Trading Easy talk about but hard to response properly!

It is a gut crunching time if you have left too much chips on the table since April. XAO become more fearful with its internal and external troubles. It lost 1200 around, 35% of its market cap, for two days in August.

It doesn't believe Australia economies could keep its dramatic performance, at 5.2% unemployment rate(nearly in full capacity), high interest rate 4.5% around(highest in advanced economies), incompetent government(minority, less vision and decisive, and incapable to lead the world), actually worries about Australia economies would tip off while EU and US were in default, and inevitably China tipped off. How could China not tip off? How could the global structure shift to better form with the emerging economies only?

XAO has become empty land to retail market players. It become popular for people to predict what is the next event would tip off Australian house, manufacture, tourism, resource, and so on. The people in XAO know(but between April - June I didn't know the people in XAO), that Australian economies is not big enough to lead the world but follower(actually they don't think Australia has the capability to go through the valley of death intelligently in balance with its matured financial, political, and economic structure and systems). They hope there are trustful super economic powers to move forward steadily or euphorically. When it worries all of super powers, what they could do is selling and leading the sale as GFCII has being hit the global economies.

I don't see the rationality but I fail to see the power of people in XAO collectively. I don't see XAO could in pessimism for so long and then it would react so furiously to the remote smoking. I ignore the crowd power in crisis, which could result in turmoils, revolts, pains, forced sale, and even revolution. I don't understand what's meaning that Wall Street is full of blood. It isn't a concept without necessary conditions and contexts. It has more blood to shed more than I imaged and it is easy to response to the market event wrongly in price sense. It could be lower and much lower than it should be. It could be rippled at the bottom with the unbelievable magnitude and length of time. It needs enough cash reserve, sure cash inflow, and peaceful and intelligent minds to turn the bloods in the Wall Street to be the profit rather than stampede in ruins.

In the market crash it has to go through a few stages with predicable psychological patters. It is not a simple fundamental or technical matter or sentimental problems but reflexive processes as wise people have talked and taught in the past.

Great value investors know the power of the crowd sentiment and take the price crash as opportunities but admit the difficulty to get the value at lowest price so that they put the focus on the margin of safety, quality of the chips they would like to hold, enough cash reserve, conservative and sure cash inflow, and gut to hold or buy more in the ruins. They know what are the catches of the value investment. Great trade tend to identify the turning point of market sentiment and put economic fundamental as their base.

Soros talked about Gold Ultimate Bubbles last year but based on his reflexive model, he seems not so eager to predict when it would be there but he seemed thought what he got from gold was enough and the crash could happen if the gold ultimate bubble comes in. Bubble is great if you just could get out before it bursts but he seems never believe he could do so. He wants his big betting on anything with enough profit but little risks to his portfolio or any damages in future should not beat him down.

Prudence in the market is not a concept without real matters to support, which could be twisted by anyone. It is wrong to paint thing pitch dark and it is wrong to paint thing brightest. The right thing is between these two extremes and should be tilt to dark side more when the days are sunny. The challenge is how we could not overdone and be extreme synchronized with the market crowd. They could be your friends to make the chances for you or dig out the grave for your death financially!

I believe a market player should be honest and tough to himself not anyone else even to the market as a whole. I admit my gut-crunching in the crash after the market collectively run against me. I could not deny I have to evaluate every scenarios if things become worse and much worse when I have lost all of my paper profit with bad and not intelligent analysis, misjudgment, and bad decisions. I feel the hurts and worse I could not find anything wrong because anyone else just intentionally put a trap along the road I choose. I put myself into the trap when it pop up naturally in the market. I failed to identify the traps and I deserve to get the consequences. I want to change more but I do worry I could not change big enough and if things are worse I could get the time and chances to change.

Yes I could stop loss but things are more complicated than what stop-loss could deal with. Market is full of things which put us in paradox. The best practice in the market is to avoid the situation for us to be paradox with high consequences negatively. Unfortunately I did so since April. I have gut to cut or bet if I believe I am right, but I just don't know enough and I allowed me to get into the uncharted water!

