What’s the biggest risk to your investment returns on an annual basis?
Central bank policy? An economic depression? Lying corporate executives? Shoddy advice from your Edward Jones guy? Nope. All of these are real risks for sure but they all come in a distant second to just one.
Your ego. Managing our egos is a constant struggle for all of us in life, and trading is no exception.
There is nothing our ego loves more than juicy gossip and rumors. Especially if the rumors make us feel better about our own circumstance or is already being accepted by a large group of people. It’s the ego that wants to be a part of the crowd rather than standing alone and blazing its own trail. Let’s face it, it flat out feels good to be on the side of the majority.
Time and time again, investors readily buy the rumor only to get their face ripped off when the real event occurs. There is also a crowd think dynamic to: buy the rumor, sell the news. It seems like the more people that buy the rumor, the easier it becomes for new people coming along to buy in as well.
That’s why it’s so damn profitable to go against the crowd.
The problem is we aren’t predisposed to go against the crowd. Our ego and our humanness, gets in the way of profitable trading.
Last week, risk assets around the world went on a tear, led by the collapsing yen and soaring global equity markets based on the latest monetary policy rumor.
Apparently Ben Bernanke, who incidentally now works for Citadel, a large hedge fund, has urged the Bank of Japan to unleash “helicopter money.”
This type of monetary policy involves the central bank funding government fiscal spending directly, by issuing government bonds that would all be purchased by the central bank itself and then converted into zero-coupon perpetual bonds on the secondary market.
The yen crashed 6% on the rumor that this type of policy might be in play. How much of a SHORT position do you think Citadel built while Bernanke was on the 6,300 mile flight from Citadel headquarters in Chicago to Tokyo, Japan? But I digress.
There is only one small problem with this rumor-fueled risk rally - helicopter monetary policy is illegal in Japan. It is prohibited by law for the Bank of Japan to directly underwrite government debt, which means that parliament would need to revise the law before this could even be on the table as a “tool.”
Re-read that last paragraph again. Investors around the world bought up risky assets for a whole week on the back of a monetary policy rumor that isn’t even legal to implement!
But let’s put the legality issue aside for a second. Let’s think about what “helicopter money” would mean in a real sense. It would basically allow a country to spend as much money as it wants without ever having to pay it back.
Does it sound like a good idea to give politicians the ability to print and spend as much money as they want to?!
You might as well eradicate the phrase “fiscal responsibility.”
It doesn’t shock me in the least that central bankers and politicians would explore this type of monetary Black AMEX card.
What blows my mind is the feeding frenzy I witnessed last week as every major equity market I monitor was pushed higher based on this lunacy.
I can’t believe that people would think this was a good idea if they really stopped to think about what helicopter money would mean if it actually was initiated.
Do people honestly think you could give politicians this type of spending ability and expect them to be able to stop themselves from using it?
That would be like giving coke feinds a kilo of cocaine and telling them to just have a little and give back what they didn’t need.
For parents with teenage daughters, could you imagine the teenage equivalent of helicopter money?
I can promise you if I set my daughter up with this type of monetary policy, by the end of the weekend, I’d be the proud owner of both a Lily Pulitzer and a Vineyard Vines store. Because you can never have too much preppy clothing.
I hate to spoil the party for all of the rumor buying investors but put simply, helicopter money allows the Bank of Japan to buy huge amounts of Japanese Government Bonds and allows the government to deploy fiscal stimulus.
Does that sound familiar?
It should, because they’ve already been doing it for years, and it isn’t fucking working!
Why else do you bring in a guy with the nickname “Helicopter Ben?” It’s not for an intimate book signing dinner. Bernanke’s book should have been called “The Courage to Burn the US Dollar like Princess Shireen of House Baratheon” rather than “The Courage to Act.”
Rational people wouldn’t buy into this type of crazy rumor but it feels really good to be with the “in” crowd. Our ego desperately wants to belong and it controls your decisions more than you probably are aware.
Even the rational people who weren’t led around by their ego on Monday or Tuesday, by Wednesday it was getting harder and harder not to believe the rumor and buy in. “Everyone else is doing it,” the ego says, “you don’t want to miss out, do you?”
If it wasn’t ego and rumor buying then how in the world did Eurozone equities turn out to be one of the better performers last week, gaining over 4.5% and now retracing over 60% of the Brexit losses? It’s because the Eurozone has been fixed in the last 3 weeks, right?
Adding to the absurdity, Greece and Turkey were the top two performing equity markets. If you want to buy into a rally led by those two countries, be my guest. However, it would be more fiscally responsible to spend that same money on a suite at the Bellagio, a night at the craps table, and bottle service at TAO.
Speaking of buying rumors, last week traders were pricing in an 80% chance that the BOE would announce easing measures at last Thursday’s meeting. Wrong! It wasn’t even close, the BOE voted 8-1 to keep rates steady where they were.
When traders realized that buying the rumor and being in the majority had led them astray it was too late. They were caught wrong-footed. The Cable snapped back all of the prior week’s 2.5% losses in minutes and yields immediately spiked higher as Gilts sold off and retraced 2 weeks' worth of gains.
That’s the problem with mindlessly accepting a rumor to be true, or deriving a sense of security from the fact that everyone else is believing the same thing. By the time you realize the rumor wasn’t true, guys like me are taking profits while you’re scrambling to contain losses.
Remember, in life and in trading, there are always 2 sides to every story and there are always 2 sides to every trade. If too many people are crowding onto one side of a trade or you find yourself mindlessly going along with what everyone else is saying, it’s time to pause and reflect.
I encourage you to go against your “humanness” and what makes your ego feel good.
Evaluate the circumstances for yourself and come to your own conclusion, separate from the group. If you still agree with the group, then go with it. At least you’ll know that you put your own filter on the situation and you didn’t just take someone else’s word for it and blindly follow the crowd.