By definition, rare events should seldom occur [and] applying that understanding to financial markets assumes that all market events follow a normal distribution or, in layman’s terms, a bell-shaped curve. More specifically, the statistics say that 99.7% of all daily movements should fall within three standard deviations of the mean, no more. Well, guess what? New research suggests that they clearly don’t follow such a pattern – that “unlikely” doesn’t mean “never”. [Let me expand on that.] Words: 1079; Charts: 1
So writes Lou Basenese (www.wallstreetdaily.com) in edited excerpts from his original article* entitled When Rare Events Aren’t All That Rare.
This article is presented compliments of www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Basenese goes on to say in further edited excerpts:
“Unlikely” Doesn’t Mean “Never”
Deutsche Bank recently measured the occurrence of rare events – defined as daily movements of three standard deviations or more from the mean – for various markets…[and] as you can see below, the proportion of three standard deviation movements hardly ranks as rare. In some instances, [such as during] the financial collapse in 2008, it happens over 25% of the time.
Or if you prefer a more eloquent explanation, here’s how Deutsche Bank puts it:
“When thinking about the year ahead, it is tempting to extrapolate the recent past whether looking at risks or one’s base case. Moreover, there is a tendency not to deviate too far from consensus, perhaps seeing safety in being part of the herd. From a statistical perspective, this is very similar to assuming markets follow a normal or Gaussian distribution, that is [that] markets are well behaved and extreme outcomes are rare. The financial crisis of 2008 taught us otherwise, yet it is very difficult to shrug off the bias to assume normality in markets.”[Conclusion:] Either way, the implications couldn’t be more straightforward. We should prepare for outliers.
6 Highly Unlikely – but Still Possible – Predictions for 2013
Such advice is particularly timely considering that we’re still in the middle of the season when pundits dole out predictions like breath mints and, as such, we should be seeking out the wildest and boldest predictions [we can think of] because they could actually happen and, in turn, we could score some serious contrarian profits.
Discarding the obvious in favor of the outrageous is easier said than done, of course, [because] we naturally gravitate toward predictions that jive with our own personal convictions. Psychologically speaking, it’s called “confirmatory bias.” We seek out information congruent with our own beliefs with much more fervor than contradictory data.
Based on what we’ve learned so far, [however,] it is imperative to think outside the box if we want to identify new profit opportunities before anyone else. so below I present my 6 Outrageous Predictions for 2013. (Some are mine, and some came from elsewhere.)
#1: The burgeoning rally in Japanese stocks endures
I know that’s crazy talk but I’m no longer the only one guilty of it. So is Blackstone Advisory Partners’ Vice Chairman, Byron Wien. In his annual “Surprises” list [Read: Byron Wien: 10 Events That Will Likely “Surprise” Us In 2013], he pegged the Nikkei 225 trading “above 12,000 as exports improve and investors return to the stocks of the world’s third-largest economy” as a possibility. Go long Japanese stocks, but beware of a falling yen sapping your profits.
#2: Congress actually passes a budget
It hasn’t happened since April 29, 2009 but it’s hard to curb spending when you don’t know how much you’re allowed to spend. (Just saying.) From an investment perspective, such an occurrence could help ward off a sovereign debt downgrade and help Treasury prices continue to defy gravity.
#3: Stocks soar by more than 15%
Bull markets aren’t supposed to last this long, until they do. [Read: Gold Stocks Go Up Dramatically In Inauguration Years – Will Another +20% Increase Occur This Year? and 5 Sound Reasons Investors Would Be Better Off On the Sidelines Than In the Market] I selfishly hope that nobody buys into this one, because it’ll serve as a strong contrarian indicator that the bull market will, indeed, charge higher and that means more profits for the few, the proud, the bulls.
#4: Ben Bernanke gets tired of buying bonds and opts for stocks instead
All the credit goes to…Deutsche Bank for this one. As they said, “With the U.S. housing sector apparently turning the corner, stronger equities may be the necessary tonic to further increase household wealth, and also to boost investment… While the Fed does have restrictions on what assets it can buy, it can invoke Section 13(3) of the Federal Reserve Act that allows more extreme actions in ‘unusual and exigent circumstances.'” Who knew such a monetary policy measure was even legal? I’m suddenly getting more bullish about stocks. As the saying goes, we never want to fight the Fed.
