Fubarrio Expat Trader

warning: technical mumbo jumbo ahead. that I don’t fully comprehend. for those only interested in montevideo info, skip this post

G. Soros focuses his finance book on the concept of “reflexivity” I listened to his book on tape while enduring the daily drudgery of early morning commutes from east bay to silicon valley a couple of years ago.

While I understood the words he was saying, I wasn’t really “getting it” until recently when some other thoughts tied the idea together for me.

Buy low, Sell high

This is perhaps one of the oldest mantras heard in retail investing, however, in practice a deceptively difficult thing to accomplish.

Why?

Well, traditional thinking and economic theory would lead one to believe that there is some “correct” price for a given asset. Since “markets will fluctuate” (JP Morgan), this traditional approach to investment would drive a trader, to buy when he perceived assets as relatively cheap by some historical measure, and attempting to sell when “expensive”.

Traditionally, I’ve thought of the “natural price” or “right price” as being like a “magnet” drawing the price towards its magical point of balance any time it strays too far….

Traditional economic theory tells us that according to the “efficient markets” theory, that things should be priced about right given an equal number of motivated and informed sellers and buyers (or something like that! ). Pricing anomolies are short term in nature and usually do not exist for long if ever and the market tends to revert naturally and quickly back to its “true” and “fair” price.

As you’ll see later (maybe) I believe the theory is out of line (slightly) with reality. This might (partially) explain why having an econ PhD doesn’t necessarily enhance ones trading results.

Probabilities & Reversion to the “mean”

When pricing assets (like stocks, eg), while present values are important, what really gets people interested is the *future* value of a given asset or security (house or stock option, e.g.)

“yeah, like, um….’duh’, fubarrio. so what?”

This is where probabilities come into play and eggheads start scribbling down random greek letters and arcane symbols in an attempt to bewilder the lesser minded canines amongst us, like yours truly.

Now, if fuBarrio hadn’t been so slothenly his Junior year at the University, had the class been a *little bit* later in the day, had his professor’s Chinese accent been even remotely understandable, fuBarrio might have a firmer grasp of statistics. Alas, we’ll have to make due with my simpleton explanation.

Eggheads like to predict that a stocks future price will fall somewhere within a “distribution” of potential future prices. In a perfect world, this would be a standard distribution around some expected future price, with the probability curve being fattest where the future price would most likely come out —shortest at the outlying extremes — your standard bell curve.

The idea is that each “tick” has some probability of being up, and some probability of being down. After some X number of ticks, the price will most likely fall within some standard distribution type pattern.

ok, clearly I’m out of my depth in a parking lot puddle when it comes to statistics, and yet I press on with this tasty bit — just in case you were in danger of acquiring any real knowledge:
(to make things more complicated and keep us under the dinner table just in case our forepaws ever develop oppposible thumbs, the eggheads often instead use a “lognormal” curve…a curve with a non-symetrical shape. Lognormal curves are skewed, and don’t look like standard bell curves.

Why?

Well, best I can make out is because a 50$ gain, followed by a 50% loss (or vica versa) leaves one with a 25% loss, not breakeven (– as a casual observation by a card carrying member of the mathematics illiterati, like myself might at first assume).

“Uh…ok…have we strayed far enough from the point yet?”

I think so, but in some vain attempt to bring it back, I will point out that the “crux” of all this probability talk though is the concept of “reversion to the mean”.

“Reversion to the mean” as I understand it means that given a large enough sample size, things will tend to average out….A classic example (I guess) is flipping a coin. Even though you may have a string of dozen or so “heads” in a row, after enough flips, one would expect the number of heads to be roughly 50%. (If you aren’t a lazy dog like fuBarrio you can google any of these terms and have a deeper more meaningful understanding in 30 seconds).

So, people will insist that markets will tend to “revert to the mean” of historical precedents in either pricing or fundamentals which will eventually drive pricing. As it so happens, this is effectively at the crux of some of fuBarrio’s “US residential housing or the dollar or both must go down” arguments….for instance when he points out in exasperation that median incomes to median prices (or some other historical measure is completely out of whack!)

….so does that mean he is/was wrong?

No, but the theory of reflexivity helps explain why while he he was right, he sold two years too early.

