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  • What is a Stop-Loss in the Stock Market: A comprehensive guide

    Introduction

    When it comes to navigating the turbulent waters of the stock market, investors are often in search of reliable tools to safeguard their hard-earned capital. One such tool that stands as a shield against potential financial storms is the “Stop-Loss in the Stock Market.” In this comprehensive guide, we will delve into the world of stop-loss orders, explore how they work, their benefits, drawbacks, and why they play a pivotal role in risk management in the stock market.

    Understanding Stop-Loss in the Stock Market

    What Are Stop-Loss Orders?

    At its core, a stop-loss order is a protective mechanism used by investors in the stock market. It serves as a predetermined trigger that automatically sells a stock when its price falls to a specified level. The goal is simple: to limit potential losses.

    Stop-loss orders work by allowing investors to set a price point below the current market value at which they are willing to sell their stock. Once the stock’s price hits or falls below this predetermined level, the order is activated, and the stock is sold automatically. This can be a valuable tool to prevent substantial losses during market downturns.

    It’s important to note that there are two primary types of stop-loss orders: fixed stop-loss orders and trailing stop-loss orders.

    1. Fixed Stop-Loss Order: This type of order specifies a fixed price at which the stock should be sold when the market reaches that price point. It is a static approach to loss prevention and remains at the set price until manually adjusted or canceled.
    2. Trailing Stop-Loss Order: A trailing stop-loss order is more dynamic. It is set as a percentage or a specific dollar amount below the stock’s current market price. As the stock’s price rises, the trailing stop-loss order adjusts upward as well, maintaining the specified percentage or dollar difference. However, if the stock’s price falls, the trailing stop-loss order remains in place until triggered, allowing investors to capture more gains while still protecting against losses.
    Stop-Loss in the Stock Market

    Benefits of Using Stop-Loss Orders

    Minimizing Losses

    One of the primary advantages of employing stop-loss orders is the ability to minimize losses. In the unpredictable world of the stock market, prices can fluctuate rapidly, and even the most promising stocks can take a sudden downturn. Stop-loss orders act as a safety net, ensuring that if the stock price drops to a predetermined level, the investor is protected from significant losses.

    Consider a scenario where an investor purchased shares of a tech company at $100 per share. They set a stop-loss order at $90 per share. If the stock’s price starts to plummet and reaches $90 or lower, the stop-loss order will trigger, selling the shares and limiting the loss to $10 per share. Without the stop-loss order, the investor might have suffered even greater losses.

    Automation and Convenience

    Stop-loss orders offer a high degree of automation and convenience for investors. They eliminate the need for constant monitoring of stock prices. Once a stop-loss order is in place, it acts as a safeguard without requiring the investor’s immediate attention. This automation can be especially valuable for those with busy schedules or multiple investments to manage.

    Additionally, the convenience of stop-loss orders can help investors stay disciplined in executing their trading strategies. Emotions often play a significant role in investment decisions, and automated tools like stop-loss orders can help remove emotional biases from the equation.

    Balancing Risk and Reward

    Maintaining a balanced risk-reward ratio is crucial in stock trading. Investors must determine the level of risk they are willing to accept in pursuit of a particular reward. Stop-loss orders assist in achieving this balance by allowing investors to set specific risk thresholds.

    For example, an investor may decide that they are willing to risk a maximum of 10% of their investment to potentially gain 20%. In this case, they can set a stop-loss order at a price that limits their potential loss to 10%. This disciplined approach to risk management ensures that investors are not exposing themselves to more risk than they are comfortable with while still aiming for desirable rewards.

    Discipline in Trading

    Successful stock trading requires discipline and adherence to a well-thought-out strategy. Emotions can often cloud judgment and lead to impulsive decisions. Stop-loss orders act as a force of discipline, preventing investors from holding on to losing positions out of hope or fear.

    When a stop-loss order is in place, investors are more likely to stick to their predetermined exit strategy. This discipline can help them avoid making hasty decisions based on emotional reactions to market fluctuations. It encourages a rational and systematic approach to trading, which is essential for long-term success in the stock market.

    Drawbacks and Considerations

    Rapid Price Fluctuations

    While stop-loss orders offer protection against losses, they can also trigger short-term price fluctuations in stocks. This occurs when a large number of investors have stop-loss orders set at similar price levels. When the stock’s price approaches these levels, a wave of sell orders can be triggered, temporarily driving down the stock’s value.

    To mitigate this risk, investors should carefully select the stop-loss price level, ensuring it allows the stock to move naturally while still providing protection.

    Selling Stocks Too Soon

    The primary drawback of using stop-loss orders is the possibility of exiting a trade prematurely. In some cases, the stock’s price may experience a temporary dip before rebounding and continuing its upward trend. Investors using stop-loss orders may sell their stocks during such fluctuations, missing out on potential profits.

    To address this concern, investors should strike a balance between setting a stop-loss level that protects against significant losses and allowing for natural price fluctuations. This balance is achieved through careful analysis and consideration of individual risk tolerance.