#5: Inflation returns with a vengeance
The Nostradamuses over at Morgan Stanley say, “Inflation could be triggered by a combination of another drought which limits agricultural production, stronger-than-expected recoveries from [the] world’s economic powerhouses (China and the U.S.), and ballooning central bank balance sheets.” That actually doesn’t sound so outrageous, now does it? Hurry up and stuff your portfolio with gold, silver, timberland, real estate and, yes, stocks (they’re the most unloved, but best inflation hedge, of the bunch).
#6: Greece discovers gas reserves worth more than all of the debt it owes
I know what you’re thinking. There’s also a bottomless pot of gold at the end of a rainbow in Ireland, right? This prediction from Deutsche Bank might not be so far-fetched, though. As they note, “Greece has sizeable undersea terrain in the Mediterranean, and several Mediterranean countries have already discovered and are exploiting undersea natural resources.” (If you’ve got moxie, you can prove it by pushing a few chips in on the Global X FTSE Greece 20(GREK). It’s in full-on rally mode – up 60% over the last six months. So it’s not really that outrageous of a bet. It’s a momentum play.)
Bonus Prediction: Lindsay Lohan avoids any run-ins with the police
This is one prediction I won’t even consider betting a single dollar on. I may be a dyed-in-the-wool contrarian but I’m not a sucker. However, if you’ve got a friend willing to bet that she avoids the law in 2013, bet the house – and make him pay up!
Just because something is unlikely, doesn’t mean it won’t happen, especially in the financial markets, so be a contrarian and bet on the unexpected happening much more frequently than everyone else. You’ll have a bigger net worth to show for your courage. Just ask John Templeton: “It is impossible to produce superior performance unless you do something that is different from the majority” – and he practiced what he preached.
Ahead of the tape,
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
For the 28th year running I have given my views on a number of economic, financial market and political surprises for the coming year….defined as events which the average investor would only assign a 30% chance of taking place but which I believe are “probable”, having a better than 50% likelihood of happening. [Below is my list of 10 surprises for 2013, complete with my rationale for each.] Words: 1037
President Obama will be sworn into office for a second term on January 21 and that’s good news if you own gold stocks. Why? Because gold stocks, [as represented by the XAU] have increased, on average, by 20% during inaugural years since 1985 (28% in 2005; 36% in 2003). While there’s no real rhyme or reason as to why gold stocks thrive in inauguration years – statistical anomaly or otherwise – it is yet another reason to buy gold stocks right now. Words: 312; Charts: 1
New year festivities have continued on the stock market even as the Christmas trees have been put away. The “death of the fiscal cliff,” not horrible job numbers and supportive comments from Mario Draghi on the other side of the pond have led to bold and bullish behaviors over the last three weeks. While no one can predict the exact peak, here are five reasons you’re better off on the sidelines than in the market.
J.P. Morgan Asset Management has developed a chart showing the past two cycles in the S&P 500 highlighting peak and trough valuations. At face value it is very alarming as it suggests a potential decline of somewhere in the vicinity of 60% over the next year or two and concurs with previous innovative trend analyses included in this article. Charts: 4
A look at the trend in prices of the Big Mac clearly shows that investors are being penalized with higher inflation, lower income from bonds and certificates of deposit and being led to believe that the economy is growing better than it really is. [Let me explain.] Words: 1012; Charts: 2
I have been reading a lot lately about the coming hyperinflation in America… [and while] I respect many of the writers [who express that opinion] I think they are jumping the gun. At this point none of the economic or political factors required to set off hyperinflation are present – and a careful analysis of theory, fact, and history leads me to conclude that inflation/stagflation is our future. It is quite a leap of fancy to say we are certain to have hyperinflation. Words: 2780
The six charts I provide in this article illustrate why the hyperinflationary pressure in America is growing. This is not necessarily a forecast for hyperinflation – this is simply a demonstration that some of the precursors to a hyperinflationary cliff are building. (Words: 1001; Charts: 7)
Whenever the BLS posts their monthly CPI there’s always the same response from critics that the index is flawed. That’s fine. I think a healthy dose of skepticism regarding government data is perfectly good. So let’s take a look at some independent gauges to see where prices are.
If inflation starts to head towards 5%, you can be sure it’s headed for 10% because they don’t have the ability to stop it now. The only antidote they have to the mess we are in, which is massively excessive debt reinforced by derivatives, is unlimited money printing. The idea that you can withdraw the punch bowl or sharply raise interest rates, it just doesn’t exist, unless you want to take a complete deflationary collapse.