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Good Morning, Memphis is one of those serious Free Thinkers -- He reads & studies a lot - he use to post at KTFA; and so did a lot of others - Well we know what eventually happens when someone thinks there's too many chiefs & not enough indians lol - Memphis now sends out his summaries, thoughts, opinions, etc to a mailing list and gets circulated to DinarLand - His writings are most of the time a little over my head but I feel sure many here will digest it easily -- whether they agree totally or not -- lol -- Maybe some here will share their perspective and understanding for all to benefit -- UNEEK "The problem ain't what people know. It's what people know that ain't so that's the problem." ~ Will Rogers I love that quote. It has come to mind often thruout this dinar journey. After typing thousands of pages of material in the past 3 yrs I look back and see that a good portion of it was simply pointing. Pointing to things, both global and domestic changes, that I saw clearly would have a lasting effect on us all. As Will Rogers astutely observed, we each have misconceptions of our world and my assumption is always that I am not alone in attempting to root them out. To minimize them and REPLACE them with reality. PICK A SIDE - ACTIVE OR PASSIVE Last time I made the statement: "Confidence may seem an elusive thing right now but it will come. Our obvious best friend towards this end is knowledge and as we grow in THAT, our confidence will soar." Most of my emails last year were not premeditated (be nice). As "real world" examples popped up, I pointed. I get extremely excited when I "see" something that has value KNOWING that few others will see it from the same perspective and thus risk missing a great opportunity to see more clearly how our world truly spins. To add knowledge. Tonight I am again excited to release this blog. What a shame if we have a real world practical example simply pass us by because we were looking elsewhere! In preparing for the challenges that lie ahead AFTER the re-pricing of the IQD we each have a hurdle to overcome, a new language to learn. The language of finance. These terms can largely remain abstract to us if not seen in the real world. Today's blog will illuminate one such term. For all but the seasoned investor, our financial future depends upon entrusting the right persons which first implies that we know enough to seek him/her out of a crowd! This then requires that we roll up our sleeves and "go to school". This school for me began a few years ago when I gave up my day job of paraphrasing Iraqi news articles and I can proudly report that I have just now scratched the surface! For most readers the majority of your investment choices will become "passive" in nature as the knowledge needed to invest "actively" is not for the faint of heart. Trust me on this. Talk is cheap but try making that REAL decision with REAL money? O well, I have never tried to convince folks on anything as it never works. We have to see it for ourselves and (I believe) soon we will. For others tho, those with a mind to actively manage their wealth, you'll need a rounded macro view of the entire globe as your world will quickly become about managing risk. Risk however is not a one dimensional problem but has many potential points that must each be recognized, analyzed and quantified. If the word passive is not part of your makeup then today's blog is tailored to you. It contains a practical "real world" example that will illuminate the discussion of "political risk", an important aspect of risk for any active investor that IMO receives too little attention. THE PERFECT GOVERNMENT? Before we look at Greece in our example of political risk can you imagine what the perfect gov't might look like? One that would present to us (as investors) a political risk as close to zero as possible? Many of you naturally would answer America here but as a contrarian I would suggest no. Never has a republic stood up against the eventual corruption from within (it's politicians) and without (those who would control the game). That form of gov't most likely to stand and resist such erosions is a pure democracy where the people decide all. This then makes Switzerland the poster child of possibility and (as investors) a nation that should be studied and watched in the years ahead. If I were to ask you to name one politician from Switzerland I doubt if any hands would be raised. Why is that? It is largely because the PEOPLE are center stage. To my point here, their politicians do not have great power and hold sway over all matters. It is by the vote that matters of importance are settled. Before arousing a political debate here (NOT my desire) let's shift to what may arguably be the opposite extreme. So,what does Greece have to do with our discussion on risk? Plenty. But only if we have ALL the information! If our "opinion" (our reality) is based on what we have seen on TV then we have SOME of the facts. These facts tell us that Greece may soon default on it's debt and exit the European Union. And they may, but is there more? If the above were the full story, and Greece DID default, then Greece would be a GREAT source of opportunity for capital as their economy would surely begin to heal very quickly. Confidence would soar and (not unlike Switzerland) capital would start pouring in to this tiny nation or at least that is my position. Confidence is everything and what we are witnessing, and about to witness to an even greater degree in the years ahead, is a great shifting in confidence. Imagine a loose cannon on the deck in a tempest tossed sea and you'll get the idea. This is where our little discussed aspect of risk comes into play. Fresh on the heels of the Greek election what do we know about the new