The Finance Book Club

It would mean messing with tradition and nobody likes that!

IMHO more than that.

As I wrote :

Noboy speaks japanese (no average trader, and even no advanced traders). Hence you cannot touch, change, modify the Holy Scriptures.

More importat nobody undesrtand what is IHK.

Why IHK ? What are its sources, its basis, its limits.

Have you ever seen on Ichimoku threads such questions discussed ?

Never

4. Power and Parasitism

Chapter 4 is a mega-chapter so I've split it up

money-capitalists and financial institutions

1. Financial dealing isn’t confined to institutions like banks
2. Companies can engineer deals between themselves
3. Capitalist producers need financial services.
   1. Buying and selling
   2. Operating payment systems
   3. Providing working capital
   4. FX for international trade
   5. Funds for long-term investment

4. Commercial capitalists focus on buying and selling commodities
   1. Retail giants like Wal-Mart, Carrefour, Tesco, Aldi

5. Money-dealing capitalists manage different money circulations
   1. Visa, Mastercard, Amex
   2. Money-dealers handle payments for commerce and industry, including FX and discounting commercial paper

6. Commercial capitalists exchange money for stuff
7. Money-dealing capitalists exchange money for other types of money, cash for a commercial bill, one currency for another, or short-term loans, like credit cards
8. Both these activities are needed for commodity producers to stay in business
9. Both types get a profit from taking a cut of transactions
   1. Buying lower than market price
   2. Taking commissions
   3. Using bid-offer spreads on deals

10. Their profits and their overhead are funded from the value extraction of the productive sphere
11. They can only maintain this position if they do a more efficient job in buying/selling and money dealing than industrialists could do themselves
12. Recently some industrial companies (Apple, Dell) go even further and produce nothing themselves but instead employ other producers (Foxconn) to do it for them
13. Instead they manage, branding, advertising and sales
14. Commercial capital or money dealers rarely move directly into production but they maintain supply chain links with producers, like on-demand companies in China, India, etc

Interest-bearing capital under capitalism

1. Money dealing evolves into something called interest-bearing capital
2. Money isn’t exchanged for other money or commodities, but instead advanced as money-capital to the ‘functioning capitalist’ who uses it to produce surplus value and then returns the money with interest
3. The same concept applies to money advances for buying shares, or government bonds
4. Money-capitalists
   1. Bankers
   2. Rich individuals
   3. Boards of major corporations
   4. Use borrowed money, not just their own
   5. Eastern European oligarchs

   
   

5. All big capitalists tend to become money-capitalists
6. The cigar-chomping nineteenth century caricature of an industrialist using their own capital to fund their own enterprises, is not relevant in today’s markets
   Attached Image (click to enlarge)

   
   
7. “Interest-bearing capital can also be examined from the perspective of the financial institutions involved in advancing money and receiving it back with interest. These institutions are often involved in both commercial money dealing and in advancing money-capital as an investment. A brief description of these institutions might be useful to provide some background for the analyses offered in this book.”
   1. Banks
      1. Manages payments of clients
      2. Shifts funds from one account to another
      3. HSBC fined $1.9B for laundering money in 2012
      4. Take in deposits
      5. Make loans
      6. Money-dealing capital:
         1. Short-term money market instruments
            1. Certificates of deposit
            2. Commercial paper

            
            

         2. FX dealings
            1. Spot
            2. Forwards
            3. Swap deals

            
            

         
         

      7. Banks also take on risk of their own, taking on positions (proprietary positions) in the market
         1. Not money-dealing capital
         2. Bank FX deals are usually with other banks not with industrial or commercial companies, and they're mainly interest-bearing capital transactions
         3. Fines related to bank dealers manipulation of interest rates or exchange rates are common and similar to price fixing by corporations

         
         

      8. Banks advance interest-bearing capital for longer-term loans to companies for investment
      9. “Banks might also advance money to companies when buying their newly issued bonds and equities. If the bank is only buying an existing security in the market, one that has already been sold by the company, then the company receives no new cash; it is just a transaction with another investor. But when banks buy or sell securities, then they make a dealing margin and might also profit from a rise or fall in the price of the security. These revenues come from dealing in interest-bearing capital. If a company needs funds for ongoing operations, then it would normally use a bank overdraft or other short-term borrowing for cash-flow purposes, which is an advance of money-dealing capital by the bank.”

