I attended a luncheon recently in La Jolla, CA where Paul McCulley of PIMCO spoke to the idea of a “stable disequilibrium” — a unique concept that helps to explain the volatile uncertainty facing traders across the globe. Paul is a great speaker. He could easily be a history professor specializing in the financial markets. I now understand more about the last 50 years of currency markets than I ever expected to know! He of course trades from a fundamental perspective.
Read Paul’s April commentary for greater insight into his “way”:
Download the Adobe PDF commentary.
I have always admired those select few that can really “get” the fundamentals and consistently use them to make positive trading decisions. Paul and PIMCO have long made the “right” moves. But after listening to Paul I kept wondering how viable his way was for most traders? Would most traders ever have the ability to absorb all of the daily fundamentals and make the right entry and exit from the market for profit?
The Scalability Problem With Fundamental Trading
McCulley’s presentation illustrates the core issue with fundamental trading as a model for the broader trading population. It works at the highest levels of institutional finance, where teams of economists, analysts, and researchers spend their careers developing the precise understanding required to read macroeconomic conditions correctly. PIMCO employs hundreds of people dedicated to building the intellectual infrastructure that allows McCulley’s kind of analysis to inform profitable decisions. That infrastructure is not available to the individual trader, the institutional professional outside of a specialist fixed-income shop, or even most hedge fund managers.
The question is not whether fundamental analysis works for the practitioners who genuinely master it. A small number clearly do master it and produce excellent results. The question is whether it is a viable approach for most traders, and the honest answer is no. Most traders will never have the time, resources, or intellectual specialization to absorb the daily flood of macroeconomic data and translate it into consistently profitable entries and exits. The data is public. The analysis required to extract signal from it is not public and is not easily replicated.
Trend following solves this by bypassing the fundamental layer entirely. The price of a currency, bond, or commodity already reflects the aggregate analysis of every fundamental participant in that market, including PIMCO’s economists and everyone like them. The trend follower reads the output of that collective analysis directly from the price chart, without needing to recreate the analysis that produced it. A price trending in a defined direction is telling you something about what the best-informed participants in that market believe. A trend following system reads that signal and responds. No macroeconomic expertise required. For the complete framework of how price is used as the only input, see the TurtleTrader rules and the broader trend following approach.
The “stable disequilibrium” concept McCulley describes, where markets operate in states of apparent stability that mask accumulating instability, is itself an argument for the reactive rather than predictive approach. If disequilibrium is stable until it suddenly is not, predicting the timing of the break requires the kind of deep structural analysis that very few practitioners can consistently execute. Responding to the price movement when the break occurs requires only a well-designed systematic entry signal. Trend following is built for the latter. The market will tell you when the stable disequilibrium has resolved into a trend. You do not need to know in advance when that will happen.
Frequently Asked Questions
What is “stable disequilibrium” as described by Paul McCulley?
Stable disequilibrium is a concept describing market states where apparent stability masks underlying instability that is accumulating until it resolves into a large move. The market looks calm but the structural pressures are building. When the resolution comes it tends to be sudden and significant, creating exactly the kind of large directional move that trend following systems are designed to capture.
Can most traders successfully use fundamental analysis?
No. Fundamental analysis at a level that produces consistent trading profits requires deep specialist knowledge, large research teams, and years of focused study in specific market domains. PIMCO’s success with fundamentals reflects an institutional investment in expertise that is not replicable by most traders. The approach works for the small number of practitioners who genuinely master it. It does not scale to the broader trading population.
How does trend following bypass the fundamental analysis problem?
By reading price directly rather than analyzing the fundamentals that drive price. Market prices already reflect the aggregate analysis of every fundamental participant, including the most sophisticated institutional researchers. The trend follower reads the output of that collective intelligence from the price chart without needing to recreate the analysis. A trending price is the market’s verdict on the fundamentals. The trend follower follows the verdict.
Why is trend following a more accessible approach than fundamental analysis?
Because it requires only the ability to read price and follow rules, not deep specialist knowledge of macroeconomics, monetary policy, or sector fundamentals. The same entry and exit rules work across currencies, commodities, bonds, and equity indices. No market-specific expertise is required. The price provides all the information the system needs.
Trend Following Systems
Want to learn more and start trading trend following systems? Start here.