I have seen the dried blood in the market. I could not find the reasons to sell after the market selling in May and June. The drama in US and EU would affect market sentiment but I could not see Advanced Economies would be in ruins since it means the completely failure of this modern economies. They are not perfect but the best human so far could find. China could go so far is not because communism and dictatorship but the free market and much fairer society than any time in its history even you could identify the corruption, false statistics(but worse statistic data before), and so.

What level could the things be worse to? You should not timing the market but you have to know what could be used to identify the worst or signals for the market sentiment turn out from crisis good enough! You have to extend the bad things into the future perspective and have no worry at the situation much worst than your worst case. In this sense, value investing and wise speculation for stellar booming trend is necessary or in your holding horizon.

Significant change to anyone is painful, which means self-challenge, self-belief-destruction, self-reinitialization, and self-esteem-rebuilding with wisdom, intelligence, and set clear lines for KNOWN and UNKNOWN. We could lose the confidence on ourselves very easily in pains since we tend to choose the way with least efforts. The most challenge is you could be very lonely since no one would like to listen your pains in the change. We like the winning and cheerful life and admire winners rather than to find who is the next winner. Could you change?

 

As we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know.




Johny.

 

"U.S. stocks tallied robust gains Friday, with the Dow Jones Industrial Average capping its longest weekly win streak in six months, after a surge in retail sales and Google Inc.’s earnings lifted sentiment."

Did you see it before it happens? It was one of scenarios I could see with the wonder that XAO and global markets had shifted its selling season between the middle of August and the end of October earlier than usual. This shifting, seemed true so far, actually damage my position very much because I failed to build enough cash reserve and cash inflow.

Once damage done and we have not got enough cash reserve and cash inflow, we could not avoid self-questioning and gut crunching since we have put us in a significant paradox. You could not stop hoping the things would be better off since you need it and it could without any notices. You could not stop being fearful since you have experienced the worse and worst than what you assumed or guessed. You could not deny the things could be worse and more damage to your position. You don't have the buffer enough and then how to build your last defensive line is a critical issue you could not avoid. If losing the paper profit is not painful enough, worse situation would eat your capital in paper, and if you could not hold your position, you would be forced to sell on fire, which could mean disasters.

Market doesn't care about the losers! The people doesn't shed the tear with mercy for losers. No one care about how you are brilliant or genius if you are a loser. We all define the heroes in history based on the last results. If you lose you don't have qualification to share with anyone else even your loves if they don't fight in the same fields and know your causes to fail. I know these and know change is necessary if you don't want to be loser unfortunately but most of us don't accept the changes but results! I could change to sell all of my assets and take the money to enjoy for 5 or 10 years, but I just could not find the enjoyment to do so.

When I said I wanted to get a spade quietly and tentatively to anyone of my loves, they feel I am sick mentally. You were trained as an Engineer and now you want to take a spade with some assets more than most of people could get in life. You don't need to do anything for years and now you want to do anything for your stupid last defensive line! OK, if you want to take a spade but why don't find a spade you love! The problem is conventional wisdom say you should not do so at 54. You don't need but you do is sick mentally! My wife just ask the reasons why I could not have a few years not to make life colorful? How long could I work crazily on what I love in my life? and forget spades for years with what we have got, and retire as most seniors to use the pensions carefully which is not big enough but as we become old we also have less things to spend as we are young?

I really start to wonder I am sick mentally and significantly! Actually I was sick between October 2010 - present. You could not deny the conventional wisdom for what they think and say but the problem is I am really abnormal to some conventional wisdom. I could go so far because of the abnormalities and I made mistakes because of the abnormalities. That is me. I want to change and use the conventional wisdom intelligently and a spade just do its job to let me see a positive cash inflow which I need to hold my position and use the conventional wisdom. I don't think it is a good time to follow the conventional wisdom!

