Globalization is still going to happen, just without the United States. Some like the president seem to think the size of the US economy means other countries will want to trade with the US. And yes, the American economy is big but collectively the rest of the world has a bigger economy.
And your tactic is doing well today!
This is the part that gives me concern for you. Again I know I don’t know enough to play how you play. And this time your not knowing worked well for you! But damn. You got put into a leveraged, meaning higher risk, position, without knowing ahead of time that was in play.
I go back to my very young days. I had finished junior year of high school and realized all I needed to graduate was US History over summer school. So I did that and had an unplanned gap year in an era that such was not done. Worked as a runner at the Board of Trade, and traded by running out of the floor to call in my own orders. In a buy position for wheat. Grain embargo rumors hit. Miracle of leverage I was up a shit ton by my young self metrics. Smart enough to not get greedy and got out. Next day rumors denied and continued denials. Markets limit down and trading halted. I would not have had my little lots filled for days. Would have owed more than I had. Of course a week or two or days? later the actual embargo happened … I wouldn’t have had the funds to last that long. (I am scared to look up an actual timing and check how well my memory tracks the real events timing!)
Short version. Leverage is scary. The idiot I was was lucky enough that it worked out well but I was just lucky.
You are no idiot. You know lots more than that fetal me did. And you are comfortable with the possibility of major loss, what with your pension and other considerations. I get all that.
But kinda knowing how it works with bets like this? It would not be my comfort level.
I agree completely. Puts are a valuable correction against exagerations and fraud (see Enron, for instance, and the subprime bubble, and Theranos and hundreds or thousands of other examples). The problem I see for small investors is that a short term swing in the price of a share can bankrupt you, and wild swings are in the cards in the present situation. The risk/gain balance is out of kilter.
Tesla has been the bane of many a short seller for years (ETA: Ask me how I know…). Mighty interests and powerful hands – and a bit of luck on Elmo Skum’s side and good marketing and the memefication of a brand and herd mentality and… – have kept it up IMO against reason. But the day of reconing must come, I expect that too. I myself am also short on tesla, but only with a small percentage of my investments. What you are doing is not evil at all. I would go as far and even call it socially beneficial. But it is very risky. I wish you the best of luck. I raise my glass to your determination. May the Force be with you! And the most important and difficult thing: May you find the right moment to change tack, and exit gloriously.
I think this is right, but I also think it does matter. Their are unique pros and cons that apply to the country who is the reserve currency. More pros than cons, too.
There is a lot of inertia in the USD being the reserve currency that will he hard to slow down or undo. But if I could ever imagine a situation that would slow it down, our current Gov’t policies and unpredictability would certainly look like the start of it.
What was it like pre-1944 when the Pound was the reserve currency? Why are there still so many different “territorial” currencies…what is the point? I went to Ecuador a long time ago and their currency is the USD. Why would more countries not do that? Just pride? Propaganda? That seems like a paper cash thing that I can’t imagine will last another few decades at any real scale.
whoa, sorry if I gave that impression, but I’m not making any sort of judgement on your actions. They’re not generally part of my investing strategy, but I have nothing against buying options or any other actions you have taken in the market.
I only meant to say that you seem to have completely changed your investment strategy. And really, this can be fine if you have a rational, well thought out investment strategy, while fully understanding the implications of your decisions. But you have readily admitted that you have entered certain leveraged positions without fully understanding the mechanism or how they fully work. You seem smart, eager to learn, and willing to take calculated risks for good returns. That’s great, I just want to ensure you to have a plan for both short term and long term investing so you have the best chance of reaching your investment goals.
Fair enough. I read a lot into a little. And I absolutely understand why I look like an idiot that lacks intellectual humility when I post stuff like “oh hey, ended up with 225k worth of gold ETF unexpectedly. That’s funny” it makes me look crazy and/or idiotic. And I could’ve definitely written it up in a way that made me look more savvy (I could’ve merely said my gold call was quite successful and left out the part about having unexpected shares in my portfolio) but I thought you guys might enjoy watching me stumble around at times since I’m trying to do unconventional things most people aren’t familiar with. I don’t mind being forward with details that might make me look like an idiot. The whole thing is a bit funny to me too.