    Choosing the Right Price

    Setting the appropriate stop-loss price level can be a challenging task. Investors must carefully assess the stock’s historical price movements, market conditions, and their own risk tolerance. Determining the optimal stop-loss level is a critical part of using this risk management tool effectively.

    Seeking guidance from financial experts or utilizing technical analysis can assist investors in making informed decisions about where to place their stop-loss orders.

    Cost Considerations

    It’s essential for investors to be aware that some brokers may charge fees associated with the use of stop-loss orders. These fees can vary among brokers, so it’s advisable to review the terms and conditions of your brokerage account to understand any potential costs.

    Conclusion

    In conclusion, a stop-loss in the stock market is a powerful tool that every investor should understand and consider incorporating into their trading strategy. It acts as a safety net, protecting against significant losses while also promoting discipline and systematic trading.

    While stop-loss orders offer numerous benefits, they are not without drawbacks, and their successful implementation requires careful consideration and analysis. By striking the right balance between risk and reward, investors can harness the full potential of stop-loss orders and navigate the stock market with greater confidence and control.

    In the world of stock trading, where uncertainty is a constant companion, stop-loss orders serve as a reliable companion for responsible and informed investing.

    Click here to read our latest article on How to Study Currency Pairs

    FAQs

    1. What is a Stop-Loss in the Stock Market? A Stop-Loss in the Stock Market is an automated order that sells a stock when its price falls to a predetermined level, limiting potential losses.
    2. How do Stop-Loss Orders work in stock trading? Stop-Loss Orders allow investors to set a price point below the current market value at which they are willing to sell their stock. When the stock’s price hits or falls below this level, the order is activated, and the stock is sold automatically.
    3. What is the difference between Fixed Stop-Loss and Trailing Stop-Loss Orders? Fixed Stop-Loss Orders specify a fixed price at which the stock should be sold. Trailing Stop-Loss Orders are dynamic and set as a percentage or dollar amount below the stock’s current price, adjusting as the price rises.
    4. How can Stop-Loss Orders minimize losses? Stop-Loss Orders minimize losses by ensuring that if a stock’s price falls to a predetermined level, it is sold automatically, preventing further losses.
    5. What role do Stop-Loss Orders play in automation and convenience? Stop-Loss Orders automate the selling process, eliminating the need for constant monitoring and making stock trading more convenient.
    6. How do Stop-Loss Orders help in balancing risk and reward in stock trading? Stop-Loss Orders help maintain a balanced risk-reward ratio by allowing investors to set specific risk thresholds, ensuring they don’t expose themselves to more risk than they are comfortable with.
    7. How can Stop-Loss Orders encourage discipline in trading? Stop-Loss Orders encourage discipline by preventing impulsive decisions driven by emotions. They ensure that investors stick to their predetermined exit strategies.
    8. What are the potential drawbacks of using Stop-Loss Orders? Drawbacks include the possibility of rapid price fluctuations when many stop-loss orders trigger simultaneously, selling stocks prematurely, and the challenge of choosing the right stop-loss price.
    9. How can investors mitigate the risk of rapid price fluctuations caused by Stop-Loss Orders? Investors can mitigate this risk by carefully selecting stop-loss price levels that allow for natural price movements while still providing protection.
    10. Should I use a Stop-Loss Order in my stock trading strategy? Incorporating Stop-Loss Orders into your trading strategy is advisable. They serve as a vital risk management tool, protecting against significant losses and promoting disciplined trading. However, their use should be well-informed and balanced to avoid potential drawbacks.

    Click here to read our latest article on Stop-Loss in the Stock Market

  • Critical Forex Updates for Feb 1st, 2023

    Singapore dollar Strength Continues:

    USD/SGD is oversold, as it recently tested key support on the lower edge of the channel. This suggests that the four-month slide may be losing steam given how close USD/SGD is to its 2018 low. A positive momentum divergence (lower lows in price associated with a slowdown in 14-day Relative Strength Index) indicates that this decline might not be as strong as previously thought.

    Singapore Dollar

    It’s possible that there may be a temporary slowdown or pause in the decline of the USD/SGD, especially in light of the US Federal Reserve’s interest rate decision today. The market widely anticipates the Fed to raise rates by 0.25% to a range of 4.5%-4.75% and investors will pay close attention to the accompanying statement. If the rate hike is viewed as aggressive, it could result in a temporary increase in the value of the USD globally. Currently, futures markets predict that interest rates will reach around 4.9% due to growing concerns that US inflation may be reaching its peak.

     

    Inflation is probably past its peak, says RBA:

    The Reserve Bank maintained its prediction of 8% peak inflation towards the end of last year and anticipates a decrease in inflation throughout 2023. During a parliamentary hearing on the rising cost of living, RBA’s head of economic analysis, Marion Kohler, stated that the central bank was reassessing its economic projections and that inflation has already reached its peak. Official data showed a 7.8% yearly increase in consumer prices during the December quarter. Since May 2022, the RBA has been increasing interest rates as a response to the surging inflation.

