Zak Mir Interviews - Paul Rodriguez
pr:
With trading, the barriers to entry are very low — and that is the problem why so many fail. But, with the internet, there is usefully a lot of information out there. Working through it and filtering out what is important is a big task. This can be taught to save the beginner time. When you first start out you don’t instinctively know what the important issues are.
“One of my favourite expressions is as follows: Eventually, everything happens eventually .” One of the biggest barriers in trading are the dangerous assumptions people make, such as, “the Fed will always save the market”, “house prices will always go up”, “you can’t go wrong with gold”, “this time it is different, you cannot value Apple (AAPL) like a normal company” etc. The markets will show all these assumptions to be false eventually. But at the time, many people are holding onto such positions that the ‘professionals’ would not be. One of my favourite expressions is as follows: Eventually, everything happens eventually. You will see hyperinflation, deflation, interest rates near zero, interest rates over 20% / 30%, governments go bust and so on. I am not saying this is about to happen, but an experienced trader knows that all of this can be part of a long term cycle. Whether it is a low percentage or not, we know these things are a possibility, and understanding this is the first step to understanding the markets. Low probability events can be much higher than you think.
ZM:
The difference now may be that you have boom and bust occurring at the same time in different geographies. Before, the world economy tended to move in unison, with the Great Depression being experienced almost everywhere — a point also highlighted by the aftermath of the Oil Crisis in 1973 and the 2003 - 2007 Asset Bubble. Now, we have not only the divergence between emerging and “developed” economies, but also, say, a boom in prime London real estate and a bust in the same asset class in the EU Periphery.
pr:
Over the past 10 years we saw a synchronisation of the markets which has started to break down. And you normally see that kind of phenomenon when a bull market is false, with the example of London house prices going up and everywhere else in the UK going down. This fragmentation makes you think that the prevailing upward trend is not as strong as it seems. For instance, we are seeing the same in the financial markets now with the Dow at a new all time high, but the Nasdaq not yet there. Tech may follow, we shall see, but all the indications are that this could be a false breakout in equities. Whilst you can’t short the market here, you should be dancing near the door in my opinion. The market here reminds me very much of the real estate market in 2003-2004 — where the trend was going up very aggressively. Could you short it? No. But you could not trust it either. The after affects are still being felt now of course. Saying that it just does not feel right is not very scientific, however, but the warning signs are there and your trading strategy has to be nimble in this environment.
“Whilst you can’t short the market here, you should be dancing near the door in my opinion.” I think we are going to see a very interesting 2013. My personal view is that we could be very close to another 2007 – 2008 style collapse. The lights are flashing amber, and we are waiting on red. The situation is interesting as I think it will be driven by interest rates. The second the market senses rates are going to rise you are really going to see whether we have been looking at a sustainable rally — one that can absorb higher interest rates. Time will tell.
May 2013
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