To be fair, I haven’t done anything yet that has hurt me from not understanding that I can recall. Even with the GLD thing we’re using as an example, I can just immediately turn around and sell those shares and take the profit, which is sort of what I expected to happen automatically. But I understood what I was doing as far as putting a call on gold - how it would succeed, how it would fail.
I would like to clarify though that in a year possibly sooner I’ll be back to how it was before – mostly long positions, maybe taking 10-20% of my portfolio on picks I like. I’m not going to become a day trader or make wildly risky bets indefinitely. I was just trying to take advantage of what seemed like a predictable disaster that would probably crush typical long positions but give opportunity to bet against the US. But so far I’ve underestimated the “this can’t be REALLY happening here, can it?” factor which has mad the market basically price in maybe 10-25% of the economic destruction heading our way and made everyone extremely eager to spring the market back up at the smallest sign of good news.
I’m definitely not doing anything that requires great sophistication or subtle market prediction – I think my financial edge on the current market is that I’m willing to see that we gave a monkey a machine gun and he’s wrecking everything whereas the rest of the market is still in the “he’s not REALLY a monkey, is he?” And or the “we didn’t REALLY give him a machine gun, did we?” stage and I’m trying to stay ahead of the crowd based on that.
It makes sense for a country (or economic collective—EU) to have their own currency, because it lets them control the supply of that currency. They can have their own equivalent of the Federal Reserve which sets interest rates and does all of their manipulation to keep inflation in check, soften recessions, and such.
If a country’s currency is controlled by someone else, say because it is fixed to USD (or gold), then then they can’t make those adjustments based on local economic conditions.
If a country can’t trust themselves to manage their own currency, or don’t trust the next administration to manage it, then it is better to use someone more trustworthy’s currency.
Loosening the money supply by lowering interest rates or printing more money may be useful in a recession or time of high unemployment. If that knob can’t be adjusted, then bad times might run longer. If an idiot has control of the knob and turns it to “hyperinflation” then it is much worse for everyone. Better a prolonged recession than total economic collapse.
(Did I get this right? I only know things from years of Planet Money)
Thanks for the reply. That makes sense, but yea, you really need to trust those in charge with the levers. I think Ecuador did it because they did not trust those in charge.
To be clear, I don’t think it has to be the USD, I was just wondering why we haven’t “evolved” to a handful of stable currencies or something. I get pretty ignorant pretty quick with global currency stuff.
I sincerely appreciate your posts, a lot because of this reason. I don’t have much of a clue what you’re doing and all the details are very helpful. Thank you.
I called into Fidelity before converting to a margin account and had them walk through every step of the equation. They were very polite, informative, and willing to stay with me for as long as it took. No cost.
I wouldn’t call them every day, just for nonsense, but I wouldn’t be shy about talking to them.
And again potentially my ignorance … but staying ahead of the crowd for a jump up doesn’t require great timing. Several of my long term holds of personal picks that have done quite well significantly underperformed the market for a year or so or longer. There was opportunity cost that it wasn’t in a better performing choice but I could wait if I still believed my analysis still. Even add on a drop. (Some never turned around but let’s not talk about them!)
Shorting things? It isn’t enough to be ahead of the crowd; you have to be only just so much ahead of the crowd. It costs to hold that short position. Waiting a year, or two, patiently, is not an option. Waiting a month is expensive, yes? You don’t think that subtle market prediction but it is more subtle than … some of us … are capable of.
I actually agree here. I don’t think Trump deliberately crashed the market with the tariff talk so that he could then pump it later when he removed him. I think given how much Trump has been fixated on the tariff issue for decades it’s legitimate. However, he (or someone in his administration) knew that when he talked about a 90 day pause the market would go straight up, and either Trump or that person committed the biggest insider trading of all time. It’d unmistakeable how people suddenly bought calls 10 minutes before his announcement.
I’m actually on the Holland America Rotterdam. I decided a 14 day trip to Europe full of good food and drink would be a more fun way to go than a 14 hour flight. It’s quite a good ship with a good crew wand good food… And like 20 people under the age of 55. I hardly have any age peers. Oh well. Having a good time.