     

    Record Trade Deficit in Japan: 

    Japan’s Ministry of Finance announced a 2022 balance of trade (exports minus imports) deficit of ¥20.0 trillion, which is larger than the 2014 deficit of ¥12.8 trillion and marks the largest trade deficit in available records dating back to 1979. This marks the second consecutive year that Japan has faced a trade deficit. The increase in imports is largely due to the depreciating yen and rising energy prices caused by Russia’s invasion of Ukraine.

    Japan Trade Deficit

     

    Lebanon to devalue the currency by 90%

    Lebanon’s central bank governor, Riad Salameh, announced that the country will adopt a new official exchange rate of 15,000 pounds per US dollar on February 1st, which represents a 90% devaluation from the current official rate that has remained unchanged for 25 years. The change from the previous rate of 1,507 to 15,000 is still much lower than the parallel market rate, where the pound is currently trading at around 57,000 per dollar.

    Beirut

    Salameh stated that the new rate will apply to banks, resulting in a decrease in the equity of the institutions that were central to the country’s financial crisis in 2019. Analysts believe that the change will have a limited impact on the wider economy, which is becoming increasingly dollarized and where most transactions occur according to the parallel market rate. The pound has lost approximately 97% of its value since it started to deviate from the 1,507 rate in 2019.  

  • Crude oil sell-off a bit overdone 

    Crude oil sell-off a bit overdone 

    Following a spike to near $123 per barrel last week due to a variety of global factors, crude oil prices fell by as much as 6%, or $11 to $112 per barrel, on June 17. This was a sharp reversal from the steep ascent that followed Russia’s invasion of Ukraine, with global travel opening up and services reviving. 

    The correction was primarily caused by two factors: new figures for Libyan oil being confirmed at 700,000 barrels per day (bpd) rather than the previously expected 100,000 bpd, and US market turmoil caused by a sell-off in broader risk assets.

    The Libyan oil minister confirmed this as well, and while the number is still below the 1.1-1.2 million bpd that Libya is capable of producing, compared to the 100,000 bpd production that the market had assumed, this was somewhat bearish news.” 

    Not only in the United States, but globally, demand is still strong. There is still some momentum there from pent-up demand.”

    However, in the midst of the COVID-19 pandemic, the bulk of demand has shifted from products to services such as travel, leisure, hospitality, and industries, among others. 

    It is also the peak season for travel in the Western Hemisphere, with people returning to the roads and skies in droves. There is some momentum, but suppliers remain in the driver’s seat. 

    The sell-off on Friday was “a little overdone,” and prices could soon be “ticking back up again.” 

    Since the Ukraine war, crude prices have remained in the $100-120 per barrel range and are expected to remain there. 

    As long as Western sanctions against Russia remain in place, there is no reason to expect crude oil prices to fall below $100 per barrel in the near term. 

    The immediate concern for the “here and now” is supply. So, $100-120 heading into the next quarter, with an average of around $110/barrel is expected. 

    On June 20, oil prices fell slightly, reversing earlier gains, as concerns about slowing global economic growth and fuel demand outweighed concerns about tightening supplies. Brent crude futures were down 3 cents at $113.09 per barrel at 0515 GMT, after rising as much as 1% earlier. Front-month prices fell 7.3 percent last week, the first weekly drop in five weeks.

    Meanwhile, WTI crude was trading at $109.42 per barrel, down 14 cents, or 0.1 percent, after rising more than $1 earlier. Last week, front-month prices fell 9.2 percent, the first drop in eight weeks. 

    On June 20, shares of Oil and Natural Gas Corporation (ONGC) and Oil India fell, mirroring the sharp drop in global crude oil prices. 

    Rising oil prices have been one of the driving forces behind ONGC and Oil India’s outperformance in 2022 thus far. While Oil India shares are still up 18% this year, ONGC is down 5.5 percent following the recent correction.

    Concerns about these stocks are heightened by the possibility of imposing a windfall tax on their earnings to compensate the government for the loss incurred by excise duty cuts. 

    Brokers are still optimistic that crude oil prices will remain above $100 per barrel for the rest of 2022-23, boosting ONGC and Oil India’s earnings. Furthermore, domestic natural gas prices are expected to rise sharply at the September review, potentially increasing earnings for ONGC and Oil India.

    #edgeforex #forex #forextrading #forexsignals #oil #crude #selloff #crude #sharply #rise #demad #gas #prices #supply

  • BOE gold trades at a rare discount.

    BOE gold trades at a rare discount.

    According to traders familiar with the matter, gold at the BOE has recently traded as much as a dollar an ounce below benchmark London prices. According to one of the traders, such a large discount usually indicates a large institution, such as a central bank, selling a significant amount of reserves in order to raise US dollars or other currencies. 

    The Bank of England’s vaults house 5,676 tonnes of bullion, making it one of the world’s largest stockpiles, which it holds on behalf of other central and commercial banks. Gold held by central banks is typically bought and sold in bilateral trades between large institutions at prices that are typically within a few cents of the market rate.

    Gold in central bank vaults traded $1 lower than the London benchmark. 

