Martin Kronicle

According to George Soros, Greece is basically meeting the conditions that the IMF would impose. He also said something much more ominous: we haven’t yet corrected the imbalances which have created the crash of 2008.

Protecting your capital at this stage should be your first priority. True it always should be your first priority, however, as I mentioned in my post about the potential #1 crisis, the current correlation between commodities and equities is nearly 1:1.

Whether your a trader or an asset allocator, I would suggest that you use protective stop orders – mental or GTC – or at a minimum have an uncle point to protect your capital. It can take a VERY LONG TIME for the markets to come back.

On a side not, is it me, or does it sound like there is a helicopter in the background?

Besides Robert Mundell, I was blessed to study with Jagdish Bhagwati. He was as entertaining as he was knowledgeable – he was hilarious actually. Here is a clip from Reason.tv, but you should read the whole transcript as the entire interview did not make it on tape.

Brief excerpt from the transcript:

Jagdish Bhagwati: When you look at a trade agreement like NAFTA, it’s about that thick (holds his hands about two feet apart). When I debate people like Lori Wallach of Public Citizen, she arrives with a lot of books, and among them is this NAFTA treaty she carries for effect. I hope she gets a hernia from doing this often enough, because it looks pretty heavy to me. I wouldn’t be carrying it around. Anyway, she shows this book and asks, “Is this free trade?” And mad as she is, she’s right to raise that issue. You should be able to say maybe in 10 pages that in these sectors we are going to liberalize and so on. But nine-tenths of what’s in these agreements are things which have nothing to do with trade. Labor standards, environmental standards, intellectual property rights. If I were Jane Fonda, in order to sell more workout tapes, I could put into the agreement a clause that the president of Mexico has to do his exercise to my tapes. And it would go in, because ours is a lobbying culture and nobody really would know that it’s there. Because who opens these things except the lobbyists?

So many developing countries are now waking up to the fact that they’re being sold a bill of goods in the form of trade agreements.

reason: You have been on the short list for a Nobel Prize in economics for your contribution to trade theory. Could you explain what your main contribution is?

Jagdish Bhagwati: My breakthrough in trade theory was very simple, as all breakthroughs are. Back in the 1950s, when the case for free trade was widely regarded as less compelling analytically than today, protectionists had one very powerful argument on their side. They noted that a country necessarily benefits from free trade only when markets are perfect—that is to say, only when market prices reflect true social costs can we expect these prices to guide allocation correctly. Take pollution. Say your production process makes you spew things into the air and water but you do not have to pay for this pollution. Then the social cost of harming others is not being taken into account by you and hence your production costs are less than the “correct” social costs.

So you could take two points of view. The time-honored view was that when there is such “market failure,” or what might be better called a “missing market,” the case for free trade was compromised and any form of protectionism was justified. I argued that if you had a market failure, fix that, and you are back to perfect markets and the legitimacy of free trade. So, for example, you can have a polluter-pay principle on the environment. If you do that, then there’s no damaging spillover which has not been taken into account.

The proper policy response then is not to abandon free trade but rather to fix the market failure and then to embrace free trade. This was a revolutionary thought. For 200 years, serious economists had abandoned free trade in the presence of market failures of one kind or another.

You can also see the 2-part interview I did with commodity manager Bill Dunn, Chairman of Reason Foundation.

Nick Gillespie is editor in chief of Reason.tv and Reason.com. Hit & Run was named by Playboy, Washingtonian, and others as one of the best political blogs. You can follow him on Twitter @nickgillespie.

Michael Mauboussin of Legg Mason is a great thinker and writer. I’ve read his newsletters for years and I’ve read all of his books. Here he is during an interview with the The New Yorker on the release of his most recent book, Think Twice.

I’ve said that emotional intelligence and self-awareness make up the majority of trading profitably. I think Mauboussin’s work speaks to that and you’d be well-advised to read as much of it as you can.

Hat tip to Barry Ritholtz.

Risk isn’t something to fear, but to manage. Michael Covel obtained some good insight on risk his documentary Broke: The New American Dream. You won’t hear these insights on risk everyday in the MSM. Most of the stories with sizzle have to do with someone being reckless – something Jonathan Hoenig speaks to in this clip.

Most professionals traders/prop traders who’ve been around for a long time know that successful trading is about keeping your losses small, not betting or gambling, nor taking excessive risks. Good trading is boring.

Most start out just like Larry Hite suggests – by being able to answer the question, “what are you comfortable losing?”

Jonathan Hoenig and I were at Trader Monthly together and he now is a regular panelist on Cashin’ In on Fox.

David Harding is a successful CTA who runs Winton Capital in London.

Larry Hite founded Mint Investments and was featured in Market Wizards.