controlling Syriza party? Is there anything of importance? Are they truly JUST the "anti-austerity" party as mainstream media is telling us? In defining risk, using a global mindset, we must always consider political risk. This is one of those terms that we must add to our new language but given the volume of new terms that surely are hard for us to quantify and give value to, I am today pointing to Greece and suggesting that (as investors) this is a perfect real world example of the supreme importance of defining ALL risks. Please don't fail to appreciate that there can be various risk categories applied but for today's purposes? One of the biggies that I see often ignored (seldom talked about) is political. After reading the article linked below you will forever remember the need to take into account political risk. Is Greece soon to be a hot spot for the value investor or is it more likely to be a turbulent home for only the sharpest of crisis investors? I think the latter but regardless THIS is a PERFECT example of the changes taking place in our world. It is then up to us to go seize the opportunity that is afforded. LIVING ON THE EDGE An important thought in closing. I have a habit that has been with me from my earliest memories. It has never seemed odd to me and until recent years I assumed that most folks shared my habit. That turned out however not to be the case. It appears that I am rather odd in that I take EVERYTHING to the extreme. Immediately after being presented with new information it is taken to it's possible extremes. It's my way of chewing on it. Both "worst case" and "best case" scenarios are imagined based on all probabilities at hand and then I attempt to find balance. In time an equilibrium forms and that is then where I become "settled" on the matter. Here's why I share this... Despite what we hear and read in alternate media SELDOM do we witness the extreme possibility become reality. This is important to ponder for what we now see manifesting in the world is exceptional. I won't go into the many factors driving things globally (other than to mention the extreme of sovereign debts) but allow me today to simply point out that we are witnessing the extreme in Greece. Extraordinary circumstances in that nation have brought about a radical shift in their government and this will have a ripple effect in the region, of that you can be certain. Is this to be an isolated example? I think not. What we once considered extreme is changing and I think this trend will continue. It goes with the word "volatility" like Robin goes with Batman and if we think back just 3 weeks another example pops up... The SNB made a surprising move in the middle of the day when they unpegged the Franc to the Euro. The result? An unprecedented move in their currency. This was an extreme event folks and extreme events? They change how people think, how they react and THIS is the secret to understanding how and why capital moves. Exciting times indeed!! Memphis Thinking as an investor of YOUR wealth, IMAGINE NOT KNOWING WHAT YOU ARE ABOUT TO KNOW: on Greece's new gov't: http://www.mauldineconomics.com/the-10th-man/socialism-is-like-a-nude-beachsounds-like-a-great-idea-until-you-get-there
This was very interesting for me as this is more in line in the field of my expertise and where my second career was geared - How every thought creates an action or reaction and the consequences -- as in "emotions" - This article really was well done in my opinion and covered a very interesting topic so close to all of us in this investment - UNEEK The Biology of Risk By John Coates June 7 2014 Photo Credit Jonathon Rosen SIX years after the financial meltdown there is once again talk about market bubbles. Are stocks succumbing to exuberance? Is real estate? We thought we had exorcised these demons. It is therefore with something close to despair that we ask: What is it about risk taking that so eludes our understanding, and our control? Part of the problem is that we tend to view financial risk taking as a purely intellectual activity. But this view is incomplete. Risk is more than an intellectual puzzle — it is a profoundly physical experience, and it involves your body. Risk by its very nature threatens to hurt you, so when confronted by it your body and brain, under the influence of the stress response, unite as a single functioning unit. This occurs in athletes and soldiers, and it occurs as well in traders and people investing from home. The state of your body predicts your appetite for financial risk just as it predicts an athlete’s performance. If we understand how a person’s body influences risk taking, we can learn how to better manage risk takers. We can also recognize that mistakes governments have made have contributed to excessive risk taking. Consider the most important risk manager of them all — the Federal Reserve. Over the past 20 years, the Fed has pioneered a new technique of influencing Wall Street. Where before the Fed shrouded its activities in secrecy, it now informs the street in as clear terms as possible of what it intends to do with short-term interest rates, and when. Janet L. Yellen, the chairwoman of the Fed, declared this new transparency, called forward guidance, a revolution; Ben S. Bernanke, her predecessor, claimed it reduced uncertainty and calmed the markets. But does it really calm the markets? Or has eliminating uncertainty in policy spread complacency among the financial community and actually helped inflate market bubbles? We get a fascinating answer to these questions if we turn from economics and look into the biology of risk taking. ONE biological mechanism, the stress response, exerts an especially powerful influence on risk taking. We live with stress daily, especially at work, yet few people truly understand what it