    The price of gold stored at the Bank of England has been unusually low, indicating that central banks may be selling some of their holdings. 

    According to the most recent World Gold Council data, central banks increased their gold holdings by nearly 456 tonnes in 2021, continuing a long-running trend driven by emerging markets diversifying their reserves away from foreign currencies. Brazil, Thailand, and Ireland, which made its first purchase since 2009, were among the notable buyers.

    Purchasing could slow in 2022 as financial institutions seek to hold more interest-bearing dollars as the Federal Reserve prepares for aggressive monetary tightening. The dollar is on track for its biggest annual gain in seven years, putting pressure on emerging market currencies and borrowing costs. 

    The BOE gold discount has narrowed since the dollar-an-ounce margin, but it remains large by normal standards, according to the people, who did not want to be identified because they were discussing private information. Bullion has fallen more than 12% since its peak in March, leaving it nearly unchanged this year.

    #edgeforex #forextrade #forex #forexsignals #boe #gold #bullion #fell #peak #traders #market #cost #standards

  • Forex News March 26, 2022

    Forex News March 26, 2022

    #edgeforex #forexsignals #forextrading #forex #market #trading #economic #payrolls #bonds #us #auction #cryptocurrency #bitcoin economic

    US

    The US economic calendar for the coming week includes quarter-end and non-farm payrolls.

    Next week’s US economic calendar begins quietly but ends with a bang. The most important thing to remember is that the month and quarter are coming to an end. We’ve seen some massive moves in bonds, which will result in some associated flows. It’s also the end of the fiscal year in Japan. Here’s what to expect from US economic data in the coming months.

    • Monday’s events include an advance goods trade balance, a 2-year auction, and a 5-year auction.
    • Tuesday’s events include JOLTS, Consumer Confidence, the House Price Index, and a 7-year auction.
    • Wednesday: ADP employment, Q4 GDP final.
    • Thursday: PCE and initial jobless claims.
    • Friday’s economic data includes nonfarm payrolls, the ISM manufacturing index, and construction spending.

    There will also be a lot of Fedspeak. Williams today emphasised the importance of data, and the market is currently pricing in a 79 percent chance of 50 basis points on May 4.

    Germany

    Scholz of Germany said : “We will be independent of Russian gas sooner than many people believe”

    Scholz’s comments: Germany is less reliant on Russian gas than others, with some relying entirely on it. The process of becoming self-sufficient in Russian gas is irreversible.

    It would be something if Russia turned off the taps; it would undoubtedly be a quick transition. 

    Russia

    • The Russian demand to be paid in roubles will be a major topic next week.

    • This week, Putin put a damper on rouble shorts by demanding that payments for Russian oil and gas from ‘unfriendly countries’ be made in rubles.

    • This resulted in a 10% rally in the rouble on Wednesday, with the currency retaining two-thirds of its gains.
    • The question now is whether it occurs (unlikely) and what Russia will do in response (much tougher to guess).
    • Europeans have made it clear that they will not pay in roubles.
    • They argue that the contracts require payment in dollars or euros and that they are under no obligation to change course. Even if they wanted to pay in roubles, they would have a difficult time obtaining them. As a result, Putin’s threat may be hollow.
    • This week we’ll find out. Russia has hinted that if Europe refuses to pay in roubles, it may hold them in arrears. That’s a stretch, but we’re not exactly adhering to global standards.
    • On a domestic level, this would be extremely damaging to Russia, but it would also have a significant impact on European industry and energy consumers.
    • It would be a significant escalation in the economic war. What makes me think it’s more likely than most people believe is that Russian Foreign Minister Sergey Lavrov stated today that the West has declared total war on Russia as a result of sanctions.
    • This could be their way of repaying the favour. The US is talking about increasing LNG supplies, but there won’t be any for years. Anything delivered to Europe will have to be rerouted from somewhere else, most likely Asia.

    China

    • Be on the lookout for data from China this weekend – February Industrial Profit.
    • Due at 0130 GMT on March 27, 2022
    • This expected data release is not listed on all calendars.
    • Due at 0130 GMT on March 27, 2022
    • Saturday, March 26, 2022, at 21.30 US ET (9.30pm).
    • Industrial Profits in China in February 2022
    • prior +4.20 percent year on year • prior +34.3 percent year to date
    • The Chinese PMIs for March will be of greater interest next week. These will begin on Thursday, March 31st, with the official manufacturing and non-manufacturing PMIs from China’s National Bureau of Statistics, which are due at 0100 GMT on March 31st:
    • The times listed in the left-hand column are in GMT.
    • The numbers in the right-most column are the ‘prior’ (previous month) results, and the number in the column next to that is the expected consensus median.
  • Swiss Franc 

    Swiss Franc 

    #edgeforex #trading #forex #impact #politics #reacts #monetary #fiscal #intervention #swiss #franc #parity #currency #governments #cryprocurrency #bitcoin franc

    The Swiss franc reached parity with the euro on Monday, but data from the country’s central bank suggests policymakers are unlikely to be concerned. The Swiss Franc at Euro parity indicates that the Swiss National Bank’s interventions are only muted. 

