Welcome to The Wolf Den! This is where I share the news, my ideas about the market, technical analysis, education and my random musings. The newsletter is released every weekday and is completely FREE. Subscribe!
Sign up for my other newsletter, THE DAILY CLOSE!
I built The Daily Close to give you the same institutional-grade indicators and signals that I use to trade the market on a daily basis. It's automatically generated and delivered to your inbox at the daily close everyday.
1 Week FREE for all subscribers
17% discount if you subscribe for a year
$25 a month, or $250 a year
In This Issue:
The Paradox Of Skill
Bitcoin Thoughts And Analysis
Altcoin Charts
Legacy Markets
ETH Developers Are Considering A Major Change
Binance Backs Out Of The UK
Recession Risks Double | Can Fed Pause Rate Hikes And Still Stop Inflation?
The Paradox Of Skill
Over recent months, I've delved deeply into the concept of luck, yet it feels like there's so much more to uncover. Understanding luck is crucial, especially in the investment realm where it is frequently misunderstood and misrepresented. Misinterpretations of 'luck' can undermine our ability to assess its real influence and to make sound decisions based on a thorough comprehension of risk and opportunity.
So, let's delve once more into the enigma of luck.
A common belief is that as one's skill in a certain activity increases, the impact of luck on the outcomes of that activity diminishes. Yet, the paradox of skill challenges this notion, proposing that as skill levels rise across the board, luck actually assumes a greater role in determining outcomes. This paradox may sound illogical and counterintuitive, but it holds true in any scenario where luck can come into play.
Consider the world of sports. In a Major League Baseball game, the gap in skill between the top, average, and worst players is relatively narrow. To clarify, among the nine players on the field at any given moment, the best player isn't significantly more skilled than the average or the least skilled player. The variation in skill levels is relatively slight.
Contrast this with a Tee-ball game, where the disparity in skill between the best, average, and worst players is far more pronounced. Some children may be more physically developed and have private coaching, while others might have been compelled to participate by their parents. Here, the gulf between the most and least skilled players among the nine on the field is quite wide.
Thus, in determining outcomes, skill plays a larger role in Tee-ball and a smaller role in Major League Baseball, whereas luck assumes a more significant role in Major League Baseball and less so in Tee-ball.
Michael Mauboussin, the originator of this paradox, has the following to say about the concept:
If the variance in the skill distribution is shrinking and the variance in luck is stable, luck plays a growing role in shaping results. An absolute improvement in skill, when combined with a relative decline in the range of skill, means that luck is more important than ever. This concept is called the “paradox of skill.”
The paradox of skill says that in activities where results combine luck and skill, luck is often more important in shaping outcomes even as skill improves. In many competitive interactions, it is the relative level of skill that matters, not the absolute level of skill. In many fields, including investing, the dispersion of skill is shrinking, which leaves more to luck.
In Mauboussin's exposition, he extends the paradox by introducing the concepts of relative versus absolute skill. While this can open up a whole new conversation, the condensed explanation is as follows: relative skill focuses on how an individual's skill compares to others, while absolute skill refers to the inherent level of skill an individual possesses.
Pertaining to our paradox, as relative skill levels become more homogenous due to overall skill enhancement, achieving standout performance becomes increasingly difficult (hence the role of luck), regardless of an individual's absolute skill level.
Let's pivot and consider how this applies to investing. Today's investment landscape is vastly different from what it was 30 years ago, or even just five years ago. The level of competition among skilled investors striving to outperform the market and each other is unprecedented. Moreover, information has never been as accessible as it is now.
Signs are everywhere: an increasing number of MBA graduates, a record-high number of CFA holders, and hedge funds showing more interest in artificial intelligence and quantum physics than in finance - the competition is relentless.
Given our paradox, as the absolute skill of investors rises and relative skill declines, luck has never played a more pivotal role at the highest echelons of investing. As daunting as this might sound, don't be disheartened. Many highly intelligent individuals overlook this concept, erroneously attributing their success exclusively to skill. This is where we can gain an edge.
An intellectually well-rounded investor acknowledges the role of luck in their success. True alpha lies in emotional intelligence and self-awareness - attributes that distinguish the most successful investors from merely well-educated ones.
Success requires a touch of luck and the humility to accept the market's lessons when it's not our time to win - there's a skill in allowing luck to play out, but most investors struggle to come to terms with that.
Bitcoin Thoughts And Analysis
We discussed the 200 MA on the weekly chart yesterday, a level where price is currently trading. Zooming into the daily, we can see that the 50 MA is in the same area. The dark blue descending line acted as clear resistance on the move up yesterday, and is the area to watch in the coming days.
Otherwise, still not much to see here.
Legacy Markets
Global stocks and US Treasuries dropped as the second-quarter rally hit resistance from economic difficulties and overbought positioning signs. This slump was led by the European chemical industry, with Lanxess AG falling 15% due to a profit warning, which affected shares of other companies in the sector. US contracts also declined, with an index of Asia-Pacific shares falling as well.
