4/25/14 John Templeton and the Flat Five

There's a quote (apocryphal, perhaps) attributed to Dizzy Gillespie that reads, 'When I hear the door creak, my fingers immediately position themselves [on the trumpet] on the flat five [an interval higher or lower on the scale].'  The 'flat five' is the signature 'sound' of the bebop era.

It's analogous to the reaction that John Templeton refers to when he says, 'Buy when there's blood in the streets.'

Trading and music are similar in many ways.  One I have yet to come across is what might be called 'harmonic dissonance.'  Depress a D-flat key on the piano, followed by its flatted fifth, G (aka a flatted A-flat).  A dissonant sound for most listeners.  However, what happens when you add a C, B-flat, and E underneath?  It then becomes a C7flat5flat9, the driving sound behind most blues.  Note also that a Db7flat5 voicing is exactly the same as that for G7flat5, the so-called tritone relationship (http://en.wikipedia.org/wiki/Tritone).

Who cares, really?  Investors should care.  When playing in the key of D-flat major, it's redundant to voice D-flat or A-flat in the upper register.  That's because a bass player has the notes 'covered.'  Instead, you want to 'color' the chord by playing the third, ninth, or major seventh.  Similary, when you read the 'news,' typically the correct trade is to 'fade' the news, or to at least fade the reflexive reaction by most investors to the news.  That's how a trader structures a winning trade.

If markets only worked that predictably.  They don't.  Still, the odds favor fading the majority.  There's a good chance that buying Russia, Brazil or China this morning will pay off down the road.