    Last week’s sight deposit figures showed a 0.07 percent increase to 725.7 billion francs ($785 billion), implying that the Swiss National Bank only intervened marginally to halt the currency’s appreciation against the euro. 

    The increase is modest, indicating that the SNB has not intervened significantly in the last few days. It has a lot to do with the franc’s appreciation against the euro rather than other currencies.

    Last month, the franc gained about 1.2 percent against the euro, aided by haven flows following Russia’s invasion of Ukraine. Furthermore, the European Union’s high exposure to the Russian economy has harmed the common currency. Earlier Monday, data showed that the SNB’s foreign-currency reserves fell by 8.4 billion francs ($8.7 billion) in February to 938.3 billion francs. This is most likely due to the franc’s appreciation that month. 

    Currency interventions, along with the world’s lowest interest rate, are part of the SNB’s policy approach. While the Fed reiterated its willingness to intervene on Monday, it also stated that it “considers the overall currency situation,” with individual currency pairs not playing a “special role.”

    The euro-franc pair has continued to fall this month, reaching parity in early trade Monday for the first time since the SNB lifted its cap on the franc’s value against the euro in 2015. At 10:57 a.m. in Zurich, it was trading at 1.0048 per euro. 

    It’s a difficult situation for the SNB. The franc/euro parity has reached a psychological tipping point. On the other hand, the case for monetary policy easing is weak because of the inflation outlook and the growth outlook, both of which are favourable due to the reopening of the Swiss economy” following the omicron surge.. 

  • The dollar rises as tensions in Ukraine increase.

    The dollar rises as tensions in Ukraine increase.

    #edgeforex #trading #market #stocks #money #forex #inflation #turkey #nebati #reserve #gold #russia #ukraine #tensions #cryprocurrency #bitcoin tensions

    The dollar had been trading mostly sideways until the US caution about Russia’s invasion of Ukraine hit markets. The dollar index, which gauges the US currency’s value against six major currencies, rose 0.258 per cent.

    At the same time, the dollar and other safe-haven assets rose on Friday as the United States reported Russia had collected enough troops near Ukraine to launch a major invasion.

    Crude futures in the United States soared more than 5% to $94.66 per barrel, the highest level since 2014, while gold jumped more than 2% to a near two-month high at one point.

    According to White House National Security Adviser Jake Sullivan, a Russian strike may begin at any time and would most likely begin with an air assault. 

    The dollar rose in response to Sullivan’s words, as well as rumours that Russian President Vladimir Putin had chosen to invade Ukraine, which the White House later disputed. 

    Washington ordered that all citizens of the United States leave the country within 48 hours. Other countries have warned their citizens to leave Ukraine immediately, including the United Kingdom, Japan, Latvia, Norway, and the Netherlands. 

    The surge in the dollar, together with advances in other safe-haven assets such as US Treasuries and the Japanese yen, indicates that the market is growing increasingly concerned about the possibility of an invasion. The Japanese yen surged 0.63 percent versus the US dollar to 115.29 per dollar, while the Canadian dollar plummeted as risk-sensitive assets sold down in response to worries of a Russian invasion. The market’s uncertainty over how interest rate rises would go has contributed to frantic sessions this week, as the dollar remained uncertain about its future.

    Russia’s ruble, which was already down for the day, plummeted even further as a result of the news. The rouble was recently down 2.73 percent against the dollar, trading at 77.00 per dollar. 

    Meanwhile, the euro fell as markets absorbed the news, and it was on track for a weekly loss after European Central Bank President Christine Lagarde stated in an interview that hiking rates now would not reduce record eurozone inflation but would instead harm the economy.

  • Sound Money 3: The Full-Employment Doctrine

    Sound Money 3: The Full-Employment Doctrine

    #edgeforex #trading #market #stocks #money #forex #trader #inflation #dollar #gold #price #pattern #doctrine #employement #sound #money #adjustment #cryprocurrency #bitcoin doctrine

    Inflationary or expansionary doctrine comes in a variety of flavours. However, its core material stays constant. 

    The most basic and unsophisticated interpretation is that there is an apparently inadequate amount of money. According to the grocer, business is terrible since my customers or prospective customers do not have enough money to increase their purchases. So far, he is correct. But when he adds that increasing the amount of money in circulation is what is required to make his firm more profitable, he is erroneous. What he truly wants is to raise the amount of money in the pockets of his clients and prospective customers while keeping the quantity of money in the hands of others constant.

    Adam Smith and Jean-Baptiste Say demolished this bogus grocer ideology once and for all. Lord Keynes reintroduced it in our day, and it is now one of the fundamental policies of all governments that are not fully subservient to the Soviets, under the guise of full-employment policy. Nonetheless, Keynes was unable to make a compelling case against Say’s law. Neither his pupils nor the slew of faux and real economists in the offices of various countries, the United Nations, and a variety of other national and international organisations have fared any better. The fallacies implicit in the Keynesian full-employment thesis are fundamentally the same faults that Smith and Say have long destroyed.

