Bully in the playground
Lula and the Carnival

There is a lot of chatter around about the need by the Federal Reserve in the United States and the Bank of England here to expand its Quantitative Easing operations. This a type of economic policy that Central Banks undertake when they have run out of other ideas and interest rates have fallen to near zero. In theory it is a good plan. The Central Bank buys securities from Commercial Banks in exchange for cash. The Commercial Banks, flush with cash, then lend that to you and me. We take the borrowed money and invest in businesses and generally spend. This boosts the economy in the same way as a set of jump leads helps a car with a flat battery.

All well and good I hear you say. Someone lends me money, I buy something and the economy improves. That is the theory. Well what happens if you and me have soooo much debt already that we really don’t want to borrow any more. As you get older you realise that you do not need so many new things to survive. You manage with the things that you have. Do you need 3D televisions when you are 60? We as a population are aging fast and so we do not need as much new “stuff” as when we were younger. So we prefer to try and pay some debt back, especially when the job outlook is poor and the Government is telling us they are going to cut back so even public sector jobs will be hard to come by. What happens then? Going back to the car analogy the battery is so flat that we might get the car started but it will stall again very quickly.
Now what? The Central Bank has to change the perceptions of the public. This is what all the noise and chatter is about in the newspapers. The Central Bank has to persuade you and me to stop paying off debt and borrow more.
Is that likely? If you are convinced that inflation is coming ( a rather large IF!) you will borrow money to buy things NOW because you will have to pay more for them in the future. But if you are retired and living on a pension you are more likely to be worried that inflation will ruin your pension and so you save even more. Forget buying more stuff, you want to save to survive.
This is why the Bank of England has to become the BULLY IN THE PLAYGROUND. It has no choice. THERE WILL BE MORE QE, A LOT MORE. The Bank of England will try to force us to spend more money. Hence, Governor Bean on the radio the other day encouraging pensioners to spend their Capital. Not sure that is either wise or acting prudently.
THE END GAME HERE IS INFLATION IS COMING – DON’T FIGHT THE BULLY. The real issue is when? Watch this space!

LULA and the Carnival

Think of Brazil and your thoughts turn to sandy beaches, attractive young people, carnival and rather a lot of forest. The country is exciting and vibrant – a cocktail of the exotic. In finance too there is a buzz in the air. The country has weathered the global financial crisis well. The Brazilian Breal has been soaring, economic Growth is around 8% per annum and they are hosting the Olympic games in 2016. According to Bloomberg which tracks the interest rates of over 50 countries, the interest rates in Brazil are the fourth highest after Lebanon, Pakistan and Venezuela.
This optimism attracts the so-called Carry Trade investors. These investors borrow in a currency with low interest rates and invest in a country with high interest rates to pick up the difference. Hence the attraction of so-called Lula Bonds (Brazilian Real denominated bonds named after their colourful President) that currently yield around 11.7%.
There is a snag of course. The currency has to remain stable for the idea to work. This time around the rally in world stock markets and asset prices generally has benefitted Brazil. The Real has risen (witness the chart below against Sterling).

However, in the world of finance there is no such thing as a free lunch. Higher yields are higher risk. When the sentiment turns against Brazil for whatever reason the correction will be sharp and dramatic. This is the way of markets – slow to rise and quick to fall. Enjoy the high rate of interest – If things go wrong I hope that you get your money back!

Beggar thy neighbour

On the subject of Brazil, the Finance Minister was on the wires this week complaining about everyone else!
Apparently he thinks that there is a plan amongst the struggling economies of the world to export all their problems. Well if he thinks that the Brazilians need to be worried about sending our English football team over there I can reassure him now! On the other hand we do have a few other problems and I think that he has a point. The UK, via the Bank of England (those folks again!), has made no secret of their desire for a lower currency. It might not help in the long run but short term it makes our exports more competitive and makes London Real Estate look really cheap. This all goes to help the economy and it really needs that help at the moment. We are EXPORTING DEFLATION elsewhere.
This means that successful countries like Brazil, Switzerland and Australia all have rapidly rising currencies as we try to send our deflation there. This will have consequences. At some stage their economies become so uncompetitive internationally that it leads to a recession. This then leads those countries to pursue lower rates and expansionary fiscal policies to maintain growth domestically. That way the whole world ends up with economic stimulus. At different times mind you, but this is the only outcome possible.
ALL THIS WILL LEAD TO MORE CURRENCY AND INTEREST RATE VOLATILITY. Asset prices will continue to be very choppy for the foreseeable future while we work off the problems. This is not a good time for the “Buy and Hold” type of investing
You need to have a disciplined approach to investing.
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Until next time….

