None But The Brave

Higher rates show Feds true colors

What about Ben? Two stories.

There has been a lot of chatter about the Fed and how their QE2 strategy is failing, but is it?

The government has just agreed to borrow $600 billion dollars from them. That is just a down payment. The government has to refinance 30 % of it's debt this year and 50 % of it's debt over the next 3 years. At present, the government pays approximately 1 1/4 % on the exiting debt. I haven't heard the Fed guarantee the Government a low rate on the new refi loans, just market rates. The higher rates go, the more money the federal reserve banks make.

The Government is the perfect victim, they will always make the payment on time and in full.

Think about it, after an orgy of greed and gluttony at the home mortgage trough. When all those bubbles gave them indigestion. The Fed printed money to bail out it's own banks. At the same time they turned predatory, forcing competing smaller banks to close or be absorbed.

They said it was to make the banks whole again, so they could start lending to mainstreet and get the economy back on track. That was a flat out lie and never the intention at all. The money was to be used to jack up the price of assets backing the existing loans that nobody could repay. Do not forget that when a debt goes bad, the bank grabs the underlying asset that secures the loan. The last thing they want to see are deflating asset prices on underlying collateral.

They did such a good job of ramping up the price of assets, that JP Morgan has gone from insolvent, to cornering the copper market.

In this latest scam, they can lend trillions of dollars to the one entity that will be sure to service the debt and they can jack rates higher at will. It is now up to the government to get the economy going via fiscal policy. They will be squandering money hand over fist and there is no way they will ever pay it back. The banks will get their cut and they have no skin in the game. This is going to make the housing bubble con look like small potatoes. So far, the Fat Boys are way ahead of the curve. Trade on what they do, not what they say.

I am writing this article because the situation we are in, will change peoples lives forever. You are either on the up escalator or the down. The wealthy and the well connected are on their way higher. The rest are on their way down. That is well documented. What is not documented, is that god hates a coward. If you sit paralyzed with fear, you are going down.

I teach people to trade and invest. I work with people in many different circumstances. They all have varied emotional strengths and weaknesses. I want to tell you the story of one of my students.

Ben's story

Back in August I received an Email from a young man named Ben. He said he had been reading my articles on line and was hoping that I could help him. He was smart and believed in the hyperinflation story. He thought that investing in "things" that would benefit from what the banks were doing, was a good way to improve his future. He had borrowed money from a family friend and was heavily invested in various inflation hedges. When I say heavily, I mean when he told me his position sizes, my jaw dropped.

At the time, the guru chatter on the web, was that the stock market was about to crash. He was positioned to take advantage of the coming collapse. He was leveraged double short the S&P, using the Ultra bear fund. He was also long the vix because he was expecting a big ramp up in the fear premium as stock priced collapsed. He had already made money on both positions because the market had taken a hit and was lower than where he had sold.

The reason he came to me was that he had recently seen a large draw down in his account. I believe it was 30- 40 %. Don't forget, it was borrowed money and quite a large sum. He was happy that he had nailed the stock market short, thereby regain some of the lost ground in his account. Yet he knew that he need a way to better manage those times when he got things wrong.

I had just written an article for FSN at that time, suggesting there would be a nasty short squeeze in the stock market. I think that scared him. He told me he was a big picture guy. He wanted to know if I could help him with trading technique and risk management.

There was something that impressed me about him from the start. The size and leverage of his positions told me he was serious. He was confident and he had guts. Even with the large draw down, he still believed in himself.

The problem was he was getting pull into the internet market chatter and not following the Fat Boys.

The first question I asked him was. Did he have any kind of stop loss on his short positions?

He said, he did not, but he was sure that prices were going lower. I said "What if you are wrong? What if they go up? What will you do?" He didn't have an answer. I think I said something like, "That is the reason your account has seen the draw downs."

I went on to give my usual lecture. Saying that looking at the big picture fundamentals was ok, but when you use leverage like he was doing, it only takes one mistake to kill your account and gut your confidence so badly, it never comes back. You must have a plan before you make any trade. Take care of the pennies and the dollars will take care of themselves. In other words focus on the trigger points and the stop losses. Plan to let your profits run when you are right.

I suggested he stay long his gold and silver, but cover his short position in the stock market and the long position in the vix. I showed him why stocks were going to surge higher. At first he resisted the idea of covering his shorts. Then, after working together for a couple of days, he informed me that he had bought back his shorts. Right on the lows as it turned out. We continued to work together for several weeks. The market began a multi month run as you can see. With no stop loss and no plan, a move like that may have ended his career.