I agree with your point. I don’t think shorting is really an exotic bet. You’re predicting a stock will go down rather than up and that’s fairly easy to understand. Though I am unclear about part of it – I know that fidelity charges me 10% annualized interest from the money I borrow from them to make margin plays above and beyond the cash value of my account, I’m not seeing anywhere that I’m paying an interest rate on borrowing the shares themselves. Maybe I’m not looking at the right place, or maybe I’m borrowing Fidelity’s shares interest free? I’m not clear on this point. Does shorting always come with a lending charge, or are there instances in which you can short without paying a lending fee?
Now that I know more about how this works, I think there are instances where rather than shorting a stock I’d just make a put. It ties up less capital and doesn’t incur interest charges. Though there are instances when it isn’t a better move. Options contract are based on prices set by traders, which means they change with market sentiment. If the whole market believes Tesla will crash, the put prices will be very high, whereas the short prices will be whatever the stock’s current price is. There are definitely times when a short is smarter than a put.
IMO overall that’s a great summary. Bravo!
The upside to a small country like e.g. Ecuador using USD is that their own venal or corrupt politicians can’t destroy their economy by screwing up their monetary policy for electoral gain.
The downside while the USA is was sane is that by tying themselves to the USD, they import the USA’s monetary policy into their economy wholesale. Commonly the US enters & leaves recessions ahead of the rest of the world, who tag along a few months (or years) later. When US policy is sanely set, it’s set only with regards to US needs. Such that it’s wrongly set, or out of phase, with the needs of e.g. Ecuador’s economy. e.g. They’re shrinking while their imported US-made policy is contractionary, making their problem worse. Or they’re overheating, while their imported US-made policy is expansionary. All of which tends to amplify the booms and busts of their small and rather fragile economy.
The BIG downside is when the USA is ruled by a toddler tyrant and US monetary policy is simply insane. Now the Ecuadoreans are being taken for a wild ride they want no part of. But cannot escape. Better home-grown economic vandalism than imported economic vandalism.
Can someone help me out with something:
The Fed sets the overnight rate. I know this has a knock-on effect on other rates, but my understanding is that most rates regular people interact with are based off the 10 year, which is set by what the bond market demands. So the 10 year didn’t suddenly rise last week because of any overnight rate issue, but because the market was losing faith.
I’m asking if I have this right, because Trump is back on his tantrum about the Fed lowering rates, and I’m trying to understand to what degree he would even get what he wants if they DID lower rates.
That is not my understanding. I understood that consumers rates are most often pegged to prime and prime follows the Fed rate.
The Fed sets one particular overnight rate, the Federal Funds Rate. This investopedia article explains it pretty well. The Federal Funds Rate is the rate at which banks lend each other money over night.
Banks are required by law to hold a minimum amount of liquidity at the Fed to ensure that they are solvent. This amount is a token for their liquidity. In the U.S., the Federal Reserve dictates the amount of cash, called the reserve ratio, that each bank must maintain. Historically, the reserve ratio has ranged from zero to 10% of bank deposits. The end-of-the-day balances in the bank’s account averaged over two-week reserve maintenance periods are used to determine whether it meets its reserve requirements. If a bank expects to have end-of-the-day balances greater than what’s required, it can lend the excess to an institution that anticipates a shortfall in its balances. The interest rate the lending bank can charge is the Federal Funds Rate. That is the minimum amount of interest a bank expects to earn overnight (very short term) in a given moment. The rate influences short-term interest rates, albeit indirectly, for everything from home and auto loans to credit cards, as lenders often set their rates based on the prime lending rate. The prime rate is the rate banks charge their most creditworthy borrowers—a rate that is also influenced by the Federal Funds Rate.
Until recently the US government was considered the most creditworthy borrower of them all. They could print money if needed, after all. The risk of defeault was negligible. Therefore, the interest rate the Fed set was de facto what the USA paid in interest for their debts (Federal Bonds).
In recent days the rate the markets have demanded for Federal Bonds has been higher than the Federal Funds Rate. Trump believes that if the Fed lowers the Federal Funds Rate this will automatically translate in lower interests for US debt. The markets are signalling something different. The chairman of the FED, Mr. Jerome Powell, is aware of this and he has said so on the record.