is. Most of us tend to believe that stress is largely a psychological phenomenon, a state of being upset because something nasty has happened. But if you want to understand stress you must disabuse yourself of that view. The stress response is largely physical: It is your body priming itself for impending movement. As such, most stress is not, well, stressful. For example, when you walk to the coffee room at work, your muscles need fuel, so the stress hormones adrenaline and cortisol recruit glucose from your liver and muscles; you need oxygen to burn this fuel, so your breathing increases ever so slightly; and you need to deliver this fuel and oxygen to cells throughout your body, so your heart gently speeds up and blood pressure increases. This suite of physical reactions forms the core of the stress response, and, as you can see, there is nothing nasty about it at all. Far from it. Many forms of stress, like playing sports, trading the markets, even watching an action movie, are highly enjoyable. In moderate amounts, we get a rush from stress, we thrive on risk taking. In fact, the stress response is such a healthy part of our lives that we should stop calling it stress at all and call it, say, the challenge response. This mechanism hums along, anticipating challenges, keeping us alive, and it usually does so without breaking the surface of consciousness. We take in information nonstop and our brain silently, behind the scenes, figures out what movement might be needed and then prepares our body. Many neuroscientists now believe our brain is designed primarily to plan and execute movement, that every piece of information we take in, every thought we think, comes coupled with some pattern of physical arousal. We do not process information as a computer does, dispassionately; we react to it physically. For humans, there is no pure thought of the kind glorified by Plato, Descartes and classical economics.Our challenge response, and especially its main hormone cortisol (produced by the adrenal glands) is particularly active when we are exposed to novelty and uncertainty. If a person is subjected to something mildly unpleasant, like bursts of white noise, but these are delivered at regular intervals, they may leave cortisol levels unaffected. But if the timing of the noise changes and it is delivered randomly, meaning it cannot be predicted, then cortisol levels rise significantly. Uncertainty over the timing of something unpleasant often causes a greater challenge response than the unpleasant thing itself. Sometimes it is more stressful not knowing when or if you are going to be fired than actually being fired. Why? Because the challenge response, like any good defense mechanism, anticipates; it is a metabolic preparation for the unknown. You may now have an inkling of just how central this biology is to the financial world. Traders are immersed in novelty and uncertainty the moment they step onto a trading floor. Here they encounter an information-rich environment like none other. Every event in the world, every piece of news, flows nonstop onto the floor, showing up on news feeds and market prices, blinking and disappearing. News by its very nature is novel, adds volatility to the market and puts us into a state of vigilance and arousal. I observed this remarkable call and echo between news and body when, after running a trading desk on Wall Street for 13 years, I returned to the University of Cambridge and began researching the neuroscience of trading. Sources: Federal Reserve Bank of St. Louis; Standard & Poor’s Graph Go to link below to view http://www.nytimes.com/2014/06/08/opinion/sunday/the-biology-of-risk.html?action=click&contentCollection=N.Y.%20%2F%20Region&module=MostEmailed&version=Full®ion=Marginalia&src=me&pg In one of my studies, conducted with 17 traders on a trading floor in London, we found that their cortisol levels rose 68 percent over an eight-day period as volatility increased. Subsequent, as yet unpublished, studies suggest to us that this cortisol response to volatility is common in the financial community. A question then arose: Does this cortisol response affect a person’s risk taking? In a follow-up study, my colleagues from the department of medicine pharmacologically raised the cortisol levels of a group of 36 volunteers by a similar 69 percent over eight days. We gauged their risk appetite by means of a computerized gambling task. The results, published recently in the Proceedings of the National Academy of Sciences, showed that the volunteers’ appetite for risk fell 44 percent. Most models in economics and finance assume that risk preferences are a stable trait, much like your height. But this assumption, as our studies suggest, is misleading. Humans are designed with shifting risk preferences. They are an integral part of our response to stress, or challenge. When opportunities abound, a potent cocktail of dopamine — a neurotransmitter operating along the pleasure pathways of the brain — and testosterone encourages us to expand our risk taking, a physical transformation I refer to as “the hour between dog and wolf.” One such opportunity is a brief spike in market volatility, for this presents a chance to make money. But if volatility rises for a long period, the prolonged uncertainty leads us to subconsciously conclude that we no longer understand what is happening and then cortisol scales back our risk taking. In this way our risk taking calibrates to the amount of uncertainty and threat in the environment. Under conditions of extreme volatility, such as a crisis, traders, investors and indeed whole companies can freeze up in risk aversion, and this helps push a bear market into a crash. Unfortunately, this risk aversion occurs at just the wrong time, for these crises are precisely when markets offer