As most of you already know, I’m not a big fan of technical analysis, and in general Casey Research focuses on fundamental analysis. But even among fundamental analysts, I’ve seen some reverence for technical analysis. The most common view among sympathetic fundamental analysts seems to be that, “Technical analysis seems flawed, but many successful investors use it. Hence, it must have some value.”
Here’s the problem with this perspective: How many articles have you read by someone who went bankrupt by using technical analysis? I don’t think that I’ve ever read a single one. Nearly all the criticisms of technical analysis come from either fundamental analysts or academic theorists. Does this seem a little strange, or does it prove the worth of the technique?
Let’s go through a mental exercise to see the problem here. Suppose 10,000 Casey Daily Dispatch readers start using technical analysis. They’re drawing lines on charts, watching the moving averages, and paying attention to the Bollinger Bands. After a year, some will make lots of money simply by chance. Perhaps 100 readers will become wealthy in the process.
This simulation doesn’t even require technical analysis. Suppose every reader picks ten stocks without the slightest bit of research and puts his or her life savings into them. Perhaps 100 readers would become extremely wealthy by luck alone.
But here’s another problem that inevitably occurs with investing: Those lucky 100 won’t feel lucky. They’ll be certain their decisions were logical and sound. They’ll praise their intuition and their ability to draw lines on charts at the right moment. And guess what? Many of them will be heard. We naturally gravitate to successful investors to hear their opinions on the market. However, their opinions aren’t always worth the attention they receive.
The successful have the loudest voices. However, the voices of those who failed with the same technique are never heard. Hence, a number of successful technical traders doesn’t prove that the system works, because we don’t know the number of unsuccessful traders.
No one is lining up to read advice from investors who abysmally failed. The other 9,900 technical analysts aren’t being heard. If anyone knows of a financial writer who bases his advice on his failures in the investment world, please send me his work. And I’m not talking about someone who failed then succeeded – I’m talking about a flat-out failure writing wisdom about his failures. It doesn’t exist.
What is the total pool of failure for technical analysts? In my opinion, it must be very large. The techniques are relatively simple, especially compared to the work required for fundamental analysis. Given the ease of the techniques, the number of successes appears to be very small. If one only had to draw lines on a stock chart to get wealthy, everyone would be wealthy.
Hence, the success of a few doesn’t prove the merits of the technique. Think about a casino: Someone will hit the jackpot, someone will get the royal flush, and someone will make it big on the roulette wheel. However, there is a big difference between a casino and technical analysis. We all know someone who has lost money at a casino. In fact, we probably know way more losers than winners. We understand that the number of winners is extremely small, and the number of losers is extremely large. As a result, most of us don’t see blackjack as a road to riches. But with technical analysis, one only sees the winners writing about their “successful” techniques. One never hears anything from the losers.
And that’s where an understanding of theory becomes important. Whether the wealthy guru is a fundamental analyst or a technical analyst, one must ask, “Do his ideas actually make sense, or is this guy one of the lucky 10,000?” And sometimes, it can be difficult to tell the difference. Even the lucky guys will make plausible explanations for their success.
For the rest of the issue, Doug Hornig will present some suggestions from our readers on how to save the middle class. Of course, we don’t endorse all of these views, but it’s nice to hear some other opinions. I’m very grateful to have readers with good heads on their shoulders, and who often send us interesting thoughts.
by Doug Hornig
A while back in this space, I pondered the implications of rising income inequality in this country. We have a shrinking middle class; the trend is unmistakable. Private-sector middle-income jobs shrank from a 54% share of total employment in 1980 to a 42% share in 2010.
That’d be great if people were moving up, but they aren’t. At least not in the private sector, where low-income jobs grew over the same time period, from less than 30% to more than 40% of total employment.
Government is a different story. For example, total compensation for federal government workers has grown 36.9% since 2000 after (adjusting for inflation), compared with 8.8% for private workers. Federal employees take in on average twice as much as their private-sector counterparts. Even state and local government workers earn 15% more.
One might be tempted to say that government is picking up the slack, but government workers have remained steady at about 18% of total employment for 30 years. And in any case, they are prospering at the expense of the rest of us who pay their salaries, so there’s no real gain.
There are any number of reasons for the crash of the middle class. The primary one is likely the disappearance of so many lower-skill, higher-paying jobs that allowed upward mobility for working class families. Another is that many white-collar workers in the private sector have been downsized out of their jobs, and have had to take lesser positions, if they can find work at all.
Whatever the causes, the trend is worrisome. The stability of post-WWII America has been built upon a prosperous and growing middle class, and the associated hopes of families for the future of their children. That’s slipping away, and the consequences could be ugly – from ever-greater forcible redistribution of wealth by government to full-out class warfare.
