At the start of the Great Depression, Franklin Roosevelt told the nation that what was most to fear was “fear itself.” A popular song of the era encouraged folks to spend with the line, “Let’s have another cup of coffee. Let’s have another slice of pie.” The current Federal Reserve Chairman is an acknowledged expert on the fact that shutting down liquidity and international trade in the early 1930’s turned an economic downturn into the Great Depression. However, more liquidity can mean more debt. Trading liquidity, trading market confidence, and trading fear itself can be viable strategies for the day trader.
Last year the markets were in shambles and there was a real possibility of a collapse of the world financial system. The, probably, proper response was to inject massive amounts of capital into world financial markets to maintain liquidity and maintain sufficient market confidence to avoid another Great Depression. Now, a year later, economies have not popped back, the US has over ten percent unemployment, and places like Dubai in the oil rich Persian Gulf are asking banks for a six month moratorium on their debts.
We talk about trading liquidity because, to a large degree, it is liquidity and not cash that gives confidence to consumers and the overall financial system. Trading liquidity works because increased liquidity goes with increased consumer purchases, increased spending on business expansion, construction, research, etc. Market confidence is better with increased liquidity and market confidence is worse when liquidity is reduced.
What does the trader do if there are a set of debt defaults throughout the world that reduce financial liquidity and consumer spending? Having a trading strategy ready will help you deal with either the fallout of changes in market confidence or the repair of market confidence.
What will happen to luxury automobile sales if markets collapse? What will happen to the makers of consumer electronics if market confidence disappears and no one wants to buy a new TV, Ipod, or Gameboy? Trading liquidity means trading research budgets, new product rollouts, and whether people buy steak or hamburger. The US has become a much more Wal-Mart centered society in the last year as a culture of frugality sets in.
The US has been negligent in putting money into savings accounts for years. Now, as people are starting the save, the need is for spending and liquidity to restore and maintain market confidence.
Going into the recession we looked at the consumer product companies of the world, such as Proctor and Gamble, as likely to survive and prosper. Now, if market confidence collapses, people still need toothpaste and laundry soap. Trading liquidity may mean watching and trading P&G, Colgate, and Clorox for the next year.
With Roosevelt’s words in mind maybe trading General Mills (Betty Crocker) may be a good means of trading liquidity, or the lack of it, as people stay home from restaurants and bake their pies and cakes at home.
As always we are not specifically promoting General Mills or P&G but encouraging you to look for specific ways to trade liquidity with individual stocks or sectors.
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