, door-to-door delivery and logistics solutions provider closed shop and transferred to China and elsewhere while the latter closed one of their plants in a Cavite thereby laying-off some five thousand to around ten or twenty thousand.

Also, the Philippine Export Zone Authority plant located in some parts of the archipelago and especially that in Baguio City where a number of companies engaged in semiconductor production and assembly has considerably laid-off several hundreds to thousands of workers or cut down on working hours. Moog, for example, does not anymore allow its workforce to have overtime in. The measure was implemented in order that the workforce be maintained (meaning no one is laid-off) while considerable cost-cutting is ensued. Texas Instruments meanwhile has laid-off several thousands of workers in lieu of cost-cutting and better management of resources both human and capital.

In countries abroad, companies especially pre-need firms engaged in fund outsourcing, mortgage, housing and the like down to the ones which invest in construction, engineering, research and many more have either laid-off a significant percentage of the workforce (which includes Filipinos of course), cut down on working hours or declared bankruptcy and closed shop entirely. Such came about in the case of AIG (American International Group, Inc.), which according to the 2008 Forbes Global 2000 list, was the 18th-largest public company in the world[1] and Layman Brothers Holdings Inc. in the United States who have filed for bankruptcy protection or bailout.

Furthermore the repercussions of the global financial crisis can all the more be seen in the grassroots level of the household. How is this?

The effects of such phenomenon trickle down from the paradigm of the big corporations and pre-need or investment firms in whatever field of endeavor-from those which serve as employers to their employees, constituents and beneficiaries. The laying-off of workers, reduction of working hours, filing for bailout and bankruptcy and closing of enterprise primarily affect the rank-and-file, regular employees of private and government-owned institutions in that their jobs are the ones at stake.

In the long run all these events can and will result to inflation in that there will be lesser and lesser producers of goods and services in the country; the lesser the producers the lesser the product to be produced or the more strain put on production of the same quantity or amount of final produce thereby increasing production cost and mark-up in the process by virtue of law of supply and demand. This will increase the populace’s reliance on imported goods since they are cheaper. Case at point: China.

Chinese products have in recent years been on the boom. As the joke goes: “God made the world. Everything else is made in China.” Joking aside, there is a truth in the statement. In almost every facet or field of the local and global economy, China is present-from textile to construction to information and communication technology (China phones and gadgetry most especially), human resource allocation and outsourcing and even arms production and military personnel and armory enhancement and development-ironically albeit comically even your underwear has its own version made in China.

The “waking up” of the so-called sleeping giant has weaved its effect into the economic fiber and life of the global community. China’s provisions cheap labor and production has caused other countries to step-up their production process and human resource management in order to keep pace, be competitive pricewise and not be left out in the market. The Chinese global economic community is as is the outsourcer of one of the cheapest labor force and production staff the world over.

In comparison to other nations, the “Chinese economic boom” also affects the Filipino people’s economy. Our workforce or human resource may be one of the most well equipped or at least knowledgeable in various disciplines and competitive, but the cost of their labor and overall production process in our country is generally higher than that of China given that we have a relatively “exorbitant’ taxes compared to the latter giving them an edge over our products (since theirs is cheaper) though ours may have superior or the same quality and durability as theirs.

Financial Economic Crisis – Turning Points

Did you know there are many ways of beating this financial economic crisis? Yes thats right, you can take control of this crisis by creating different ways to earn your money. There is a little catch to making things work toward your advantage. Do you remember the old saying “it takes money to make money.” That saying is true, especially in today’s economy.

Let’s say that you always wanted to know how to build websites for people but you didn’t know where to begin. You don’t have to go to school to get that degree in building websites. Although it is a good idea, but that costs more than what you want to spend, so here’s a suggestion. After getting your first check, you will need to go to Barnes & Noble bookstores and check out their line of program language books. You also want to get some books on program language editor books because there are some languages that require you to have special editors. If you don’t, you won’t be able to use those certain program languages. You will also want to get books that usually are simple teaching editorials, such as the Sam’s teach yourself book line. Now some of these books will even come with some of these language programs in the books. Some of them even supply you with some of the server languages. For example you have the php editor, then you have Mysql with Cpanel, and then you also have Apache server software.

Such as: PHP uses an editor called zend studio, oh one more thing, you will want to try to get the newest version of the language possible because for example if you try to use php4, that version is no longer supported by PHP or zend, the latest version of PHP is php5_5_10.

There are many different styles of languages, as mentioned above there is the php language, then you have html, shtml, dhtml, xhtml, xml, colbalt (almost non-existent anymore), Javascript, Java, etc.

Then you have server languages such as Joomla, Ubuntu, Ajax, Magneto, Apache, etc.

As stated, you don’t have to go to college to be able to build those websites that the professionals are building, just go to a local bookstore and buy some of the easier to learn books and start teaching yourself how to build websites, there are even online tutorials that can help you in getting started. Just go into www.Google.com and do a specified search of “learning how to build websites” and you should come up with the search results like I have here: “349,000,000 for “learning how to build websites” (0.30 seconds).

Once you get the mentioned materials, go home and get started with your reading and practicing. It may be frustrating at first, but as they say: practice makes perfect. The more you practice the more perfect you become. I know I had to practice a lot and now I can build websites with the best of them. I started to go to college but they don’t teach what I am wanting to learn. And so I am always teaching myself a new language all the time.

Computers are changing the world, they are a great asset when you need something fast. Twenty years ago computers were huge boxes that sat on our desks, now you can have a computer that is as small as your phone, and they will get even smaller as the years come and go by us. I predict that by the year 2015 we will have computers that will be the size of a watch, just think, the CPU’s in our computers are getting smaller, why not our computers also?