So, fuBarrio, armed with your doggie wit and C minus in elementary statistics, why aren’t you a trading superstar bazillionaire like George Soros, and furthermore, why do so many economists suck at trading?

“Trending” markets and reflexivity’s role

Reflexivity, in this context, means an asset (or security) price’s ability to effect its own price.

huh?

Reflexivity is a bit like a computer programmer’s recursive function call. The function, in effect, calls itself until some preset condition is met (or the open loop hogs all the cycles and available memory)

In the interest of brevity (yeah right) I’ll only use two examples to make my point.

Housing:

I’m using housing as an example of a reflexive market on the way down. However, the same principles work in reverse on the way up.

If we accept the fact that a certain number of homes around the world were being bought with:
1.) equity withdrawals from previously “purchased” real estate.
2.) money earned from sales, construction, financing, etc of houses during the boom

Then, it is perhaps not difficult to imagine that once affordability exhausts itself, real estate will enter into a “self reinforcing” downward spiral….or a “reflexive” relationship where its future price movement is strongly influenced by its immediately preceding price movement.

As rate resets, unemployment, overbuilding, unaffordability start to slow sales, builders and home owners with lots of equity will be the first to lower prices to raise cash. These lower prices will affect comparable sales, used in appraising the value of other homes in the neighborhood, for the purposes of sales or home equity withdrawals. As more people who represent buyers at the fringe have trouble staying liquid, credit standards will eventually have to get tougher.

It doesn’t take much of an imagination to see that once the “cracks” start in a market driven by speculative excesses, the bottom won’t likely be reached until it is as cheap as or cheaper to buy than to rent.

Reflexivity in an up market:

Where reflexivity in a down market is characterized by liquidity constriction and fear, the opposite is true for reflexivity in an up market. It is driven by greed and liquidity expansion.

Well how does that work?

Let’s suppose that fuBarrio (or someone who is actually respected) starts touting Uranium as an investment (as an example). If there is no positive price movement, or negative price movement, it is quickly dismissed and you say, “well, duh….a bald dog with bad teeth and empty grey eyes can’t spot a trend” and that is that.

If however, the prediction proves correct in the short term, people start to think that fuBarrio’s hair must’ve fallen out after extensive radiation poisoning during research in underground U3O8 mines.

You think, “He must know something. That balding, spotted mutt fubarrio is rakin it in on Junior Uraniums and he only got a C minus in stats at that crappy school of Huskies! If I have to put up with all his meglomaniacal rants, I’m going to benifit a little too. I’m gonna follow his lead….”

If your make a little money, you tell friends about your astute stock picking, and they want a taste, new miners are able to raise money in IPO’s, private placements, and secondary offerings. Winners from the sector cash in winnings and put them on new stocks (often in the same sector)….until the quality of investments and the prices being paid for speculation are so out of wack that the world runs out of “greater fools”.

So, reflexivity is an attempt to explain part of the rationale behind, “the trend is your friend” and “The markets can stay irrational longer than you can stay liquid.” Rather than be pulled by an invisible hand to some “correct” price, greed, fear, and the power of reflexivity will create markets that oscillate, constantly pushed away from our concept of “neutral” or “correct” pricing.

ciao,
fB

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Ok….I’m giving everyone what they want….A few pictures of beautiful Montevideo before returning you to my mind-numbing-wall-of-text ™ posts on everything BUT Uruguay

1.)The first picture is of the old abandoned MVD train station…not in use (unbelievable!)

2.)A church in Pocitos

3.)Williman road, in Punta Carretas…very comfortable brick paved street, close to and home to a couple of my favorite restaurants.

4.)Sunset off fuBarrio’s rear terrace.

5.)”Shaky paw” night shot off of fuBarrio’s front terrace.

If you are in the northern hemisphere, you probably don’t even want to know how gorgeous the weather was today — church shot and Williman road were taken today….others this past week.

ciao, fB

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Fubarrio and Golden Lotus ventured once more into the great wild world of trying to find a place to live in Montevideo this last week.

We found some things that were very interesting. Sadly for fuBarrio and GL, fuBarrio’s small monthly stipend check (a settlement from the failed ‘dna replacement therapy’ that left fuBarrio a dog in bad need of some orthodontics, the hairclub for canines, and aggressive plastic surgery) doesn’t cover the “nut” on the featured house here.