Now: who do you believe, Mr. Powell or Mr. Trump? Are the USA still the most creditworthy borrower in the world, or should lenders expect a premium over and above the Federal Funds Rate? If they do, then the Fed lowering the Federal Funds Rate may not be enough for the Trump administration (and I use this term loosely) to borrow as cheaply as they would like. Expect many more tanTrumps from the beserk toddler in the White House, ketchup on the walls and all.
Other countries have similar arrangements. In the UK the central bank sets the so called Libor (London inter-banking offering rate: the British “Federal Funds Rate”). In Frankfurt it was the Fibor (Frankfurt inter banking etc.), in Madrid the Mibor, and so on. The X-ibors of the Euro-zone have been merged into the Euribor, which is set in Frakfurt by the EZB. Still, despite having only one Euribor at any given time, Germany pays less interest than Italy, Italy pais less than Greece, despite all three being Euro-countries. The difference is called the spread and is a closely watched indicator for the financial health of the Euro countries.
Greece would love to pay the Euribor for its debts, but the markets are not prepared to lend Greece money at that rate. So it pays more (the spread). It seems to me that the USA expects to pay the Federal Fund Rate, but the markets are readjusting their risk assesment and are mentally putting the US debt no longer in the excel box labelled “Germany” but in the one labelled “Italy”, trending towards “Greece”.
That is very bad for the USA, which is already paying more interests for their debt than they spend on the military, and that is saying something. If the Fed loses its independence, that is, if it is forced to set the rates acording to the executive’s whishes and not according to economic reality (however you measure that), the spread between the Federal Fed Rate and the rate the USA has to pay effectively for its debts may widen. Perhaps the debt will still carry a nominal interest rate of 4.5%, but it will lose value, perhaps, say, from 100 to 90, so that the effective interest rate will slide upwards (in this example it goes from 4.5% to 5% for one year. Adjust the figures and you can get any number you want). trump will be very disappointed then, and holders of US debt will lose a lot of money. Trust in the USA will erode even more. That is the way vicious circles start.
And nobody knows for sure how they stop, or when or where. Financial markets hate this insecurity and unpredictability.
Very informative.
Now, if the rate the US pays rises substantially, and the Fed rate is pushed down “improperly” (meaning, not in accordance with what Powell thinks is right), how will that affect the rates consumers see?
It will depend on their creditworthiness, but as the Federal Funds Rate is the minimum the banks can expect to earn overnight they will not borrow below that. It that rate is widely believed to be too low, all banks will demand a premium interest on top of the Federal Funds Rate from all customers. Suppose, for the sake of the argument, that the “correct” rate is 5%, but the Fed must set it at 3% because trump dictates so. Still the markets will demand 5% from the USA. As consumers are not more creditworthy than the USA (except, perhaps, a couple of very rich oligarchs) I doubt they will get better terms than the US governement. Banks are not that stupid: it’s not personal, it’s only business. Why would they offer a lower rate to a private individual than they offer the governement? They would be losing money, and they would open possibilities of arbitrage that someone else would take advantage of.
So I guess that in my example the official rate would be 3%, the real rate the government would have to pay would be 5% and the rate the consumers would pay would be above 5%, significantly more for “sub-prime” consumers. And long term interest rates would probably be even higher, at least at the beginning, to cover for possible changes for the worse in the economic outlook. Which brings us back to the vicious circle. 
ETA: Where I wrote EZB I meant the European Central Bank, sorry for using the German acronym. And sorry for the other typos too, I will never learn to write slowly and to pay attention. Still, what I wrote is, I believe, in essence correct. And investopedia is very useful for basic economic concepts.
ISTM that the loan length matters too?
Correct me along the way.
Ten year is based on confidence of expectations of what interest rates will do in the future. Usually paying more than short term loans but recently markets were giving better rates on money markets than on long term bonds. An expectation of future rate drops.
Under usual circumstances ten year rates rising would be based on expectations of future increases (so requiring a bigger premium to commit). Now is different. Now it is because of a move to dedollarization.
Yes?