Sediu-Social

Currently, there is a lot of talk about deflation. It hasn’t really happened yet… but there are a lot of signs pointing in that direction. We all know what inflation is, but what is deflation?

There are two types of deflation: the good kind and the bad kind. The good kind happens when prices decrease due to improvements in productivity, either though technology and/or lower cost of production. The bad kind of deflation is when the lack of demand forces margin squeeze. The lower demand eventually means lay-offs and demand decreases even more. And it spirals down from there. To pull out of an era of deflation is much harder and takes longer than handling an inflationary period.

We could say that the growth of globalization and technology has been the main reason that prices look like they are very contained if not decreasing in real terms. The catchword is “low-flation”. However, there is another factor that can exacerbate deflation. It’s called a “liquidity trap.”

A liquidity trap is when interest rates are so low that there is little motivation for people to invest in certain instruments such as bonds. Indeed, investors feel that interest rates will soon rise and they hold-off buying and providing capital to the financial system. Of course, Central Bank monetary largesse has pumped trillions into bond buying and that has driven interest rates even lower. What investors would buy negative yielding bonds?

The liquidity trap doesn’t apply to Central Banks… or does it? Most doomsday Monetarists felt that Quantitative Easing would bring about high rates of inflation but that hasn’t happened. Inflation is generally too much money chasing too few goods. The reason there hasn’t been inflation is that the trillions of dollars from Quantitative Easing have just been recirculating in the regulated financial system and not chasing goods but pumping up stock prices. Also, banks aren’t lending to anyone but the most credit worthy.

OK that’s the simplistic look at the current situation. No inflation to speak of and stagnating unemployment. So, we could say that we are experiencing mostly productivity based price containment, not deflation in the bad sense. All that said, what if the right decisions coming out of the Fed or the ECB can’t stimulate economies? How does a Forex trader trade in a deflationary environment?

Here’s my take based on thirty-five years of trading. By recirculating excess money supply and not letting it loose in the consumption sector, there will probably be more downward pressure on margins. However, there is high demand in emerging world markets. In an effort to boost domestic jobs and production, there may be a race to devalue the currencies for the purpose of pumping up exports. It’s already happening in Japan. However, if every exporting nation does that all at once, there is the danger of a slack tide grounding all boats. But that would take a while and then we would come face-to-face with worldwide “bad” deflation; that would be bad news and a probable inflection point in history.

Investors are constantly reminded that trying to time the market is a losing proposition. However, traders are all about timing and what is happening to prices at the moment and not in the future. Although curious, traders are not trying to read the future in the mathematical-statistical entrails of technical indicators.

In summary, successful Forex traders will do what they always do: trade price movement, be it up or down. That said, about ten years ago, the World-famous Blue Angels flying team lost all four formation airplanes and their pilots when all four flew into the ground at over 600 mph. The reason for the accident was that three of the planes follow the lead plane without fail. The lead plane had lost control and the others followed their training mandate into the ground. So, if deflation does happen, try not to listen to the popular strategies and end up flying into the ground.

The phrase “get out of your comfort zone” is always uttered when you’re being motivated to do better in life. It’s the same with dealing with phobias. For someone who’s afraid of heights to deal with his fear, he is slowly being subjected to increasing heights so as to desensitize him. The point is to get out of your comfort zone so you could grow. So if you’re too comfortable with the direction your career is going, perhaps you may not be taking enough risks.

Why would you need to take a risk if everything’s all set for you? To that, you should ask another question. Are you truly happy with your career that you feel you have reached the highest you can go or are you just settling for a stressful job that pays well? If it’s the latter, then you may find a lot of other opportunities if you take risks.

Risks need not be huge ones. It’s as simple as volunteering for a presentation when you have a fear of speaking in public. It’s as small as striking up a conversation with the big boss of the company if you find yourself alone with him in the smoking area. Again, the core idea is to get out of your comfort zone. By handling a presentation, you not only get over your fear of talking in front of an audience, you get to add public speaking to your repertoire.

The bigger risks to take often involve leaving your current position or company and, again, outside of your comfort zone. For instance, if you hold a higher-tier position in the IT department, you can try your luck at being in sales where you can have the chance to reap good commission. You may also take a crack at a trainer position if you have developed a knack for public speaking from all those presentations.

Finally, there’s also taking a risk with another company. If you have gotten too comfortable with your current standing in your company and would like to experience something fresh, you can apply for a good position in another and expand your skill set.

Do note that there’s a difference between taking risks for your career and gambling it away. Jumping blindly into a situation you don’t understand is never a good idea. Your career is on the line here, so take risks only if you understand the rewards and the possible pitfalls you may encounter.

By as early as the beginning of 1915 Winston Churchill, The First Lord of the Admiralty, was appalled at the way the War was going, at the apparent stalemate in the trenches on the Western Front and at the acknowledgement that it was becoming a war of attrition. He was frustrated that nobody seemed to have a plan for a breakthrough to achieve an early victory. He devised the plan for a campaign in the Dardanelles as a possible solution. The aim was to capture Constantinople from Germany’s ally the Turkish Empire, and draw a lot of the efforts of our enemies away from the Western Font, or from the Russian Front, or even both.

The Result.

The campaign went on for many months, resulting in a very high loss of life, and was ultimately unsuccessful. Churchill was blamed for proposing the plan in the first place, for many of the specific mistakes, and for continuing with it once it had become obvious to almost everyone else that it was not working, although some people believe it was a good plan but not carried out very well. This failure led to hid becoming extremely unpopular, and was one factor in his being dropped from the Government for over a year.

Different historians have different views as to the main reasons for this failure. The list includes:

· Poor planning,

· Underestimating the problems,

· Beginning too soon, before everything was ready,

· Giving the enemy time to get reinforcements and strengthen the defences,

· Lack of commitment by some of the commanders,

· Poor communication between the Army and Navy,

It is thought of as a good example of “How Not to Do It”.

The What If..

There has been far less discussion of what might have been, if it had succeeded. Now I know that whenever you say “if only” someone says you need to forget that and concentrate on dealing with things as they are, and usually that is good advice, but just for once I would like us to dwell on “if only” a little. Think about the effects on the World if:

· The War had ended two years earlier than it did.

· Britain had not been taken to the edge of starvation.

· Germany had not been devastated. (Would the Kaiser have survived?)

· Russia had not endured such losses – would the Revolution have happened?

· America had not needed to join the War.

· Women had not been needed to work in factories.

One thing is almost certain. Both Churchill and Prime Minister Asquith would have been a lot more popular. Would Lloyd George have become Prime Minister?

Was It Just a Gamble?

You could say that Churchill took a gamble and lost. But that is not quite fair. There were risks in not doing anything, but allowing the war of attrition to continue. The difference between gambling and Risk Management is that in gambling no risk exists unless you choose to accept it. Risk Management attempts to manage those risks which already exist. I am unaffected by the outcome of the Derby, the Grand National, the F.A. Cup, the Test Match, or the Boat Race, unless I choose to place a bet, whereas the risks in my business are there whether I like it or not. I remember a cartoon in one of the daily papers back in the 1970′s. It showed two businessmen passing a news-stand. There were two posters beside it. One read “Ali to fight Frazier” whilst the other read “Heath to fight inflation”. One of the businessmen comments “at least with Ali and Frazier we can choose which one to back.” He obviously recognised that we all had a vested interest in the battle with inflation. Doing nothing is not necessarily the safe option. Some businesses have gone out of business because they failed to take a chance.