If you are interested to become a forex trader or stock market investor, there are many online investment opportunities that you can try. If you are a serious investor, you can conveniently trade online regardless of your geographical location, as long as you have access to a computer and internet access. However, if you are a neophyte trader, you may end up committing mistakes that can cost you big losses. You can minimise mistakes and risks of losses if you have a good and proven system of trading.

One excellent investment opportunity that you can try is stock market day trading. It had its boom during the 1990’s but it is now abandoned by amateur traders because of its complexity and high investment requirements. There are also fewer opportunities available for this type of investment but many highly skilled and professional investors can still find excellent investment opportunities.

As the name suggests, day trading is stock market trading done during the day. It involves the buying and selling of securities or financial instruments, such as stocks, within the same day before the market closes. Its main advantage is that profits can be maximised because positions can be closed when the stock prices are advantageous to the traders. Positions cannot be affected by overnight fluctuations.

Another excellent investment opportunity for new traders is forex trading. The foreign exchange market is the largest financial market in the world with more than $1.2 trillion worth of daily transactions. It is now the new lucrative investment market for new investors. Although this market was traditionally accessible only to banks, corporations and big investors, it is now open to casual investors. You do not need to be really rich to invest in this market.

The forex market is different from other types security markets because it does not trade using a fixed exchange rate. It is also not dependent on a particular or centralised or localised trading place. Its operation is worldwide. Currencies are primarily traded between central banks, commercial banks and other non-banking corporations. Hedge fund management firms, personal investors and speculators also play in this market. Since 1995, smaller investors gained access to this market because of the lowering of the initial cash requirement to open an account.

The population of traders in the forex market dramatically increased as a result of the lowering of the initial cash investment required. For as low as $300 an investor can already open an account. The need for forex trader training seminars and reference materials also increased.

However, before you open a live trading account, you can take a free forex seminar to gain basic knowledge and skills. Many online brokers also offer free dummy or practice accounts for training purposes.

You may also enrol in a formal forex course but there are advantages and disadvantages. A forex course that is intended for beginners is usually a crash course that focuses on the practical aspects of currency trading. Less time is devoted to theoretical aspects, such as history and economic models of the currency market. Another main advantage of enrolling in a currency trading course is the technical support, which may be accessible online or trough phone.

On the other hand, one disadvantage of enrolling in a currency trading course is the expensive tuition fee. Another disadvantage is the narrow scope that may only be largely based on the practical experience of the instructor. Various situations actually need different strategies. You may need to modify your approach depending on the circumstances.

The forex market offers a lot of opportunities for investors and traders to make maximum profits on their investments. However, there have been plenty of individuals who have been too eager to jump into the business without knowing the most common pitfalls, resulting in massive losses. If you are starting out a career in forex trading, read on to find out the mistakes that you need to avoid in order to become successful in your trades.

                        

The first common mistake that many novice traders commit when trading in the forex market is investing more than what they can afford or what they can afford to lose. Remember that no matter how seemingly profitable a trade is, you should not just gamble all of your savings, expecting that it to double. Similar to other businesses, encountering losses is inevitable and always possible so you should make sure that you are able to properly manage the risks involved and the capital that you are using.

 

You should also avoid becoming too attached to the trade. If you have made a trade and you are already losing money, you need to get out of it. This is a common mistake that many traders commit as they have allowed themselves to become attached to a trade, believing that it would probably turn around sooner or later. The best way to ensure this would be to set a stop loss for each of the trades that you would be entering into. If a certain trade you have entered is losing, you could just move on and go with another currency trade.

 

Another pitfall in forex trading would be being overconfident in the trades that you would be making and in the behavior of the market. You should not just assume that a certain trade is guaranteed to be successful or that the market is heading towards a certain direction. Keep in mind that anything is possible in the foreign exchange market and the only way to protect yourself and your investments would be to be knowledgeable and updated on the trends and the fundamental principles which govern them and the market. You could also consider using forex indicators as well as a good forex trading system which would work best for you.

 

Lastly, another important mistake that you should avoid would be starting to do forex trading without sufficient knowledge and training. Many successful traders in the currency exchange market recommend beginner traders to take up an effective forex trading course that would be able to provide them with the information and training needed to understand the concepts and strategies on how to maximize profits in the forex market. Such courses are available both online and offline. You could also consider finding a coach or a mentor who is knowledgeable and experienced in forex trading and is willing to share his or her expertise in the business. Through receiving one-on-one coaching through a forex trading course or a mentor, you could study which trading techniques would work best for you and your trading style.