Trade The Journey

Trade The Journey

Panic, Paranoia or Preparation!

Greetings! A lot is happening in the world today! Oil Price wars, a developing liquidity trap, plunging stock market, and the Coronavirus all happening at the same time.

You couldn’t have imagined this scenario even if you tried.

 

A liquidity trap is a new term to me and most likely unknown to many Americans. It’s a trap in which the Federal Reserves’ actions do little to inspire consumer confidence in returns. An adverse event is perceived to be either occurring or in the process of happening.

Due to this perception, people would rather hoard money than receive a return. Japan faced a similar situation in the 90s (The lost decade), which left an indelible mark on its economy. Those highs reached before the crisis have yet to be reached again.

Cryptocurrency and Gold both declined. Cryptocurrency I understand, but Gold has always been viewed as a storehouse of value. The traditional rules of market interrelationship are faltering.

The event that occurs before a crisis is seen as the causative when this is seldom true. Often small events that go unnoticed become a developing wave, and finally, a final push is given by a surprise event to the masses.

In one of the books, I’m reading it mentions that black swan events, although uncommon, happen more frequently than not.

Many people are reacting to this crisis by loading up on canned goods, water, and toiletries. In the past, the people waited for the President and White House to declare a state of emergency. When the government began to make efforts to blunt the virus, it was a preventive measure and a proactive action.

Instead of action, we saw a delayed reaction by the government even to acknowledge the Viruses’ presence in the United States. The markets begin to react, and as a forecast to future events, turmoil ensued.

The stock market fall made it to the evening news, and the public noticed. Judging by the public’s reaction, panic would likely follow, and it did. People begin to pull all of their money out of any investment that held the slightest bit of risk.

The federal reserve injected over one trillion dollars into the markets for Repos, treasury securities purchases, and other actions aimed at avoiding a liquidity trap.

Unfortunately, I feel this is a sign of the events to come. The coming events will reveal how strong or weak the financial markets indeed are.

With the current administration, it’s hard to tell what the outcome of this crisis will be. To say that the Coronavirus is the only crisis we face is foolish.

 

What am I to do in times like this?

Most likely, the prices of goods and services will fall, but so will my income. With a significant portion of my cash tied to investments, I could face a liquidity crunch in the future. If I take my money out now, I will do so at a loss.

Stocks are on sale with the bottom of the market, nowhere to be seen. If I begin to buy shares now, am I purchasing near the bottom?

Timing is one of the lesser-known skills of a successful trader. I think the market might see a short bounce this upcoming week. Based on my situation, I need to have access to cash. However, This is and will be a time to buy.

 

“Fearful when others are greedy and greedy when others are fearful.” – Warren Buffett


 

This week in Review:

Unless your willing to arrive at the store before its opening or wait in line to enter the store, most stores are inaccessible. Long lines and a frightened temperament grip the nation. Most news outlets are encouraging people to stay home to either avoid spreading the virus or prevent catching it.

This has helped to curb my expenditures a little more than usual. All of the fast food places are still open. I anticipate that at some point, a lockdown will occur to allow the US time to do something.

The critical question is, how will the economy be affected? How will we be affected by entire industries seeking a bailout?  How will the consumer handle this situation?

 

Will we take this event as a sign that we are unprepared for emergencies that aren’t exclusively financial?

or

Sweep this event under the rug and label it another close call?

 

The best thing for us to do is prepare for the absolute worst.

Scenario:

The economy does not recover, and the Coronavirus has spread to most of the population. A lot of people are choosing to stay home to avoid contracting the virus. They also are hoarding their cash. Investments and Risky investments are no longer attractive to the general public. Naturally, wages are reduced, and the spending that supported the economy earlier has collapsed.  The economy is in a freefall and there is no safe landing in sight.

How would you prepare? Think past purchasing toiletries and cleaning supplies.

I may have to reduce my investments, curb my expenses to the bare minimum, and continue to scour the market for attractive investments. At some point, the economy will recover depending on the severity of the economic downturn.

This week I’d like to give myself a “C“. Thinking about the potential damage these events can due to my financial portfolio is scary. Spending years preparing only to end up at the starting line alongside the unprepared doesn’t seem to be fair.

Such is life.

In times of economic peril, information and knowledge will serve as a currency and guiding light.

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