Welcome to another week of The Enlightened Trader Newsletter… Have you ever noticed how some people just do things without really thinking about the consequences down the road?
Like wild teenagers who do what feels good now without thinking through the consequences.
This seems to be exactly how the powers in the US financial system behave… making knee jerk decisions and doing what makes people happy now without thinking about the future consequences. It has been happening for years – all the wall street bailouts and bank rescues that happen because they are ‘too big to fail’… The trouble is bankers are like teenagers (and puppies)… if you reward them with bailouts and bonuses when they make stupid decisions guess what happens next?
More stupid decisions!
I really believe in the power of the free market – if a company, bank, or individual makes stupid decisions, they should have to live with the repercussions of those decisions. That is the only way good decisions are made because everyone is incentivised to make good decisions.
The financial system has been rife with moral hazard for the last few decades because of the bailouts justified with ‘too big to fail’.
My theory is that the only reason they are now too big to fail and need a bailout is because they knew they could make risky bets in the first place and get bailed out.
Now we are stuck with the Fed not being able to raise rates as much as it needs to in order to control inflation because the banks will collapse.
Why? Because for decades now we have been in an artificially low interest rate environment (because the Fed has been trying to kick the can further down the road), so banks have been chasing yield by investing in longer term riskier assets that have been getting pounded now that rates are going up. So with rising rates to combat inflation US bank balance sheets deteriorate because of the declining value of their long term bonds.
This was hidden for a while because of another stupid rule that said the banks didn’t have to mark to market the value of long term Government bonds on their balance sheet; they were allowed to record them as “hold till maturity” and book them on the balance sheet at par value… this was all fine and dandy when rates were held artificially low by the Fed, but now that rates are rising and the real (mark to market) value of these long term bonds declined (a lot), it became apparent that there was a huge discrepancy between the actual value of the asset and the value recorded on the balance sheet.
The reason it became apparent is that one of these banks had to sell some of the long dated bonds and take a loss… which made everyone panic… and lead to a rush in withdrawals… which is very bad for a bank!
And why did all of this happen?
Because we have a bunch of ‘teenagers’ making decisions about the economy without thinking through the future pain their decisions may cause. So they make decisions that feel good and avoid economic pain now (kick the can down the road), and when these problems come home to roost (like in the last week) they are trapped and all they can do is scramble to kick the can again before the whole system falls apart.
Sometimes you just need to take the medicine, even if it does taste like crap and might be unpopular.
I just hope that at some point the powers that be will realize that the reason capitalism is so great is that the free market solves problems like this and big government interventionalist behavior just screws things up.
So now we still have inflation. The Fed’s hands are somewhat tied because they can’t raise rates as much as they need to control inflation and they just had to print a bunch of money to save the banks (again!!!) which will lead to more inflation which is now hard for them to control.
That is why we don’t let teenagers make life-altering choices… they end up in crazy situations like this.
So what can we, as individual traders do?
From my perspective, there are several things:
- Keep our risk low: We don’t know whether this latest move will prop up the market or some bigger panic will come sending us into a fresh downtrend. I just don’t think this is the time to be leveraged or aggressive.
- Be ready to go long or short: I currently have both long and short exposure. Ensure your systems will ride the winning direction and close losing trades in the wrong direction (all the systems in the Trader Success System do this).
- Diversify into multiple markets: US stocks are uncertain, but if you also trade Aussie and Hong Kong stocks, Cryptocurrencies, gold, commodities and own property then the uncertainty affects you less. I know not everyone can afford to do all of these things, but you can start moving toward diversification, right?
- Don’t Panic! If you trade systematically, there is no reason to panic, you need to keep your composure and follow the rules. We don’t know how this is all going to play out, we need to trust our systems to guide us through… because let’s face it, with this shit show our emotions will certainly get the better of us if we don’t have a system to follow!!!