      
      

   2. Brokers
      1. Get fees for connecting buyers and sellers of currencies, securities, commodities or for giving advice
      2. Exchanges also engaging in brokering
      3. Banks also engage in brokering - calling clients to make deals in FX, money-market instruments, or securities
         1. The bank profits on the difference in buying and selling price

         
         

      
      

   3. Asset Managers
      1. BlackRock in the US is the biggest
      2. $4.6T in assets
      3. Hedge funds
      4. Mostly invested in company shares and bond securities, but also real estate and commodities
      5. They manage OPM (other people’s money)
      6. Sell services for a fee, usually a percentage of the assets held, not based on the return from the assets (which could be negative)
      7. Hedge funds also take a share of the profits
      8. Advance money-capital on behalf of others

      
      

   4. Insurance Companies
      1. Berkshire Hathaway is the largest
         1. Its largest investments are in US equities

         
         

      2. Takes in payments for providing financial services and invests those revenues in securities and other assets to generate funds to pay claims
      3. Worker’s savings have become ‘metamorphosed into capital’

      
      

   5. Pension Funds
      1. Insurance companies can also be pension funds
      2. Aviva, ABP
      3. Use regular payments to invest in anything that might generate returns
      4. Returns are used to pay pensions

      
      

   
   

When pension funds began to invest in commodities it was one factor in the sharp rise in commodity prices

There are some functions only financial companies can perform. One of these is:
Bank Credit Creation

1. Banks don’t just earn profits they literally ‘make money’
2. Banks create money with their credit operations
3. Banks don’t just take in deposits and lend out money to others
4. “ Banks do take in deposits, but the credit creation process is even more important and highlights one way in which command over society’s resources does not have to depend directly upon value production. Money being printed by a central bank is something people are more used to hearing about. For example, the US Federal Reserve is the monopoly issuer of US dollar currency, as are other central banks with their own currencies, and a $20 bill costs only 10 cents to produce. Yet, the vast bulk of what we call money is created in quite a different way via the banking system.”
5. This happens whenever banks make loans
   1. Example of a $200,000 mortgage loan to a property buyer
   2. Bank credits the buyer’s account with this money
   3. They are ‘fictitious deposits’ because they are created out of thin air (silicon?)
   4. They don’t depend on how much cash the bank has on hand
   5. Banks borrow money from other banks to finance these loans through the interbank system

6. Interbank transactions most often balance out
7. In 2011, CHAPS, the UK interbank system, was transferring more than £250bn per day in payments between banks.
8. Banks with surpluses lend them out to those with deficits
9. This type of lending ‘stretches’ the production of value
   1. You don’t need to have earned the money you spend today
   2. However there will eventually be a ‘reckoning’
   3. Depending on your status in the financial hierarchy that reckoning might be near or far
   4. For poor countries the risk is that the ‘stretch’ of the elastic will snap back.
   5. If a central bank just prints $20 bills the demand it creates will cause inflation if there is no extra ‘output’
   6. The extra output will only occur if it is profitable for capitalists to produce it

10. Credit creation is different but can also lead to problems
11. A bank’s loan counts as an asset only if it gets paid back and doesn’t become a loss
12. “The more a bank expands its loan assets, the greater the risk that potential losses on those loans will eat into its capital and reserves, eventually making it bankrupt. As it begins to face losses, it will find it harder to access the monetary system because other banks will be reluctant to lend to it, something that usually happens before the bank’s customers realise the problem and decide to get their money out.”
13. Example of UK’s Northern Rock crisis of 2007
14. “The process of credit creation is critical for the capitalist system’s expansion of financial assets and is a unique feature of banks as financial companies”
15. It is supported by the central bank and can ‘appear’ to be independent of capitalist production ‘for a while’

Financial Securities and Economic Power

“The reader may already feel a little unsettled about the extent to which bank credit creation stretches the link between what an economy produces and the funds available to buy things. If so, I would recommend taking a deep breath before reading on, although be comforted that there is a method in this madness.”

