Date: 5 Nov, 2022
Why is investing/trading difficult? Because we are slaves to conventional thinking. We feel optimistic (pessimistic) when the majority are optimistic (pessimistic). So we dare to buy when it’s time to sell and panic to sell when it’s time to buy.
With a portfolio long on stocks, people tend to believe and express optimistic views. With nothing but cash, people tend to believe and express pessimistic views. This is human nature. This is why a top is full of optimism and a bottom is full of pessimism.
To have a successful investment career, one has to be confidently unconventional. It’s not easy. Most of us are just nice social animals.
On international monetary system
The world needs a central bank that takes care of the world economy. What we have now is a central bank (i.e., the Fed) that has global influence but (at least trying) takes care of the American economy only.
The international monetary system is deeply flawed. Exchange rates are too volatile. And the direction of volatility doesn’t make any sense. The dollar, with high inflation, trade, and fiscal deficits, flies to the sky, while low-inflation and trade-surplus currencies (CNY, JPY, NOK, etc) tumble.
Money managers only care about nominal returns. So we are seeing money flowing to the US when the US inflation is higher than its interest rates. Yes, the deposits at RRP and money-market ETFs are losing purchasing power.
On the Fed’s policy
Financial repression (negative real rates) is necessary for the US government to stay solvent. The Fed will eventually face the reality. It must tolerate high inflation and keep interest rates low.
It is great to know that policymakers are relying on a lagged indicator because you can predict the next policy move well in advance. Yes, I’m talking about the Fed relying on CPI.