The legend is that before big hurricanes and natural devastation in the Carolinas, a gray man appears . What is the gray man that appears before big devastations in the markets? I propose that yields in bonds going up a plethora is one such gray man, a throwback to the bond vigilantes, and there are stock vigilantes and gold vigilantes. The whole subject calls for quantification as I return from the Carolinas.

James Lackey replies:

When my dad first moved to Fla in 1987, we thought the silliest thing in the world was riding out a Hurricane. Why not just load up the van and head to Atlanta? That is what we did at first. But after 12 years, 12 false alarms and a few close calls you think you can ride out the storm. Then in 2004 Hurricane Charlie taught us a lesson. We both laughed after the fact describing our attempt to ease our fear, "I don't think the heavy stuff will come down for quite a while". Caddy shack conversation. Boy did I feel like a moron, trading until the last minute when my internet and power failed, risking the lives of my babies. The storm was predicted to hit 300 miles N, it took an abrupt right hander over Sanibel and wiped out Punta Gorda.

To get the joke of the Gray man ask yourself, do we try to avoid panics and disasters as traders or to profit from them? My view is that after a few years in the markets we become far too brave.

Sam Humbert asides:

I wonder if the Palindrome's perfervid media tour in support of his new book is an attempt (old/young lion?) to push aside the Derivatives Expert's claim to the "I foresaw 2007" meme-space. Note how the Pal stresses that his analysis goes back to the Reagan years, i.e., pre-Expert.

Jim Sogi reports:

The current 20 day average S&P500 futures range is 17 points. Over the last 14 years, periods when the average range was above 15 fell in or before retrospective bear markets, and below 15 within bull markets, using overlapping periods, and have like intermediate outlooks. The higher volatility periods, above 15, lasted nearly 1000 days at a time, and the low vol regimes, under 15, a bit longer and compose nearly half the time series. If this data sample and regime and cycle repeats forward, the current higher volatility regime is perhaps not over and does not bode particularly bullish over the next month.

Russ Humbert contributes:

It may be the gray man that causes people  to flee in Carolina, but it is "the golden parachutist" in banking which sent my feet scampering.





Speak your mind

4 Comments so far

  1. Craig Bowles on May 13, 2008 9:29 am

    Since July 2007, we’ve had stocks, dollar/yen, and bond yields moving together. Never have seen such a similarity with all three. Since July 2007, the Arms Index has shown bearish internals. Bond prices and gold being in a multi-year bull market is something you don’t see every day. Also, global stock markets are moving together. Maybe we lose the balance when everything moves together. Might not be the gray man but a good reason to look for the guy.

  2. steve leslie on May 13, 2008 9:31 am

    I can think of two very apparent Gray Men and one not so apparent.

    One is Congress when they start to raise taxes on the individual. For example, Obama is proposing raising the capital gains tax from the current 15% to 28%. Should congress consider raising marginal tax rates as well and restructure the tax code that could only spell disaster for the economy.

    Second is the Federal Reserve. When after a period of stability in interest rates, the Fed starts to raise rates that is a harbinger of nasty things to come. Note that they do things in steps meaning they never raise rates just once, it is always in a progressive fashion. It gives the individual plenty of warning of what is to come. This occured most recently in the last several years and we are now seeing the ill-effects notably in real estate.

    The third is oil. Eventually this dramatic rise in oil should it be sustained can only lead to higher prices and if not to higher prices at the consumer level it must lead to a contraction in profits for corporations. There is no getting around it. Simply put, if corporations do not raise prices to compensate for the direct and indirect cost of the raw material of oil, they will show diminishing returns to the bottom line. There can be no positive outcome to a sustained rise in the price in oil.


  3. vic niederhoffer on May 13, 2008 4:28 pm

    Let me not encourage others to make the same mistake as Sornette or Collins, that is, to look at the probabilities of big declines without taking account of the whole distribution. Often, as in the totally flawed Collins approach, a characteristic is associated positively with greatness [or failure], but the expectation when the characteristic occurs is in an opposite direction from the probabilities. One should also consider the second handers that are set loose before big declines so that those with big positions who set them on their despicable mission can get out when the contagion reaches the turning point et al. I knew such a second hander whose function in the chain was to spread rumours of disaster, the kind that the Palindrome has had in the palm of his hand for 10 years, and I expunged his thinking after he was wrong for eight or nine years. Similarly with "the odds are 3 out of 10 that there will be a market meltdown similar to 1907 or 1987" athlete. Eventually they were right, but little good did it do anyone except those who were the only brokerage to profit from the sub prime et al. vic

  4. Marco Loureiro on May 13, 2008 10:27 pm

    The Gray Man gave a speech today that pulled the rug under the bond bulls…

    Rest assured that the consequences of liquidity injection into the system at the expense of price stability will eventually come to the forefront.

    But this will be a story for another day…


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