 

1. The value of equities doesn’t just depend on the company’s raw value
2. Investors who expect it to make a profit will be interested in buying its shares which makes the value go up
3. If the company fails to make a profit any money advanced to it will be a loss and the value of the equity drops to scrap value
4. “If the value of all the company’s shares happened to be exactly $100 million, the same as the capital invested, then that might seem to be ‘correct’. But even if that were the case, there is still something strange going on here. The capital does not exist twice, once as the invested assets and again as the value of the shares in the market, but they do have a separate existence. The shares entitle their owner to a portion of the company’s profits and a claim on the company’s assets, but they are traded as securities in the financial market and their price has little to do with the value of the invested capital. This led Marx to describe securities as fictitious capital.”
5. This is most evident in government securities (treasuries, gilts) because unlike a share in a company the price is not based on any existing asset, just the ability of the government to repay the debt
6. The value will fluctuate with interest rates
   1. “A simple example will illustrate how the price of a financial security can change dramatically with the level of interest rates. If you own a security that will pay you $5 every year, and prevailing interest rates are 5 per cent, then that is the same return as if you were investing $100 at 5 per cent per annum (because 5 per cent of $100 is $5). If the level of interest rates then went down to 2 per cent, the price of your security would rise sharply to $250, because the $5 you receive is now equivalent to $250 being invested at a 2 per cent annual interest rate. Or, if interest rates rise to 10 per cent, then the price of your security would drop to $50, because you could invest just $50 and get a payment of $5 every year.”

7. We must also allow for all future cash flows associated with the different types of security, but in general, lower interest rates raise financial security prices and vice versa

The explanation for the many "false breakouts" generated by the Ichimoku method is very simple:

1: Standard parameters of the Ichimoku method:

The 26 Day Moving Average is based on the fact that when the system was designed the Japanese market was open on Saturdays. Which gave us an average of 26 trading days per month.

Question a) should we use the same parameters now that the markets are closed on Saturdays?
Question b) should we use the same parameters on Forex which is open 24 hours a day?

2) "What are Senkou Span A and Chikou Span really?"

Senkou Span A is a weighted moving average translated into the future of 26 units of time.

In short, Senkou Span A works very similarly to Hurst's FLD (Future Line of Demarcation) where prices are translated into the future by half the period of the observed cycle. The crossing of Price Action and of the FLD then allows us to determine a Price Target Zone and to make a price forecast.

BUT if we use a FLD of 26 time units, that means there is an active 52 time unit cycle within Price Action

Question: what happens if we use 26 time units as a parameter for the Senkou Span A and there is NO cycle of 52 time units active within Price Action?

Chikou Span is just the closing price translated 26 units of time BACK, very similar in operation to an FLD (Future Line of Demarcation) translated back in time instead of in the future.

We could call Chikou Span a PLD (Past Line of Demarcation)

Same reasoning as the previous one: "What happens if you use 26 time units as a parameter for the Chikou Span and there is no cycle of 52 time units within Price Action?

As for these parameter stories,. Personally on other criteria and to stay consistent with my other methods I prefer to use 8/21 or 22/43. On the other hand, the 9/26/52 combination works much better on a weekly basis (6 months, 1 year). I say that but I don't use Ichimoku! Remember that these are valid parameters on a minimum graph of 3 to 6 months. Over a much shorter time this makes no sense.

This is golden wisdom, even if takes some study to fully understand. I recommend everyone reading this should follow Parisboy over at his thread, if you aren't already. https://www.forexfactory.com/thread/...s-waves-cycles