I could not sell on fire. I could not do nothing for sale on fire. I need the chances to sell when the time I should use the conventional wisdom. Unfortunately it is too complicated to explain how to deal with the valley of death in a war place such as the market to the civilians. I just shut up to avoid hurting my friends and my loves but silently to sort out my minds, get the lessons, prepare to get a spade for my last defensive line, and hope the market could be at the rock bottom and believe if EU is not default, I would get the chances to use the conventional wisdom.

 

Johny, fully agree and my problem since October 2010 is I did believe I would have known what would happen but I really didn't know. I believe the black swans but I put too much on the faith for good black swans than bad ones. It is biases and over-optimism after I allowed cost run and cash reserve depleted.

It is not a fundamental and technical issues about market but my mental system has significant faults, which I knew when my mind is cool but unfortunately I failed to make my mind cool but red hot. Big mistakes are never caused by tech systems or external matters but something in deep layers of our mental system. They try all to pop out to defeat us in war place since too many randomness and false signals to trigger the popping out!

Since IT crash and great failure to lose $400,000 paper profit, I tended to be very cautious and kept to have quite big cash reserves and bought anything very tough but I have to admit that since last October after locked huge profit I became ignorant and arrogant, which resulted in breaking down all of rules I set up for myself. I deserve all of failure and then could not move out the corner for a while if not forever!

My focus is to chew the lessons, change my mind to learn the quality and economic moat, lock the profit based on what I have got now along the bullish ways, recover, revive, and have a healthy mental system which could use life logic and common senses under right conditions and contexts.

What don't I know? How bad if I put my toes into uncharted water? What's the margin of safety to means and value with the belief of regression to means or value? How much cash reserve I should get for the worse time than the assumed worst cases in the holding horizon? How to build a trustful cash inflow without the need of a spade in next great crash or GFCII? How to get a big enough buffer for my mistakes? Yes we need a system to harness our primary instinct which is the fear and greed.

I could not agree that any mechanical systems could do the job which our minds don't allow or let us to avoid the damages our minds would strike to do for us! I was trained for control system and in my knowledge no any human made system could be complicated than the brains for fuzzy logic processing! We have GFCI since the big boys over trusted the mechanical systems and so many genius fell in the ruins or hell!

Thank you!

 

DOW became so bullish but how about XAO?

Not very sure but it seems that XAO shorters would be very busy to cover their positions and these big boys used the uncertainties and market fears to put XAO into the range of GFCII.

How long would the retail warriors come back to the market? They would wait for longer time with some sureness and before they desperately want to jump back they would use any sunny days to sell with the fear what if the market becomes worse rather than better. They could not see the future and then they have to see something in rear mirror for their future.

I would be cautious and continue to build my last defensive line in the market with all of resources I could use, which would give me a peaceful mind and allow me to wait patiently for the time XAO comes back to 5000! The more important thing is I could get the time to think about how to get rid off the debt and depend on the rental to play in the market. I have got the age I could not use my labor value I had as before. That is a reality. I need a reasonable yields from bonds or bond-like investment. How to turn the super as annuities for some income after 55?

If while I wait for XAO 5000, advanced economies could show signs to come back normal track, China could land softly without hurting demands of resources, and emerging economies could turn to be more self-reliant, Australia economies would move forward in full capacity even with the pains and worries of future big holes around without gold and oil anymore, and XAO could be up across 5000 in a few days without any notices for me.

So work for protection, realize the time limitation for me to set up the protection lines, and be ready to ride the bullish trend are what I should focus on! It is a strategic thought and need tactical measures to be sure no losses and never forget no loss! You could not be beaten down in flat and could get up at 54 as you did at 20s, 30s, or even 40s. Somethings at 20s are right and wise but stupid in 50s. Could I borrow another $400,000 for a plan in another 20 or 30 years plan? Obviously I could not!

