Does every trader want a bubble?

If you asked me in early 2009 I would say yes. If you asked me in late 2009 I would say maybe. As great as 2008 was for traders it has been equally painful for some as 2009 progressed and 2010 has shown moments of good times. Traders like bubbles; they just prefer it to happen in their non-primary market.

My intuition told me that we are in some stage of a bubble in bonds. I have spent the last 3 months trying to learn as much about bonds as possible. I had visions of chasing bubbles from market to market. A modern day robber baron. I am finding I need way more information, more time, and more money.

Approach a bubble with caution. There are ways to predict a bubble, but you have to be close to it to feel it. IE in that market. A good article on the subject is from seekingalpha.com, it specifically talks about the Chinese bubble but is relevant for all bubbles.

Here is my timeline of a bubble:

Government or institutional policy/hype.
Retail investors enter.
Trader get killed on the short side.
Market ignores all fundamentals and technicals.
Smart people take the profits.
Bubble continues to form.
Institutional view changes.
Market continues longer.
Longs start to feel pain.
Shorts assert their authority.
Longs puke.
Retail and some institutional investors get killed.
Short cover bounce.
Volatility slows.
The traders get demolished by institutions.
Market begins the healing process.

This list is off cuff. Let me know if I missed something. I will never forget a housing or mortgage CEO, who said “we saw the bubble coming but we had to stay in it because we were still making money”. That is not an exact quote and to be honest, even after searching, I do not know who said it. That best sums up a bubble, it works till it doesn’t. When the rising tide does not lift all boats some are left in the Dead Sea. The traders are left to make it back to shore. I saw the writing on the wall in early 2009 and took about 6 months off. And by seeing the writing on the wall, many of my friends realized their worst case scenario. I needed that time to re-evaluate my expectations. There we shells of themselves, it was depressing. I was not going to be making the same money trading the same way. More importantly losses were more significant in that I was not able to make them up as easily. Being down in a 50 handle range is way different than being down in an 8 handle range.

I will continue to study bubbles but it is going to take much more effort. The fuck you money will have to wait till next year.

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