The Flexible Noose

1. Higher security prices increase the wealth of fictitious capital owners, even if production in the economy hasn’t changed
2. Equity owners have some power over how companies make decisions
3. Significant shareholders make money from being on the board, and from the dividends of their shares
4. Debt holders have higher priority in being paid back from an insolvent company than equity holders
5. The price of financial securities reflects the sentiment about a company’s future
6. It is also a way for the market to enforce discipline - as a company that displeases its investors will have its shares sold down
7. Corporate shares are also a form of credit system as a public company can grow much larger and faster than by using their own money
8. “This kind of system reproduces both monopolies and ‘a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock issuance, and stock speculation”
9. Revenues from fictitious capital doesn’t have to come from productive labour, but productive capital comes from the exploitation of workers.
10. An example of ‘unproductive’ fictitious capital would be CDOs (collateralized debt obligations) which you probably remember from the 2008 financial crisis.
11. The ‘financial aristocracy’ is not the only group that benefits from money-capital and fictitious-capital.
    1. People in richer countries also benefit, but to a lesser degree
    2. Capitalist economic power allows them to marshal ’social resources’
    3. Industrial and commercial companies also use the market power of securities
    4. Example of Facebook which raised $16B in 2012.
       1. It paid less than $200M to the banks organizing the float, and it turned all the shares in the company into assets at market price, which gave FB a market cap of $100B.
       2. Mark Zuckerberg and the original owners accumulated tens of billions of dollars in new financial wealth.
       3. The company value was far in excess of what they had personally invested and most of the shares were non-voting.
       4. As a result, with no assistance from investment banks, FB was able to acquire WhatsApp, with ‘only’ $4B of the $22B purchase price paid in cash, the rest in FB shares
       5. This illustrates the role of shares as a means of payment
       6. It also shows how a monopolist values market position vs the standard equity market valuation method taught in business schools or a calculation based on discounted future revenues.

This is a reflection of how “the productive capabilities of humanity are distorted in an increasingly dysfunctional capitalist system”

ICHIMOKU

Obviously in Daily the combinations (7/21/43) or (8/22/44) work better than 9/26/52!

It is not difficult to understand. Originallyduring the tests carried out by Hosoda the trading week was 6 days.

9 days is 1.5 weeks.
26 days represent 1 MONTH (30 days - 4 Sundays)
52 days represent 2 MONTHS.

To my knowledge on the CAC 40, DAX, SP 500, NASDAQ, DOW JONES etc the trading week is 5 Days.

1.5 weeks = 5 x 1.5 = 7.5 or 7 or 8 when rounded.
1 month = 5 x 52 / 12 = 260 / 12 = 21.66666667 i.e. 21 or 22 rounded
2 months = 21.66666667 x 2 = 43.33333333 i.e. 43 or 44.

Now I will have to repeat my testing but using your parameters to see how it is improved. I need an army of assistants to catch up on my testing backlog.

Finance and the rule of Capital

1. Norfield now looks at the work of a Marxist scholar, Rudolf Hilferding ca. 1910.
2. The class of fictitious capital owners who control the banks closely overlaps with the class of those who own industry
3. Norfield wants us to understand that banks are not at the centre of the process - they don’t have capital ownership of industry but rather the owners of industrial capital are the owners of equity capital, in the form of securitized fictitious capital (but really what does it matter? The same people own everything.)
4. Since Britain was the first industrial country, it was under less pressure to form cartels and trusts in order to compete and the links between banks and industrialists were looser
5. Even back in 1905 there were far fewer giant conglomerates in Britain than in USA
6. Hilferding thought that monopolistic trends would eventually lead to an ‘organised capitalism’ that could be brought under state control
7. However Norfield points out that monopolists cannot even control the capitalist market within a single country, let alone globally (no?)
   1. Competition is not eliminated in markets dominated by a ‘handful’ of major players (no??)
   2. They may not compete on price, but they will use ads, patents, supplier /retailer deals, acquisitions to consolidate their positions
   3. “Even the biggest companies eventually come under pressure from existing or new rivals. What for years might look like a cozy cartel can then become a fight for survival.”

take the case of FOREX or of the BITCOIN.

. There it is trading 7/7. This makes a drift of 52 days over the year and one year every 7 years!

If you think 24/24 on Forex, 1 day of trading on Forex is equivalent to just under 3 days of trading on global indexes.

Why indicator settings calculated a long time ago in a Japanese stock market which incidentally has since changed would apply in the currency market, for example the Euro / USD pair, of today operating day and night ?

if you operate intraday, I don't see a priori why parameters tested on daily prices from a "medium term" perspective would apply intraday. I'm not saying it's impossible, I'm saying it should at least be checked. IKH (Ichimoku Kinko Hyo) settings don't fall from the sky, they've been tested but we do not know how. Hence we cannot check their vlaidity today (if you assume they were valid in the past)

You just have to TRUST them.

Do you trust ? It is your money

Trust is never a part of good trading in my experience.