    Wage rates are a market phenomena; they are the prices paid for a specific amount of work of a specific quality. If a guy is unable to sell his work at the price he desires, he must cut the price he is asking for it or else he will remain unemployed. If the government or labour unions set wage rates that are higher than the potential rate of the unhindered labour market and enforce their minimum-wage edict via pressure and coercion, a portion of individuals looking for work will stay unemployed. Such institutional unemployment is unavoidable as a result of the strategies used by today’s self-styled progressive governments. It is the true result of pro-labor policies that have been mislabeled.

    There is only one effective approach to raise real wage rates and enhance wage workers’ standard of living: increase the per-head quota of capital invested. This is what laissez-faire capitalism achieves to the degree that it is not hindered by the government and labour unions. 

    We don’t need to look into whether today’s politicians are aware of these truths. Mentioning them to students is frowned upon at most colleges. Books that are dubious of official ideologies are not generally purchased by libraries or utilised in courses, and as a result, publishers are hesitant to publish them.

    Newspapers seldom question the prevalent belief because they fear a union boycott. Thus, politicians may be quite serious in believing that they have achieved “social benefits” for the “people,” and that the increase of unemployment is one of the ills inherent in capitalism, not the result of the policies they are bragging about. Whatever the case may be, it is clear that the status and prestige of the individuals who now rule the nations outside the Soviet bloc, as well as their professorial and journalistic supporters, are inextricably linked to the “progressive” concept, and they must adhere to it.

    If they do not wish to abandon their political goals, they must resolutely deny that their own policies tend to make mass unemployment a permanent occurrence, and they must try to blame capitalism for the unintended consequences of their policies. 

    The greatest distinguishing element of the full-employment concept is that it does not give information on how market pay rates are decided. Discussing the peak of pay rates is frowned upon by “progressives.” They do not discuss pay rates while discussing unemployment. According to them, the peak in wage rates has nothing to do with unemployment and should never be referenced in conjunction with it.

    If there are unemployed, says the progressive doctrine, the government must increase the amount of money in circulation until full employment is reached. It is, they say, a serious mistake to call inflation an increase in the quantity of money in circulation effected under these conditions. It is just “full-employment policy.”

    We can avoid frowning on the doctrine’s terminological strangeness. The fundamental idea is that any increase in the amount of money in circulation causes prices and wages to rise. If, despite the rise in commodity prices, pay rates do not rise at all or trail far behind the rise in commodity prices, the number of persons jobless due to the high wage rates will fall. However, it will fall simply because such a combination of commodities prices and wage rates implies a decline in real pay rates.

    It would not have been required to increase the amount of money in circulation to achieve this goal. A reduction in the height of the minimum-wage rates imposed by the government or union pressure would have had the same impact without triggering all of the additional effects of inflation. 

    It is true that in certain nations during the 1930s, resort to inflation was not immediately followed by an increase in the height of money wage rates as determined by governments or unions, resulting in a decline in real wage rates and, as a result, a decrease in the number of jobless. However, this was a one-time occurrence.

    When Lord Keynes predicted in 1936 that a push by employers to reduce money-wage deals would be far more fiercely contested than a gradual and “automatic” reduction of real pay rates as a result of rising prices,8 he had already been rendered obsolete and contradicted by the march of events. The masses had already begun to see through the inflationary ruse. The unions’ interactions with wage rates became dominated by issues of buying power and index numbers. The full-employment argument in favour of inflation was already out of date when Keynes and his supporters declared it to be the guiding principle of progressive economic policies.

  • Bid Adieu to negative rates

    Bid Adieu to negative rates

    #edgeforex #trading #market #stocks #money #forex #inflation #dollar #price #hwkish #negative #forecast #adjustment #cryprocurrency #bitcoin

    Continued upside inflation shocks and hawkish ECB remarks have resulted in more rate hikes in the Eurozone profile. Tighter ECB policy offers up more upside for longer term rates but also limiting how low the EUR/USD may go. 

    The ECB has followed in the footsteps of many other central banks in becoming more hawkish, and we have added rises to our ECB projection profile. Market pricing for the Fed’s forecast has also gotten more hawkish, but we continue to believe that quarterly 25bp rate rises are a solid baseline. In a nutshell, we anticipate the Fed to raise rates by 25 basis points four times this year, beginning in March, followed by four more rises in 2023. During the summer, a decision will be made on whether to allow the balance sheet to contract.

    In March, the ECB will decide to terminate net bond purchases towards the end of August. Rate increases of 25 basis points will be implemented in December 2022, March 2023, and September 2023. 

    EUR/USD is expected to reach a low of 1.10 later this year and a high of 1.18 by the end of next year. 

    Long term rates will continue to rise, but the yield curve will flatten from present levels by the end of the forecast horizon. 

    The ECB is becoming hawkish. 

    The ECB’s hawkish shift last week took financial markets off surprise. Following the ECB meeting, for example, the 5-year EUR swap rate increased by the most in more than 10 years in only two days. 