the most attractive opportunities, and when the economy most needs people to take risks. The real challenge for Wall Street, I now believe, is not so much fear and greed as it is these silent and large shifts in risk appetite. I consult regularly with risk managers who must grapple with unstable risk taking throughout their organizations. Most of them are not aware that the source of the problem lurks deep in our bodies. Their attempts to manage risk are therefore comparable to firefighters’ spraying water at the tips of flames. THE Fed, however, through its control of policy uncertainty, has in its hands a powerful tool for influencing risk takers. But by trying to be more transparent, it has relinquished this control. Forward guidance was introduced in the early 2000s. But the process of making monetary policy more transparent was in fact begun by Alan Greenspan back in the early 1990s. Before that time the Fed, especially under Paul A. Volcker, operated in secrecy. Fed chairmen did not announce rate changes, and they felt no need to explain themselves, leaving Wall Street highly uncertain about what was coming next. Furthermore, changes in interest rates were highly volatile: When Mr. Volcker raised rates, he might first raise them, cut them a few weeks later, and then raise again, so the tightening proceeded in a zigzag. Traders were put on edge, vigilant, never complacent about their positions so long as Mr. Volcker lurked in the shadows. Street wisdom has it that you don’t fight the Fed, and no one tangled with that bruiser. Under Mr. Greenspan, the Fed became less intimidating and more transparent. Beginning in 1994 the Fed committed to changing fed funds only at its scheduled meetings (except in emergencies); it announced these changes at fixed times; and it communicated its easing or tightening bias. Mr. Greenspan notoriously spoke in riddles, but his actions had no such ambiguity. Mr. Bernanke reduced uncertainty even further: Forward guidance detailed the Fed’s plans. Under both chairmen fed funds became far less erratic. Whereas Mr. Volcker changed rates in a volatile fashion, up one week down the next, Mr. Greenspan and Mr. Bernanke raised them in regular steps. Between 2004 and 2006, rates rose .25 percent at every Fed meeting, without fail... tick, tick, tick. As a result of this more gradualist Fed, volatility in fed funds fell after 1994 by as much as 60 percent. In a speech to the Cato Institute in 2007, Mr. Bernanke claimed that minimizing uncertainty in policy ensured that asset prices would respond “in ways that further the central bank’s policy objectives.” But evidence suggests that quite the opposite has occurred. Cycles of bubble and crash have always existed, but in the 20 years after 1994, they became more severe and longer lasting than in the previous 20 years. For example, the bear markets following the Nifty Fifty crash in the mid-70s and Black Monday of 1987 had an average loss of about 40 percent and lasted 240 days; while the dot-com and credit crises lost on average about 52 percent and lasted over 430 days. Moreover, if you rank the largest one-day percentage moves in the market over this 40-year period, 76 percent of the largest gains and losses occurred after 1994. I suspect the trends in fed funds and stocks were related. As uncertainty in fed funds declined, one of the most powerful brakes on excessive risk taking in stocks was released. During their tenures, in response to surging stock and housing markets, both Mr. Greenspan and Mr. Bernanke embarked on campaigns of tightening, but the metronome-like ticking of their rate increases was so soothing it failed to dampen exuberance. There are times when the Fed does need to calm the markets. After the credit crisis, it did just that. But when the economy and market are strong, as they were during the dot-com and housing bubbles, what, pray tell, is the point of calming the markets? Of raising rates in a predictable fashion? If you think the markets are complacent, then unnerve them. Over the past 20 years the Fed may have perfected the art of reassuring the markets, but it has lost the power to scare. And that means stock markets more easily overshoot, and then collapse. The Fed could dampen this cycle. It has, in interest rate policy, not one tool but two: the level of rates and the uncertainty of rates. Given the sensitivity of risk preferences to uncertainty, the Fed could use policy uncertainty and a higher volatility of funds to selectively target risk taking in the financial community. People running factories or coffee shops or drilling wells might not even notice. And that means the Fed could keep the level of rates lower than otherwise to stimulate the economy. IT may seem counterintuitive to use uncertainty to quell volatility. But a small amount of uncertainty surrounding short-term interest rates may act much like a vaccine immunizing the stock market against bubbles. More generally, if we view humans as embodied brains instead of disembodied minds, we can see that the risk-taking pathologies found in traders also lead chief executives, trial lawyers, oil executives and others to swing from excessive and ill-conceived risks to petrified risk aversion. It will also teach us to manage these risk takers, much as sport physiologists manage athletes, to stabilize their risk taking and to lower stress. And that possibility opens up exciting vistas of human performance. John Coates is a research fellow at Cambridge who traded derivatives for Goldman Sachs and ran a desk for Deutsche Bank. He is the author of “The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind.” http://www.nytimes.com/2014/06/08/opinion/sunday/the-biology-of-risk.html?action=click&contentCollection=N.Y.%20%2F%20Region&module=MostEmailed&version=Full®ion=Marginalia&src=me&pg