- Watch our spending: If we live beyond our means in an uncertain environment, then we expose ourselves and our families to unnecessary risks. Make sure you have a buffer/contingency fund to fall back on if something happens.
- Learn to trade systematically: With so much uncertainty, any form of discretionary trading is likely to be disastrous. Learning to trade systematically with The Trader Success System will help you navigate these uncertain times, control your risk, and diversify your trading Long/Short and over different Markets / Strategies / Timeframes to help you survive this uncertain period and come out of it ready to prosper and really grow your wealth when the market picks a direction (whether that is up or down, I really don’t care as trading systematically we can make money either way).
I hope that helps… send me a message if you have any comments or questions about the above and I’ll help you out.
Trading Tip of the Week
Trading is a game and the way we score the game is by the money in our account. Sometimes we win a turn and our account goes up; sometimes we lose and our account goes down. When we play the game of trading we don’t win by looking at every single trade we make and trying to win on that trade… the way we win is by having a good strategy (e.g. Trend Trading), and a way of following that strategy (a backtested trading system). Once we have these things, if we follow the strategy and system then over time we will win more points (money in our account).
Thinking about trading as a game is powerful because we are focused on “How can I trade better to win more points?” rather than “How can I make more money?” Focus on money is almost always psychologically and emotionally charged, whereas focusing on points is not.
Trade because you want to master the game!
Have a strategy backed up by a system, follow them religiously and over time you will win the game 😉
Student of the Week
This week I want to highlight several members in The Trader Success System who are making fantastic progress. I know they are making great progress because of the amazing questions they are asking.
The members I am especially proud of this week are Darcy, Brett and Shaun. Their questions have consistently grown in sophistication, showing their massive growth as traders. Trading is a tough endeavor because we don’t always feel like we are making progress (especially if we fall into the trap of measuring progress by looking at the number of dollars in the bank) because our accounts go up and down. But the questions traders ask tell a much clearer story.
After years of helping traders succeed, I have noticed that the best indicator of their growth is the nature of the questions they are asking. Take these two traders:
- Trader A doesn’t ask any questions and tries to figure out everything on their own… I guarantee that their growth is slow and frustration is high. Their risk of quitting is also high.
- Trader B leans into their mentor relationships, shares progress and asks questions regularly…not just out of necessity but out of curiosity. This trader has huge personal growth in both skills and confidence and it is only a matter of time before their account starts to show it.
Be like Trader B… Be like Darcy, Brett and Shaun and find a mentor, lean in and learn, ask questions along the way and you will be amazed how much of a trading master you can become!
I also wanted to highlight two more members who have made a huge leap forward this week.
Ross and Craig have implemented one of the short side systems from The Trader Success System and now have joined the ranks of long/short systematic traders. This is huge because, as you may have realized, markets don’t always go up – there are bear markets and you can make money in a bear market if you know how to short stocks. Well done both of you!
News from EST
We are continuing our refresh at Enlightened Stock Trading and this week we have released our new Products and Programs page on the website.
This page showcases all of our free and premium programs and highlights two new programs that will be available very soon. Click through and have a look and let me know what you think.
If you haven’t made use of our free resources then you should absolutely do that… If you have been sitting on the fence hoping that the markets will recover and your buy and hold stocks will finally start making you money then I would encourage you to join The Trader Success System because buy and hope is not a strategy – following a diversified portfolio of systems is a strategy!
On the Home Front
Did you know there is an online course for just about everything?
Many moons ago my wife Stephanie and I took ballroom dancing lessons. It was great at the time, but we can’t remember anything now… anyway so on Valentine’s day (which we don’t celebrate – don’t get me started on the commercialization of everything 🙄) I was scrolling on Facebook and I saw an ad for at home dancing lessons. So I got it and surprised her… it is an app that contains dance lessons and you project the app to your TV screen and have date night dancing at home. I was skeptical, but it really has been fun!
I hope you are well and staying safe in the markets. Let me know if I can help you with your trading in any way.
Founder, Enlightened Stock Trading