    We now envisage three 25bp rate increases during our projection horizon to the end of 2023, based on the ECB’s signals and higher revisions to predictions, which now show Euro-area core inflation staying over the ECB’s 2 percent objective for the majority of the forecast horizon. 

    We continue to believe that market pricing of more than 50bp higher overnight rates, i.e. two 25bp rate rises, until the end of the year is excessive.

    After all, Klaas Knot, one of the most hawkish ECB Governing Council members, has stated that the first ECB rate rise would occur in the fourth quarter, followed by another in the spring. Furthermore, according to a Financial Times piece citing ECB sources, even more hawkish ECB officials saw a rate rise this summer as implausible. 

    One should not rule out the possibility of the scenario priced by financial markets materialising entirely. After all, the ECB only a few months ago informed us that a rate rise this year was quite improbable — now it isn’t.

    A few of further positive surprises in inflation and/or shockingly strong pay growth data might lead plans to be implemented as early as September. However, based on existing knowledge, we believe that the present pricing for this year is excessively aggressive. 

    A quick tightening of financial conditions is a significant risk element for the ECB. While funding circumstances remain favourable, they have begun to tighten fast. Nonetheless, it is critical to distinguish between the Eurozone’s predicament last year, when the ECB was undershooting its aim, and the argument that favourable financing conditions were necessary to assist push inflation to the target.

    If the ECB is approaching the point where it needs to control inflationary pressures, tougher lending conditions are the tools to that end. Still, a sudden tightening is unlikely to be in the ECB’s best interests, and additional increases in e.g. bond spreads may heighten concerns that the ECB cannot tighten policy too forcefully, limiting the pricing of ECB hikes.

  • Sound Money 2 : The Virtues and Shortcomings of the Gold Standard

    Sound Money 2 : The Virtues and Shortcomings of the Gold Standard

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    The gold standard’s superiority may be observed in the fact that it makes the determination of the buying power of the monetary unit independent of government and political party policy. It stops rulers from abusing the representative assembly’ financial and budgetary powers. Parliamentary financial control works only if the government is unable to cover unlawful spending by raising the amount of fiat money in circulation. In this sense, the gold standard appears to be a necessary component of the body of constitutional guarantees that enable representative government to work.

    When gold output expanded dramatically in California and Australia in the 1950s, the gold standard was criticised as being inflationary. Michel Chevalier advocated for the abandoning of the gold standard in his book Probable Depreciation of Gold at the time, while Béranger addressed the matter in one of his poems. However, these complaints faded with time. The gold standard was no longer considered inflationary, but rather deflationary. Even the most ardent proponents of inflation seek to mask their actual motivations by claiming that they are only trying to counteract the contractionary pressures that an apparently inadequate quantity of gold causes.

    Inflation has long been advocated as a way to relieve the burdens of impoverished deserving debtors at the expense of affluent harsh creditors. The usual debtors under capitalism, on the other hand, are well-to-do owners of real estate, businesses, and common stock, as well as persons who have borrowed from banks, savings banks, insurance companies, and bondholders. People of moderate means who possess bonds and savings accounts or have taken out insurance policies are the usual debtors. If the average person supports anti-creditor legislation, it is because he ignores the fact that he is a creditor himself. The notion that wealthy are victims of easy money policies is a relic of the past.

    The issuance of fiat money appears to be magical to the inexperienced mind. A magic word spoken by the government generates something out of nothing that may be exchanged for whatever item a man desires. When compared to the Treasury Department of the government, the art of sorcerers, witches, and conjurors pales in comparison! Professors teach us that the government “can print all the money it wants.” Taxes for revenue are “obsolete,” according to the head of the Federal Reserve Bank of New York.  What a beautiful thing! And how vengeful and misanthropic are those adamant adherents of antiquated economic dogma who demand that governments balance their budgets by paying all expenses with tax revenue.

    These believers fail to see that inflation is conditioned by public ignorance, and that inflation ceases to function as soon as the public becomes aware of its consequences on the buying power of the monetary unit. People are unconcerned about monetary issues in normal times, that is, when the government does not meddle with the monetary standard. They take it for granted that the buying power of the monetary unit is “stable.” They are interested in fluctuations in the money values of various goods. They are fully aware that the exchange rates between various commodities fluctuate.

    They are, however, unaware that the exchange rate between money and all commodities and services is also changing. When the unavoidable effects of inflation manifest and prices rise, they mistakenly believe that goods are becoming more expensive while failing to see that money is becoming less expensive. Only a few people recognise what is going on early in an inflation, conduct their businesses in accordance with this knowledge, and purposefully seek inflation advantages. The vast majority of people are too dull to comprehend a right assessment of the circumstance. They continue about their business as usual in non-inflationary times. They accuse individuals who are faster to recognise the true reasons of the market commotion of being “profiteers,” and they blame them for their own misfortune. The public’s ignorance is the unavoidable foundation of inflationary policies. Inflation works as long as the housewife believes to herself, “I desperately need a new frying pan.” But today’s prices are too high; I’ll wait till they fall again.” It comes to an abrupt halt when individuals realise that inflation will continue, that it causes price increases, and that prices will thus continue to grow indefinitely. “I don’t need a new frying pan today,” the homemaker thinks at the key point. In a year or two, I may require one. But I’m going to get it now because it’ll be a lot more expensive afterwards.” Then the inflation’s tragic conclusion is approaching. “I don’t need another table; I’ll never need one,” the housewife believes at the end of the process. But it’s better to purchase a table than to hold these bits of paper the government refers to as money for another minute.” 

