“I’d be a bum on the street with a tin cup if the markets were always efficient.”
-Warren Buffett

“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.”
-George Soros

“The Matrix is the world that has been pulled over your eyes to blind you from the truth.”
-Morpheus

“Contrary investing is an art. Big money can be made betting against the herd. But the herd often gathers considerable momentum. The art is in knowing when it’s running out of steam.”

The Financial Times reports on yet another clandestine form of support the FED gives to banks. What better way to enhance profits at banks then to allow the banks to sell assets to the FED at inflated prices?

“In the interests of transparency, it (the FED) often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.”

Rigged markets lead to disconnects. This time will be no different.

China Stocks Plunge Most in Eight Months (Bloomberg)

Shanghai Stock Exchange

Observing the markets aboard The Errol Flynn today, my perpetual deliberation turned inward and I questioned whether I am who I think I am, or if my algorithmic complexity is the outcome of an undercover experiment in Artificial Intelligence. The answer is illusive, but—as with all things essential—it will find me. In the meantime, I will continue to do what I do best—speculate.

On the matter of speculation: we are beginning to see mounting clues regarding an imminent liquidity crisis. And as those of us who are following the lesson plan know, the inverse of liquidity is volatility. Being positioned correctly in front of a large move in volatility is where the big gains—the gains that break world records—will be made. The VXX (chart below) is starting to show signs of an upward move. As this moves higher, the ramifications for other asset classes are immense. Given the fragility of the underlying structure of the markets, I would not be surprised to see moves lower in equities exceeding 10 or 15% in a day.

Speaking with another trader the other night, I reminisced about trading to the long side in 1998. The sell-off triggered by the demise and rescue of Long Term Capital Management led to huge gains in the final quarter. In the summer of 1999, I questioned whether the gains in 1999 could ever match the achievements of 1998. To my surprise and elation, the gains in 99 not only met those of 98, but surpassed them by many multiples.

We saw massive gains (on the short side) in 2008. 2009 has all the structural forces in place to repeat the short side gains of 98—an enormous amount.

VXX

Back at the office, following some thought-provoking remote viewing sessions with financial powers around the world, I continue to ponder just how high this market will rally. The S&P is up 11% since July 10th. Remarkable as this may be, it could of course trade far higher.

In the trading world, there is a very fine line between work and play, especially since the market is essentially a game—a game of strategy and intrigue, risk and reward—always ending in triumphant wins and devastating losses. The best players know that the jackpot is built upon the big trades—the outliers.

While most games include specific instructions and a clear format for play, the best the market player can do is study the speculative paper that has the potential for the largest risk adjusted return. Though the market of late has given traders numerous reasons to stretch their security, the tide is going to turn.  Traders will have to unload risk, and in doing so, trigger volatility. And when volatility spikes, big gains materialize.

Though often the rules are vague and the players, fickle, we are compelled to keep playing…because the mystery is never truly solved.