Thanks for God! I was beaten heavily enough this time by Mr Market. I should know and I do know but if I were not beaten to the situation for me to be right up in night to invert my thought, I would not realize the risks, the prudence, the war place, the sick mind, and what worst scenarios could be. The time quietly passes by and change what we should do silently. I do feel young for my dream but trying to find a spade or take the spade I got used to, is a very shocking but helpful steps to see the world real not just images in our mind.

I am always ambitious enough but never conservative and prudent enough when the things move in the way I prefer! It drove me around the world but at the time I need a port for the late time of my life, I need to be wise, cautious, and intelligent to hit out with my fist rather than to give all of my body to the risk for hell! Self-awareness is important for any life. If the mistakes could make me get into great self-awareness and environment-awareness, I have to say I am lucky enough as a fool! Actually I have got enough as a man to live in a few totally strange nations. Ambitions and greed have a very thin air between. I need sharp mind to see this tiny difference and it seems I have to pay the cost for it!

It is not bad to get the spade I used to be good at. But it should be the direct goal and let alone indirect goal. I do need to get a spade for 20,000 per year to hold my defensive line. So I would buy a local newspaper to see what is available and then I can put all of my part-time to be a market student again. I love to work in the market and love the fairness from it.

You are good? You get what you target at! You are not good even tiny mistakes at wrong time could be disastrous. You don't have enemies except yourself. You have to win yourself and then if you could win yourself you win over the market and the world. That is huge leverage for life even it is not always reward you but beat you to death!

I still could not forget how my tax agents felt surprised for the 10 or 20 baggers of gains I shew them in last three years, but I do realize now how hard we could get 10 or 20 baggers every year without big risks. Sometimes I played the fire without good enough protection. I need a middle lane for my future tax returns! I need least risk for best return! It is two sides of one thing in the market!

I need to remember nothing has value if I pay too much; paper profit could be gone if I don't lock before market become anxious about the future; Cash reserves and cash inflow is necessary when all of market cry for no tomorrow; You could hope no sale on fire but it is different you don't sell on fire; I become older and older and I could not use the facilities I got used in my 40s, which needs new strategy and tactics and deep understanding of value and qualities; I could not have unlimited time to take a spade for my last defensive line and I need bonds and bond-like investment without debt; I need to lean the conventional wisdom which I ignored and was right to ignore at my 20s, 30s, and 40s, since if you can afford the risk to change even you are not ready, it would generate fortune for you after you are not very unlucky or have enough experience to build your last defensive lines; and then I should learn not stubborn and stubborn under the flag I am wise and intelligent and put no losses on every cells of my brains and let it flows in my bloods!

I am very crazy and surprised all around me since before today I just could not clearly tell my story and get clear what I could do and could not do without enough self-awareness and environment-awareness plus being a loser of huge paper profit who loses the credibility and could not say he was not a gambler after the losses. A very serious question is if you are not a gambler how could you lose $400,000 paper profit before and lose another $200,000 of paper profit and capital now?

My daughter joked me that dad you are a gambler but before you never thought you were and now you were less than a gambler but you lost again; more seriously your problem was this time you could not blame anyone else as you did in IT bust; You know a lot you didn't know in IT bust but behaviorally and psychologically you could not change big enough since you are whom you were still; you are painful to know your problem but you just could not do things your brains and your mental system don't allow or you need more time to change your behavior; and the worst thing is you started to realize you have limited time and could not do things wrongly as before!; You know you cannot afford it anymore!;

Dad, you have to choose to stop or go forward wisely and no one could help you; It is cruel but real and you may feel hard I said so, but it is your own problem and who could help you?; you know all those matters and you just need some straw to let you feel better; Could you believe these straw from anyone else could get your things better?; All are good not bad since you are not hurt hopelessly; You know you need the last defensive line; Go forward and let market does its job; They are different matters about environment and yourself;

Just imaging what if you fail. You are still my dad with your own mind and desire and never lay down there for nothing anytime you could move around; how many dads could give free lift for their kid to and from schools and offices everyday for 20 years? You have done this always and you do make mistakes but if you know you are wrong you would do all to correct them without complaining even talking too much to sort out your minds and confuse everyone who could not get the points since you have not sorted out your mind and you always think something critical in long term and know the probability to lose even you chase after odds with more than 70% to win; No too many would think in your ways; When we stand on different ways, you look very strange and crazy! And the good points you know the risks you could be crazy and you want to fill the gap between your image and the real world even not successful every time.