Before you ask, “no”, the house does not come with the old guy out front either — he is however useful for appreciating the “scale” of the house.

The house is located in “Prado”. Prado is the old original “residential” neighborhood (read: burbia). However, it is the burbia before cars were as common as they are now, so it’s a little closer in than the new “burbia” (Carrasco). Prado has some *very nice* older homes that go for 5X the cost of this one.

Once you enter the home there is a narrow hallway, VERY high ceilings (throughout) — between 12 -15 feet, doorways leading to ’sitting’ rooms on either side.

The center of the house, through the doorway in the middle of the first picture, has a large atrium area with a glass skylight (there are actually two of these skylight rooms, one further back in the house as well).

The entire house is VERY well laid out, flows well. The last picture is the rear room and one of the doors that lead outside (with the colored glass). fB’s foto skills are pretty poor, and trying to capture scale was difficult (shoulda put the old guy in each picture! )

Click on a couple of the pictures and check out the details of the floor. The house was a bit dusty on the inside, and it makes it look like somebody’s old linonleum (or something e equally hideous) back in the states. But this is actually the original painted tile from the 30’s in each room throughout the center of the house.

The rooms on the each side of the house (not pictured) had wooden floors that were the most obvious thing in need of fixing (very old/soft/creaky). The kitchen had been “refurbished” but that really just meant putting in new countertops since the Uruguayos don’t like including appliances with homes (or apts for that matter!)

A nice house, but once we figured out that they meant 84K DOLLARS, and not uruguayan pesos it was quickly obvious it was out of *our* price range.

Rather than focus on fuBarrio’s obvious lack of skills as a provider, GL was kind enough to rationalize it away as being too far from the center of town for our particular transportation needs….(for some reason or another the Uruguayos are reluctant to let someone that looks like a hairless dog have driving privileges).

Uh…I don’t know about you, but this looks like it has a little more potential that your typical $429k new construction sh*tbox 75 minutes from any culture or employment opportunities in the “other America”– but if you came here you’d have to miss out on the fun of paying that $5k in property taxes each year.

So, I guess like anything else, you gotta take the good with the bad!

peace,
fuBarrio

p.s. to try to appreciate the scale of the home, click on the picture with the “colored glass” door. if you can, see if you can spot the door handle. the door handle is at the proper height for a full grown European (not “Tatu”)

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….It’s about all the things the money will buy!”

GL was remarking the other day, “geez fuBarrio, for someone without a lot of money, you sure spend a lot of time thinking and talking about it.”

uh, good point. But, for that matter, for someone without opposible thumbs on their forepaws, I spend alot of time online too.

So, why all this obsession with the alweakly dollar (TM) on a blog supposedly about living in South America as a US Expat?

Well, for better or worse, the expense of living here factored in a BIG way in deciding on Montevideo. Although relatively inexpensive, it is clearly not the *cheapest* place on the planet to settle, but I wasn’t really looking for the cheapest. I was looking for the “best value”.

For different people, “value” means different things.

For me, my dream was to have a time machine and live in Europe in the 50’s….back when mere mortals and hairless dogs could afford a nice quality of life as out of work expats. I never lived in 1950’s Europe, but this is *close* to how I’d imagine it:

relative security
de-emphasis on US pop culture
gentle climate
lots of fresh foods — fast food still very rare (novelty)
inexpensive
emphasis on free time
de-emphasis on “car culture”

Of course the fact that nearly everyone here *is* European helps complete the illusion!

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(I originally wrote this post below on November 3, 2006 and purposely *didn’t* post it for one month to test the fuBarrio first theorem of “bad luck” (TM).

I even have a theory for why the first theorem seems to hold so often, but I won’t get into that unless this little experiment gives everyone a very public viewing of fB’s first theorem in practice. )

Ok, now the post:

Great Bull markets and bubbles seem to all follow a well-worn path to speculative excesses.

I’ve been taught the hard (read: expensive) way that these two old sayings still hold true today:

“The trend is your friend” and
“The market can stay irrational longer than you can stay liquid”

The second quote is attributed to Keynes, the first is unkown (Jesse Livermore?), but he must have been a trader.

Great amounts of speculative capital can be amassed by trend following as long as you are willing to sell “too early” (rather than “too late”). In thinking (briefly) about the two quotes above however we see that sometimes in trading, thinking, or trying to understand the “why” something is trending in a certain direction can be detrimental to your (financial) health.

