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Inflation and Recession: Today's Challenges and Trading Solutions Edit Delete May 15, 2008 0 comments Money
Inflation and Recession: Today's Challenges and Trading Solutions

I came across some information from one of my business associates over the last week and I thought it was suitable for our TEAM FXP traders to understand the importance of exceeding a minimum of 8% a year in their trading portfolio in order to stay ahead of inflation. Here is a more detailed assessment on why;

Inflation and Its Affect on Your Portfolio (US Traders Specifically)

At this time, interest rates are very low as the Federal Reserve tries to stave off a recession for the US Economy. In the last three years the US money supply has increased 30% from $10 trillion to $13 trillion and now inflation is out of control, although we are just starting to hear about it.

Here's why: two administrations ago a new formula was used to calculate the consumer price index used to measure inflation and, according to that formula, inflation is currently running above 4%. However, if you use the prior (old) administrations calculation you would find that inflation is currently running above 8% and there is more embedded inflation as money supply has increased at more than 8% per year. The bottom line is that if investors are not receiving at least 8% return on their investments, then they are losing purchasing power on their money, as true inflation exceeds the rate of returns currently achieved with corporate bonds, and Treasury Bills. For example, if a corporate bond pays 6% and true inflation is running at 8%, you are actually losing 2% of purchasing power per year. Everyone is aware of the much higher food and energy costs over the last year. It costs more to fill our gas tank. Investors can not afford to just let their money sit in cash or they are losing purchasing power of your currency.

Because all of our traders are learning the benefits of trading in the Forex market and are interested in financial matters and news, I trust that this is not the first time you have heard about the erosion of your purchasing power. I point this out because I feel that we are headed into some very volatile times and based on all those that I speak with they will trump what we have seen over the last 6 months by an order of magnitude.

Bernanke for the first time started to acknowledge a recession while many feel that we entered into one (albeit not under its technical definition) back in October 2007.

TEAM FXP: Solution for Recession and Inflation

You are in the business of trading. Take the necessary time to book your trading hours at the start of each week. Prioritize your learning and trading efforts and focus during trading sessions to squeeze as much learning and experience as possible out of the time. Apply what you learn, analyze and trade on your own outside of scheduled sessions to gain greater confidence in your abilities as a trader. Remember, this market is massive and you have to become malleable to the market, not vice versa. With all of the challenges happening, ‘recession or no recession', ultimately you are in the best place for potential in business. WHY? The currency market is the only market that is recession proof. If the USD continues to tank, it doesn't matter to traders as they have the ability to trade and profit from the rise and fall of the dollar in relation to the currency is traded against. I always wanted to be in a business that was recession proof, this is it.

As for inflation, whether at 4% or 8%, each of us understands the importance of increasing our trading portfolios. This is why we not only teach but take trades in the room as well, especially the Advanced trading room. Looking at the upcoming potential trades in two of the majors, I am pleased with the coming prospects in the days and weeks ahead. Both trades have profit to loss ratios greater than 7:1. This means if you put up just 1% of your margin in one of these trades and it hits its limit from its entry, you will make 7% on that trade versus losing only 1% if it's a miss (not withstanding a potential stop to profit move early in the trade to eliminate the potential of loss). If both long term trades hit their limits you could potentially increase your portfolio by 14% versus just a 2% loss. On two trades! This means you can put in entry orders and analyze as they kick in, versus trade hours and hours a day, a trading lifestyle not a trading life.

Russ Field

Trading Coach


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Comment by Lisa O on December 11, 2008 at 2:01pm
Today that we are in a stage of economic recession, it is important that we have some alternative when it comes to financial matter. Inflation and recession are related to each other, thus, as recession growing inflation will react in the same way. And as a result, more and more people are turning to payday loans in these trying times to meet their bills on time, like the mortgage, credit cards, or keeping the electricity on, the cars running, and food on the table. Things have been made even worse with mass layoffs going on. Adobe laid off 600, Viacom let go 850, NBCU let 500 go, and then telecommunications giant AT&T clipped 12,000 people off its workforce. These are despicable things, but they are the lesser of evils, if they keep these companies afloat. In the wake of this downturn, the banks, who were in part to blame for this turn of events, have also taken measures. Consumers have been bearing the brunt of most of these actions, which is ironic because it is precisely the consumers whose tax dollars were used to keep the large banking institutions out of trouble. Banks have been making credit more and more difficult to obtain, even to those with good credit. Fees for ATM use and overdraft or late payments have increased, in essence taking to the cleaners the very people who paid to keep these institutions out of the tank. However, some good may come of this, and it is a hard learned lesson. We, as a culture, have to learn about being more responsible with our debt, and with our credit use. Remember that payday loans are there if you need a helping hand. Click to read more on payday loans.

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