Don't forget you were trained as an Engineer, you were only salary earner for our family, most of investment decisions were made as you were a employee, you did get good enough gains in the market for three years after most of funds lost half of their assets in GFC; you did pretty good in investment even not this financial year, and you could do better since you really work hard to get the lessons, whom I feel proud; I got no debt for two degrees, and what you did give me a solid image how to budget and then pay off half of my mortgage just in 2 years. I am good too about the money!

At sideline it seems everything is so clear but when you are in the box, you feel different! Could I see the things clearly outside even I am in a box? Inverting, inverting, and inverting between extremes for a middle lane!

Don't take all words as though they come from my daughter. I just try to mix what she has seen and what I extended from what she has seen to get a objective picture about myself and sort out my minds for self-awareness.

 

Short-selling hit high and VIX extened its high

Since April, XAO has setup a great wall of worries. At beginning of August shorters in XAO pushed it into GFCII price range and then the shorters use any chances to beat the bull while VIX up/down dramatically but far from the level of GFCI and Labor kept the level healthily. The remote smoking in EU, US, and China, was shocked enough to the warriors who didn't believe decoupling anymore and over-done its self-destruction for their money desperately. RBA even could not say anything but where market would go out of their touch in short term.

Even the incipient rally in DOW and markets in EU in last few weeks, no too many thought it would last longer than days and busy to judge the data and wind to short. Yes, as shorters once you get first judgement right, you should short and short until you feel you could not do it anymore. Who don't love the quick money?

The shorters short in hopes of repurchasing them later at a lower price and pocket the difference. Outstanding short interest, or the number of shares that have been sold short, is at its highest level since mid-2009, based on news. Usually I don't trust the news but so long and so big selling in XAO, you could see what happen in XAO house from the shorting flames without know the details.

The spike in bearish bets comes as stocks turned positive for the year this morning as the Dow rose more than 100 points:

1. better-than-expected retail sales in US! How could it be, which should wonder by most of market warriors.
2. So far this month, the Dow is up 3%.
3. While the Dow is still down more than 6% from July before the recent market turbulence it could finish in the black if it holds this morning’s gains.
4. What's XAO did? It still 14% lower than its peak, 5000 around, at April even unemployment rate back to 5.2%.
5. XAO was the hell of bargain hunters you like or dislike but paradise of shorters!

It is hard and tricky to interpret the increase in short-selling for most retail market players since the shorters are different animals in the market. You try harder to know the shorters you get more trouble to figure out what you can long! However a few things are necessary to know about the shorters technically:

1. They like troubles and would find the troubles with some facts for price to fall down big enough.
2. The shorters must eventually buy shares to close their positions.
3. At bad time less shorters to short is very risky. At bottom of crash, extremely high short interest can be a bullish sign.
4. A rise in stock prices can produce paper losses for short-sellers, causing some to buy in order to close their positions and limit losses.

Why did XAO jump from 3800 to more than 4200 so quickly even all of retail market players were crying and claiming EU default, US crashing down, China tipping off, and RBA had to reduce the interest rate to save the crashing Australia economies? The shorters felt the overdone and they bought back. That buying pushed prices even higher, scaring more short-sellers, and “a short squeeze.” You play the wind, you should know what happen when wind swings against you, and you could not buy and hold since you could not hold the wind in hands!

The catches for shorters are rally and shocked rally if they feel hesitated when the wind against them. For a long time I just could not figure out why Soros doesn't say anything about buying and holding forever. He plays both winds and value of economies! Why doesn't Buffett cry for market trend or even economical trend? The trends are real matters there! He plays as a business man and he could not sell his business everyday since the winds change its course! So playing the winds or not in your game is not important but how you could know the winds and value good enough and find a reliable way to deal with them!