That said, however, it is an invaluable asset to be able to recognize when the jig is “up”and a longn running trend is near or at a speculative apex and it is time to step aside or “flip the script”.

As anyone who has read this blog knows, I’ve been “bearish” on US residential housing and bullish on metals, miners and energy. While I don’t believe the energy bull is dead, in the last couple of months I’ve shifted a portion from carbon based energy to mineral based (U3O8).

A month or two ago in the face of crude oil, refined products and natural gas declines there was significant rumblings from mainstream media that the resource bull market was dead.

While pullbacks will be extremely violent and decimate portfolios, the bull will not be deceased until AFTER it becomes a speculative fervour….

Remember when housewives were selling formed silver to traders for the metal content in 79/80….I was 10 and 11 years old and *I* was caught up and fascinated by the run-up….granted I was uniquely alert to all things financial as a yougster, but i took a portion of my paper route earnings not wasted on candy and baseball cards and bought silver ingot (— AFTER the bubble had collapsed — on the way down….becauase it was a better price! the “greater fool” ….so young to be a knife catcher!! )

Ironically, the fact that *I* was fascinated by the precious metal bull market as an 11 year old would have been the warning bell to the me 25 years older. I hopefully would have seen the paperboy interested in buying ingot as a sure sign that the great bull needed a “little” 18-20 year “cleansing” period to wash out the speculative excesses.

When cocktail party chatter is abuzz with gold mining stock profits, when you hear stories of everyday people making vast sums of wealth betting on junior Uranium miners, when a cab driver/waitress/homeless person/shoe shine boy/barber/mailman, etc starts telling you about their ingot or silver mining stock picks, you’ll know it’s time to park your funds in safer harbors. Until then, buy the dips.

If you need reminders of what speculative excess looks like, think about realestate in 2004-2005, dot-coms in 1999-2000, nikkei and japanese realestate 1989, oil in the early 80’s, precious metals 79-80. (the last two I’m too lazy to look up, but hopefuly that is a reasonably accurate ballpark)….There are also several more I never lived through- nifty fifty late 60’s – 1929, etc.

Ok…so, how do I know that I’m not STILL the greater fool and I should add “expatriate blogging from South America” to the list of everyday people??? Because right now the only people that agree with me are still viewed as “fringe” and a little cooky by “normal” people

ciao for now,
fB

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Hi. Golden Lotus here.

Hola peeps! sorry for not writing so long. i have been lazy. anways, on the topic of being wrong. i was and am wrong, for those that know me very well i hold very strong beliefs, specially about Tibetan Buddhism (TB) and his Holiness (HH).

okay, so for a long time i lived very a “strict-path” so one of the aspects of what i thought was the right “path” was to stay away from eating any kind of meat. i did. i also did not have any leather goods or fur.

however, in doing my research and studies about TB i realized that they were and are big meat eatters. Ha! so much for right path thing GL!!! even HH eats meat. so, who am i? noone special just a human being like the other meat eatters out there trying to survive.

HH says it’s important to have a open mind and beable to work with what you have. i live in a wonderful country that just so happens to be one of the top countries for meat production. and, here i am trying to figure out how i am going to prepare food for fb and i.

well, i think, that if i am trying to pratice TB i should practice it right, which mainly focuses on compassion towards all sentient beings and so on and so on. so, there. i am wrong. for those of you who might of got offended by my last post. sorry. i am only a simple human being.

FREE TIBET!!!

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Our friends were gracious enough to invite us out to their mini-hacienda out in the “country” this last weekend.

Their son stopped by our home on Sunday morning and drove us out from the city. This was (gasp!) our first time leaving Montevideo since arriving in Uruguay. Pretty sad, I know!

But, we are planning on doing a lot more traveling now that the weather has turned for the better (absolutely gorgeous).

Here are a couple of pics I snapped. Their “hacienda” sits very close (couple of kms) from the coast, in the southern part of Uruguay where the river meets the ocean….Near “piriapolis”, about 1/2 hour from Punta del Este (i’m guesstimating here).
The last shot is a blurry snap that I took out of the moving car in at the end of the day in an attempt to capture the sunset. The pic, of course, doesn’t really do it justice, but hopefully, using your imagination, you can appreciate how cool it was.

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