Investors are currently juggling between the fear of missing out and concerns that markets have surged too quickly, confronting inflated valuations and economic challenges. There has been an increase in bullish positioning in US equity futures, reaching the highest levels for the S&P 500 and Nasdaq 100 since 2010, according to Citigroup strategists.
The direction of US monetary policy is another unpredictable factor. Federal Reserve Chair Jerome Powell is set to present his semi-annual report to Congress, while investors anticipate policy meetings outcomes in Turkey, the UK, and Switzerland. Despite warnings from the Fed of more impending tightening, interest rates were kept unchanged at the latest meeting. The market pricing contrasts with the Fed's forecast for a rise in borrowing costs to 5.6% in 2023.
In the meantime, US Treasury yields increased after a break on Monday, and oil prices dropped due to China's economic support plans perceived as inadequate to boost demand. Furthermore, Alibaba Group Holding Ltd. saw its shares fall by about 1.5% following the unexpected replacement of its CEO and chairman.
Key events this week:
US housing starts, Tuesday
Federal Reserve Bank of St. Louis President James Bullard speaks, Tuesday
New York Fed President John Williams speaks, Tuesday
Federal Reserve Chair Jerome Powell delivers semi-annual congressional testimony before the House Financial Services Committee, Wednesday
Federal Reserve Bank of Chicago President Austan Goolsbee speaks, Wednesday
Eurozone consumer confidence, Thursday
Rate decisions in UK, Switzerland, Indonesia, Norway, Mexico, Philippines, Turkey, Thursday
US Conference Board leading index, initial jobless claims, current account, existing home sales, Thursday
Federal Reserve Chair Jerome Powell delivers semi-annual testimony to Congress before the Senate Banking Committee, Thursday
Cleveland Fed’s Loretta Mester speaks, Thursday
Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday
Japan CPI, Friday
US S&P Global Manufacturing PMI, Friday
Federal Reserve Bank of St. Louis President James Bullard speaks, Friday
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 fell 0.4% as of 10:10 a.m. London time
S&P 500 futures fell 0.5%
Nasdaq 100 futures fell 0.6%
Futures on the Dow Jones Industrial Average fell 0.4%
The MSCI Asia Pacific Index fell 0.5%
The MSCI Emerging Markets Index fell 0.9%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro rose 0.1% to $1.0935
The Japanese yen rose 0.3% to 141.51 per dollar
The offshore yuan fell 0.3% to 7.1823 per dollar
The British pound fell 0.1% to $1.2779
Cryptocurrencies
Bitcoin rose 0.1% to $26,749.34
Ether fell 0.3% to $1,725.38
Bonds
The yield on 10-year Treasuries advanced three basis points to 3.79%
Germany’s 10-year yield declined three basis points to 2.49%
Britain’s 10-year yield declined three basis points to 4.46%
Commodities
Brent crude rose 0.8% to $76.67 a barrel
Spot gold rose 0.2% to $1,954.31 an ounce
ETH Developers Are Considering A Major Change
Ever since staking became a feature of the Ethereum network, the magic number to become a validator has always been 32 ETH. However, with the advent of the Shanghai update and the surge in demand for staking, some developers have begun to reconsider this parameter. The proposed change entails a 64-fold increase in the maximum requirement, raising it from 32 ETH to a whopping 2048 ETH.
The most immediate benefit of this adjustment would be a reduction in the waiting time for staking. As a result of the diminished queue, centralized entities would have fewer validators to manage, and independent validators could auto-compound their ETH. Should this proposal be accepted, it could potentially decrease the number of validators operated by centralized entities and could also reduce the total number of validators in the network.
Currently, nothing is set in stone, but there are several influential core developers who favor this change. In terms of trading implications, I don't foresee this update having a significant impact on price in the immediate aftermath, if it is passed. However, I do believe it could act as a positive catalyst when market conditions begin to change.
Binance Backs Out Of The UK
At the request of Binance, the UK's Financial Conduct Authority (FCA), which performs a role similar to the SEC in the US, has officially cancelled the dormant registrations held by the exchange. Binance has, until now, maintained these licenses without actively using them, but has chosen to cancel them in line with the FCA's recommendations. According to the FCA's website information on Binance, "this firm can no longer provide regulated activities and products, but previously was authorised by the FCA and/or PRA." In essence, the ties with the UK have been officially severed. Although this segment pertains to the UK, it's hard to dismiss the thought that the SEC might be intent on pushing stronger, already-established crypto entities to other parts of the world to pave the way for Wall Street's dominance.
Recession Risks Double | Can Fed Pause Rate Hikes And Still Stop Inflation?
Macro Monday with your favorite Dave Weisberger and Mike McGlone.
The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.