Unfortunately most of retail market players are weak hands with weak and immature minds or don't have the necessary knowledge or time to get the necessary knowledge. So traders want to stop loss always and investors want to hold loss forever. The time is not important if you could not have good image about the market and what your business is about. You would extend your loss when time extends itself since you are not Soros and Buffett with shallow feeling about their complicated mental systems! Have you read any books from Soros? Have you read any books about Buffett and from his tutor, B. Graham? As retail market players we are lack the knowledge on any of what they know. What we do is to drag a few words as flag for our feeling how good we are not how much we could get for our profit! How may traders could hold as Soros had held until Great British gave up to fight anymore? How many value investors could buy when the market full of bloods and sell when all are crazy for the grand party? Most of them are dogmatic and stubborn as I did since April!

When we use ideas to rationalize our stupidity to hit our head against the wall, stop-loss and buying and holding forever become the ticket for hell! They lay out the fleas and then they could not harvest the dragons. While they try hard to predict the future as traders they stop more and more losses. As they try hard to buy and hold forever they push them into the hell at last! Belief and causes need sacrifices if they don't have the support at the roots, reality.

They have to get a point to take hara-kiri or run away or sit at sideline to cheer or cry for the hara-kiri. Harakiri most often refers to a form of seppuku (or ritual suicide). Most of traders die for stopping loss and most of value believer die in the traps they build ritually! They rather die than take a spade for their final defensive line.

 

Shorters must be quick for not losing the shirts!

1. Short-sellers could get squeezed soon since crashing tends to be quicke
2. If the market turns around and continues rallying, slow reaction would make shorters lose the shirts

Why did EU jump recently? You could not find evidence the market crowd has changed the mind and it is largely due to short-sellers abandoning their bets. In the market short interest is also a sentiment indicator and that sentiment can sometimes become so bearish that it becomes a good sign for bulls. Being dad and pushed bad enough would make the chances to desperately go to good side! Could we identify not bad enough or bad enough? It is the issue for bargain hunters!

There are other signs of gloom and doom:

Since March 2009, US hedge funds have just 45% exposure to stocks, after subtracting their short positions from shares they own. That’s well below their typical stock exposure and approaching the 42.5% level they hit in March 2009. If it was true in US it would be worse in XAO! That month, the stock market hit its bottom of GFCI, so it would have been an excellent time for a contrarian bargain chances then.

Yes just because there’s bearish sentiment doesn’t mean the market has to go up. That was I mistook since April. There was a lot of bearish sentiment in October 2008, and the market kept going down. But a lot of bearish sentiment can turn a small rally into a major one if plenty of investors change their minds and join the buying as we saw in the V-shape recovery!

The question is now what could trigger XAO change it mind? It needs something to trigger the image that China would not tip off in 6 months and need a lot of resources for its citizens while people believe EU debt could not tip off the global financial systems!

If the course starts turning around it would need a few months for XAO to change its mind again and then we, as longers, would have chance to adjust our position for cash reserves while shorters play their parts in next crisis, big or small. Each kind of animals would find their time to cry or cheer and you need to be dormant with a lot of cash reserve while the days are not for you to cheer!

If you are a dog but like to bark day and night, you would be in serious trouble and would be kicked down by some bad men or women since you are really annoying! Your behavior is the cause and the bad men or women are the part of environment you have to deal with. You ignore them? You should know the consequences!

You are not a dog? I know it. You should behave as a man, a good man in the market. Do you know how to be a good man in the market? Seriously saying half and half I know! Which annoys me a lot but I just could not kick the as* of Mr Market, who acts as a dog always! That is really driving me right up in the night!

 

Fear wall becomes thinner

No worry at all is a problem. To much worry is another problem.