Moreover it seems that no serious guy (like me ) has ever fully read some books on Ichimoku.

One book is enough, the others are just demarcations of the previous.

For the average guy Ichimoku is a thing with Chikou, Kumo etc . Nice

But it is not only that, it is also a Time Theory and a Wave Theory

Have you ever heard about it ?

Why the guys disserting at length on Ichimoku threads do not discuss both theories, do not use them in their Trading ?

Financial Parasitism

1. There is a strong connection between finance and ‘parasitism’ in Marxist theory
2. The financial sector doesn’t produce value on its own but mainly creates and trades securities, and interest rates (of course this is highly disputed and disputable)
3. However Marx believed the money-dealing and commercial capitalists were not parasites because their operations facilitate the productive circuit of capital, enabling buy and selling
4. Interest-bearing capital however is unproductive and is outside the productive circuit
   1. It advances money and gets money back with no regard to what happens in between
   2. Deducting interest from the profits of a bank’s loan to industrial and commercial capitalists is parasitic

5. The large owners of money-capital including the top executives of corporations are at the top of the aristocracy
   1. Then senior executives of banks
   2. Top brokers
   3. Asset managers (Charlie Munger believes they are at the top)
   4. Insurance co, pension fund, hedge fund managers

6. Norfield’s experience was that the pure brokers - who take no market risk themselves, were at the bottom of this hierarchy

“Without too much exaggeration, it can be said that while the brokers took the bankers for a drink in a City bar, the bankers took the asset managers, fund managers and corporation executives to the Wimbledon tennis tournament or Premier League football matches. The bank clients claimed that their business jollies and weekends away to attractive destinations were justified by them attending an ‘important’ conference to listen to people like me talk about the financial markets.

The dealers in the banks, the ‘risk takers’, saw themselves as the real workhorses, delivering the profits. The brokers were, at best, seen as a necessary evil, only required to line up clients for the dealers if their own sales people could not manage it. Meanwhile, the dealers’ opinions of the economists in the dealing room varied from the obscene to the temporarily grateful, depending on how the latest piece of advice had cashed out. If an economist actually took on some personal dealing risk, as I did on occasion, but which was very unusual in banks, then there was a certain credibility to be gained from being willing to ‘put your money where your mouth is’ and take the pain of a potential loss on a deal done.”

It's because this type of interdisciplinary reading is very rare among traders, much less among any finance types. Who has the time? Most people just want to have something 'that works' handed to them and to begin earning money. My experience is that unless you understand everything you will be at a disadvantage which is why I read and read and read. I am not as smart as some quant analysts but I think I make fewer mistakes because I don't confine myself to one subject or discipline. However it's definitely a balancing act between gathering information and synthesizing it for one's own trading use.

Actually now that I think about it the same thing happens in other fields, like Science. Something that is known within a circle of biologists might benefit a chemist, but unless they stop reading/studying/associating with chemistry and chemists they will never find out about it. This is what makes interdisciplinary degrees and departments in universities so powerful but who wants to fund them?

on daily Charts

An oldie but a good one clemmo17: 'There's nothing new under the sun'.

Global parasitism, investment, trade and finance

1. Lenin sees parasitism as a defining aspect of imperialism
2. “More and more prominently there emerges, as one of the tendencies of imperialism, the creation of the ‘rentier state’, the usurer state, in which the bourgeoisie to an ever-increasing degree lives on the proceeds of capital exports and by ‘clipping coupons.” (note that he was talking about clipping coupons from a bond, not supermarket coupons, but it also seems appropriate!)
3. Financial companies in rich countries enjoy a broad spectrum of advantages over those in less rich countries.
   1. Example of South Korea in 1997
   2. Before 1997 it saw a huge flow of international funds into the country seeking higher yields
   3. When the bubble burst it had to seek out IMF assistance and after they imposed austerity measures the economy worsened even further
   4. Similar to Greece in 2010

Who reaps the returns?
-It’s not just rich people who own financial securities
- savings plans
- endowments
- pension schemes
- 93 percent of the families in the top 10% of income distribution owned equities
- Nearly 29M people
“The extra power in the world economy that the financial system provides is made available mostly to those with privileged access to finance: the corporations and states of the richer, more powerful countries.”