How to go broke from Bill Eckhardt

“Amateurs go broke taking large losses; professionals go broke taking small profits.”

Bill Eckhardt

Bill Eckhardt is one of Chicago’s true trading legends. He may not be as well-known as others, but through the turtle bet, he helped launch an industry called managed futures. 

His short phrase is packed with information and rivals the classic phrase “you never go broke taking a profit,” an old financial proverb with an unknown exact origin, though often attributed to the legendary financier Bernard Baruch. It is also included in the book Reminiscences of a Stock Operator about the speculator Jesse Livermore.

Eckhardt is from the trend school, and if you don’t know when a trend will end, it is best to just hold your positions and not take profits early. Of course, you have to take losses quickly.

World Order drives currency dominance

When we discuss currency dominance, we also need to think about the world order. Politics and economics intersect. The exorbitant privilege the US receives through the dollar and Treasury rates is financial compensation for serving as the world’s dominant hegemon. The US has played a special role in creating and maintaining the world order, and in exchange for providing this order, it receives gains in capital markets and financial flows. 

If the US either does not want to play that special role or is usurped in controlling the world order, it will lose some of its special financial privileges. This is a slow process of world control, given that no one country or group of countries wants to impose a world order not driven completely by self-interest. 

As put by some market observers, the US has moved from Magnanimous to Mercantilist, from global interest to self-interest. This world of self-interest is inherently unstable.

 

The dollar cycle is heading down?

I don’t believe there is an inherent reason for a dollar cycle. The evidence, at least from the chart, suggests a pattern in the dollar’s behavior. No, there may be movement away from extremes, a form of mean reversion, such that if the value of the dollar gets high, policy, trade, and capital flows will reverse and cause a change in trend. We should see this more clearly through a valuation model or with the dollar’s real value. Of course, extremes in the dollar will also be affected by the behavior of other countries, since an exchange rate is a relative price. But for now, let’s take the chart at face value, which suggests the dollar has been on a ten-year strengthening run that is reversing. This change started in 2024 and looks to continue. From a policy perspective, high inflation in the US relative to many other countries suggests a decline that will continue until the Fed can get back to its 2% target and show it is committed to taming inflation. Second, the declining dollar is linked to falling Treasury safety, which will require better control of the US federal deficit. 

The dollar has no inherent cycle. However, policy behavior may follow a cycle.

Idiosyncratic risk is dominating the equity markets

The intra-stock correlation is at market extremes. Dispersion measures are also high, suggesting very little common movement across stocks. Put differently, idiosyncratic risk is high. This means that we should be in a stock picker’s dream. Investors who can see distinct differences in individual stocks will be rewarded, while those focused on common behavior will be disadvantaged. However, the ability to make money in this environment is not a given. Just because stocks do not move together does not mean the stock-picker can identify winners. It does not mean stock betas will go to zero, but it does mean alpha should be more dispersed and residuals from any market regression should be higher. The equal-weighted index has outperformed the cap-weighted SPX index for the year and over the last 3 months.