After XAO worrying for 7 months and DOW worrying for 2 and half months, VIX shows thinner worries at last. Don't expect XAO would not worry since it is its nature after GFC beats its belief about decoupling.

However if VIX continue to be less fearful, any good news from China would turn the course dramatically. Shorters are more scared to be caught in any rally. They usually don't dare to put their heads on the table too long.

Of course if EU doesn't do the job before November or in November, you could see more shorters active again. It is the risk you could not ignore just as in Oct 2008, XAO suddenly found it could not be decoupled from the advanced financial system crash!





VXO shows a very positive sign that it first time to move down lower than 30 in its unusual time period to spike between 30 - 49 far lower than GFC level! It should be higher than 30 in the coming weeks but it seems have not the gut to make new high, which bigger than 50. It is a necessary condition to let us taste what GFCII is. Fear is a bubble which usually inflated or deflated much quicker than people's imagination. In its history, the first spike of fears were biggest one.

At cross points your toes at any way could mean risks. Staying home is a way but it means the risk that a train leaves away without you as what happened in V-shape recovery, which you should not forget, don't you?

 

What if?

What if? A question we should never forget to ask and especially when we feel great, right? The problem is we tend not to ask what if until we feel not very great! So you may feel annoyed to hear so many what if questions when you felt terribly or see the market with the mercy for the struggled people. Don't let you waste the time to get clear ideas how many what if questions you can ask before next crash. Now you could sharpen your minds for these questions.

Strategists in war typically draw a base case and also an outside case, low-probability events. They are called as “tail risk” that are more “what if?” than “what now?” situations. Don't make any plan for a war before? That is not a problem if you have 101 about probability and statistics, it is the tail range far away from the means for normal distribution.

XAO since June and DOW since August has grabbed all in the market by the tail. In tail range negatively, all of us are forced to think about risk-management as some experts said it is front and center. With uncertainty and unrest spreading from Athens to Manhattan’s Zuccotti Park, we thought it was necessary to assess some potential tail risks that could develop in 2012 even the money has been burnt into ashes if they should! However it should be remember that any tiny change in the tail range toward the extreme means huge reduction in probability. That is why in the darkness around darkest time, you predict darker is a stupid conduction since any action means more risks than doing nothing.

However to check what could drag XAO and global market into the tail range again in 2012, 2013, or longer are not bad ideas to learn some lessons.

What is the base case now?

There is a relatively optimistic scenario. Here, the global economy slows but avoids recession, emerging markets post respectable growth and China and the U.S. muddle through their economic troubles.

The prevailing assumption is that companies are going to struggle and we’re going to grind to a halt. Is that how you view the world? If you just hope US and EU defaulting and China tipping off, and our resource piled up in the ports and now ships come in to take it away, you really need to invert!

While the global economy will likely show much lower growth, some companies will weather the storm. Not all of houses would collapse let alone the castles in tsunami. Don't believe that In that environment, high-quality, income-producing stocks will be coveted. Said Moore: “There’s definitely an opportunity to take advantage of companies that will do well.”


Could you see our opera harbor in risks as shown in this picture or as the following? If you could not see Australia as a prosperous and dream land or nation take it as some companies as BHP or Coca Cola with some great economic moat. That would be very helpful to kill your biases and see the value of XAO!



If Australia is safe and dream land all of your problem is what price you pay for what kind of qualities with how much margin of safety and how you could hold for the market swing back to its means of normal range in probability! It is your own problem not Australia and XAO!

 

Generally speaking, a tail risk has a 1-in-10 chance of occurring, but if and when it happens the consequences are grave or grand. You could be reborn or dead in the tail range. To be reborn is not a problem but to be dead financially is a matter you should not dare to touch!

1. The Fed hikes interest rates

The idea that the U.S. economy would strengthen enough for the Federal Reserve to raise rates in 2012 strikes most observers as farfetched, if not ridiculous.

It’s a good thing to think outside the box, but that’s in outer space! People could not think about it since we are still in the pitch darkness. But that doesn’t mean a rosy picture is out of the question.

