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.