Profit From Government's Response to Crisis

There is value in seeing things from different viewpoints, especially if one wants to make winning trades, and active traders and fund managers have a very different perspective than government policymakers do.

It is easy for those of us managing money to drift into a mode in which we believe that we see the future more clearly than policymakers and that we know exactly what they should do.

The most-important government decision makers are generalists, and many are elected or appointed by elected officials. If we had their jobs, we would probably behave as they do. Elected policymakers consider ideology, the consequences for their political base, and their own electoral chances. Many also think about the overall good of the country. They want to look good while going through this process. They often make strong statements as an initial position, while prepared to compromise and negotiate.

It is a process of building consensus. It is how our democracy works. It often seems too slow, and sometimes it is too slow. But the astute investor may well benefit from stepping out of his or her own traditional role and attempting to view the problem from a different perspective.

The Trader Perspective

Here are a few characteristics that reflect the market mind-set of active traders (a term I will use to include all of us who are fund managers, investment advisors and active individual traders). The elements of the mind-set are drawn both from conversations and written reports.

Narrow trading range: Before the last few weeks, we had become accustomed to a rather narrow trading range, with modest corrections. Volatility has been low by historical measures. Despite this, it has usually been right to fade small moves and sell option premium. Our notion of what constitutes a crisis is conditioned by this focus.

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At the time of publication, Miller had no positions in stocks mentioned, although positions may change at any time. Jeffrey Miller is president and CEO of NewArc Investments, a registered investment advisor, and Capital Markets Research. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Miller appreciates your feedback; click here to send him an email.