It’s not a zero-probability event even it is at the top tail very much. If it happens it would be a big surprise and mean the economy has bigger and stronger growth than we and the rest of the market expects.

Don't forget it is a election-year which could stir the cooperation in Washington on spending and deficit reduction, and low mortgage rates spurring home sales and buoying the banking sector.

What to do? I don't know! I would like to ponder it and get a picture. But it should be good new for the risky assets such as Australia economies and XAO in the eyes of the international sharks or dirty-cheap fishes!

The more risk the market sense, the more chances they choose to flee away from good economies such as Australia since they just could not accept the fact that the global economies has being shifted in structure while US dollars are the only reserve currency. We don't cry until we feel extremely bad or laugh loudly in surprise to the public!

2. Social unrest rises

Seeds of social unrest are sprouting worldwide. This world is never safe enough! Capitalism system is a mechanism to give us the chance to realize ourselves but it also drives the people crazy for the money which at extreme are unfair.

Why do the Occupy Wall Street protests happen: The average American doesn’t watch the stock market day to day, but they do know something is wrong when the library is closed on Thursdays, the potholes aren’t getting fixed, big corporations are doing well and the CEOs look relaxed and tanned. You could not say it is fair that billionaire pay less tax than the people in middle class.

Social unrest is one tail risk that appears to be growing in bad economy time. The development doesn’t bode well for most stocks, as it reflects deteriorating economic conditions, a stretched consumer, austerity in the absence of growth to repay debt and a lack of leadership and collective will to put people back to work.

3. China tips off

China’s high-speed economy will slow and what the XAO wants to know is, how much?
We worry that the world’s second-largest economy may be a less-powerful growth engine going forward and in worst case what if it tips off.

China’s three big issues could complicate its job to land the economies softly:

1. an oversupply of real estate development and infrastructure projects,
2. a banking system exposed to a large swath of this questionable debt.
3. Policy makers in China are stuck in a place between fighting inflation and an inevitable slowdown.

All would be hurt around the world especially Australia which provides the fuels for the Chinese economic miracle. It would generate knock-on effect of a hard landing globally!

Money would then flow to defensive assets in the U.S., Europe and Japan, chiefly the U.S. dollar and high-quality corporate and government bonds, plus gold.

4. Greek debt crisis triggers the domino effects

Greek debt default is inevitable but market expected and priced for orderly defautl. A “restructuring” of Greek government bonds would be done to avoid contagion to Italy and other periphery countries’ debt, and recapitalize or possibly nationalize important European banks with heavy exposure to these problem assets. If above happen, EU would put itself at a very good position.

The risk is Greece suffers a “disorderly” default on its debt, which spills over to Italy, Spain, Portugal and Ireland. Once it happens or has sign to happen, the euro nosedives and Italian government bond yields spike.

As the situation deteriorates, periphery European governments balk at austerity measures, the euro zone splinters, and the bond market looks askance at slow-growth conditions in the U.S., U.K. and Japan.

If disorder default happens stocks would suffer deeply, especially the financial sector. Corporate bonds, energy and industrials would be hurt as well, along with anything related to the euro. Money would flock to safe havens, especially US Treasurys, gold and the U.S. dollar.

It probably is ‘game over’ and EU could be no tomorrow.

5. Trade war starts

Fear of a global recession would make chance to protect self. In crisis it’s easiest to name an external enemy than to deal with the problems in ourselves. We all tend to blame others for our own problems.

The U.S. and Europe could fight recession with protectionism, and then China retaliates with tariffs on Western goods could happen. Trade war could be possible since they need the war to delude the people or voters.

No one could win in the war economically. It could lead to stagflation, which is a truly miserable combination of rising prices and slow economic growth.

6. Big with quality but the cost runs!

For safety, more and more would be happy to tale flight for safety and once demand are much bigger than supply, all of qualities would be highly priced. Qualities could be the words for bubbles.