I assumed in my previous piece that we generally agree that we don’t want government to try to “fix” this situation. But what can be done to make us more prosperous? Is there any hope? I tossed that question to readers, and I got a ton of responses. I thank all of you who took the time to write so many thoughtful emails. Alas, we have room for only a small portion of some of them. It's your turn to speak:
J.T. writes from Sweden: “If ‘the rich’ only consisted of people who had earned their wealth through adding wealth to society as a whole, such as true free-market wealthy do, I do not think there would be resentment against ‘the rich,’ as people generally (except for the antisocials) would recognize them for the contribution they had done to increase the accumulated wealth of society through their actions: The market actions of these true free-market wealthy would mean added jobs to the job market of that society, and thus increased wealth to those willing to take those jobs.
“Those who came by their riches by gaming the system, however, are the 'consequence of governments intervening in the market place,' and 'the first thing to do … would be to remove the government from the marketplace, and let the free-market discipline have its way with these individuals, who are, actually, nothing more than leeches, or parasites. A free, functioning capitalistic market would make a very short affair out of such a person …
“I think the safest way to protect the rich and to, at the same time, solve the financial difficulties of the different groups of society, would be to introduce true free-market economic policies: That would ensure only those got rich who deserved it, and that everyone would gradually grow more wealthy as a consequence of the actions of the most ambitious and astute … which would lead to continuously, or exponentially, more new jobs.”
G.F. writes: “I don't think it can be resolved, because the ones who have the power to change the system don't really want it changed. It is working pretty much like they want it to right now.
“I think we will have to wait until it collapses, and then hope that we can rebuild something more reasonable from the rubble. I do not like this conclusion, but this is the conclusion that I have reached after a lot of thought and consideration. And thus … I now live in Ecuador, where … the odds of riding out the tumult to come are likely to be a little better.”
R.A. writes: “The fundamental problem is that our society has not developed a way for the mass of the people to participate in a meaningful way in the production of goods and services. The struggle that we see in our society today is, to a significant degree, a struggle between the owners of capital (who, in a moral sense, rightfully claim an increasing share of the national income) and those who have only their labor power to contribute to the production of goods and services (who, out of a need to have a right to a share of the national income commensurate with their numbers, demand that the government take redistributive action so that they will have a fair share of the national income).
“I do not see a real solution to this issue (i.e., income going to those who produce it versus income being artificially redistributed to those who need it) until our society develops a way for everyone to individually own enough productive capital so that they will have the right to a reasonable income based upon their individual ownership of productive capital. The natural tendency toward the concentration of wealth is compounded by our corporate and tax laws that encourage it. We need to develop ways in which people can acquire ownership of productive wealth. There are many ways that the tax laws and other governmental policies could be changed so as to give a meaningful opportunity to people to acquire income-producing capital. The government's tax laws and activities definitely have an effect on what happens in this arena. The government's role should be one of an umpire and not a participant and as such could appropriately establish rules of the game that give most of the people a more realistic and practical opportunity to participate in the productive process.”
B.M. writes: “By removing the obstacles to entry. Reducing the size, scope, and expense of government. Reducing the tax burden on invested capital, and reducing the regulation and restrictions on business startup. We need to bring back opportunity for the average citizen to create and build a business into a success. And the ability to succeed through hard work and a little luck without the fear of being punished by governmental regulation, taxation, or any other type of lawsuit. I know that's a tall order, but if we bring back opportunity then we significantly reduce the tendency toward class envy. Oh... and our economy would go wild creating jobs and, I suspect, higher tax revenues.”
J.B. writes: “Bring back the Glass-Steagall Act to prevent the gambling with deposit monies by the commercial banks on another scheme to leverage our money for their benefit. Let those whores work for their money.”
K.B. writes: “I have been pondering this for the last couple of years, and have come to the conclusion that there is only one private-sector mechanism to accomplish this, which is the corporate boardroom. Unfortunately, the same wealthy class long ago achieved control of this supposed check on management excess through exclusion of dissenting voices, through the use of mutual funds. I think the creation and proliferation of mutual funds (and their forced use on most of the population) allows for the fund managers to control the voting on all board resolutions, instead of individual stockholders. Since fund managers are controlled by Wall Street, the opportunity for any outsiders to rein in corporate management compensation is prevented.”
B.G. writes: “The solution – a flat tax without any loopholes at a much lower rate than currently, say 12%. There also should be a flat tax for personal income as well. By implementing a flat tax, big business will save millions in lobbying costs while beginning to share the same tax burden as those businesses not so connected. Further, there would not be idiotic policies like ‘cash for clunkers,’ home rebate credits (that netted the American jailed criminals millions in fraudulent returns). This would also end the utter waste of billions spent annually to circumvent tax laws that no one knows nor understands. My solution would not end the gap, but it would go a long way towards restoring a tax system that is fair and devoid of chicanery.”
Thanks again to everyone who wrote. I only hope some of our “misrepresentatives” in Washington read our little daily dispatch.
[Investing ahead of the crowd is a good way to improve on a middle-class income. The Casey Report, with its knowledgeable, savvy team (which includes Doug Casey himself), can help you thrive in these uncertain times. A three-month test drive is risk-free. Details here.]
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Casey's Daily Dispatch Editor