    The index-number approach is a very rudimentary and imprecise way of “measuring” changes in the buying power of a monetary unit. Because there are no stable relationships between magnitudes in the sphere of social affairs, no measurement is feasible, therefore economics can never become quantitative.

    Despite its shortcomings, the index-number technique plays a vital part in the process of making people inflation-conscious during an inflationary cycle. Once the use of index numbers becomes widespread, the government is compelled to limit the rate of inflation and persuade the public that the inflationary policy is only a temporary measure to deal with a temporary situation that will be resolved soon. While government economists continue to tout inflation’s advantages as a long-term monetary management strategy, governments are forced to take caution in its implementation.

    It is legitimate to label a policy of purposeful inflation dishonest since the desired outcomes can only be achieved if the government succeeds in fooling the majority of the population about the strategy’s implications. Many proponents of interventionist programmes will have no qualms about such deception; in their minds, nothing the government does can ever be wrong. However, their high moral indifference is unable to counter an objection to the economist’s anti-inflation argument. The essential issue, in the economist’s opinion, is not that inflation is ethically terrible, but that it can only work when used with extreme caution, and even then only for a limited time.As a result, resorting to inflation cannot be seriously regarded as a viable alternative to a permanent standard like the gold standard. 

    The pro-inflationist propaganda stresses today the purported reality that the gold standard failed and will never be tried again: governments are no longer ready to follow the rules of the gold-standard game and suffer all of the costs associated with maintaining the gold standard. 

    To begin with, it is critical to recognise that the gold standard did not fail. It was eliminated by governments to make room for inflation. To bring down the gold standard, the whole infrastructure of tyranny and compulsion — police, customs guards, criminal tribunals, jails, and, in certain nations, even executioners — had to be put into operation. Solemn vows were breached, retroactive legislation were passed, and constitutional and bill of rights provisions were openly ignored. And a slew of servile authors lauded the governments’ actions and heralded the century of fiat money. 

    However, the most surprising aspect of this ostensibly new monetary strategy is its total failure.

    True, it replaced sound money with fiat money in domestic markets, favouring the material interests of certain persons and groups at the detriment of others. It also had a significant role in the collapse of the international division of labour. It did not, however, succeed in dethroning gold as the international or global standard. If you look at the financial section of any newspaper, you’ll see right away that gold is still the world’s money, not the various products of various government printing agencies. The more steady the price of an ounce of gold, the more valuable these bits of paper become. Today, anyone who even suggests that countries may revert to a local gold standard is branded a crazy. This terrorism might go for a long time. The status of gold as the world’s standard, on the other hand, is unassailable. The policy of “moving off the gold standard” did not remove a country’s monetary authority from the need to consider the price of gold when determining the monetary unit. 

    What all opponents of the gold standard decry as its fundamental sin is the same thing that supporters of the gold standard praise as its greatest virtue: its incompatibility with a credit-expansion programme.

    The expansionist fallacy lies at the heart of all anti-gold authors’ and politicians’ arguments. 

    Interest, or the discount of future goods against current goods, is an originary category of human valuation, present in every sort of human behaviour and irrespective of any social structures, according to the expansionist view. The expansionists fail to see that there have never been and will never be human beings who place the same value on an apple accessible in a year or a hundred years as they do on an apple available today.

    Our central bank is compelled to retain its discount rate at a level that reflects international money market circumstances and foreign central bank discount rates. Otherwise, “speculators” would withdraw cash from our nation for short-term investment in other countries, causing our central bank’s gold holdings to fall below the permissible ratio. There would be no need for our central bank to adapt the height of the money rate to the circumstances of the international money market, which is ruled by the world-encompassing gold monopoly, if it were not required to redeem its banknotes in gold.

    The most incredible aspect of this argument is that it was made in debtor nations, where the operation of the international money and capital markets meant an infusion of foreign funds and, as a result, the appearance of a trend toward lower interest rates. In the 1870s and 1880s, it was quite popular in Germany and much more so in Austria, but it was barely discussed in England or the Netherlands, whose banks and bankers gave generously to Germany and Austria. It was only after World War I, when Great Britain’s status as the world’s financial hub had been lost, that it was advanced in England.

    Of course, the reasoning is flawed in the first place. The transnational intertwinement of the lending sector does not cause the inevitable failure of each endeavour at credit expansion. It is the result of the fact that non-existing capital goods cannot be replaced with fiat money and bank circulation credit. Credit growth might initially result in a boom. However, such a boom would inevitably end in a fall, a depression. The repeated attempts of governments and banks under their supervision to extend credit in order to make business profitable through low interest rates are precisely what cause economic crises to reoccur.