Anton Kreil posted this 27 September 2011 (Sep 27, 2011 6:57 PM).
I was asked today on email whether I agree with what Alessio Rastani talked about in his BBC interview yesterday. This was the email I sent back.
He is a trader. It’s a traders job to predict the future and profit from it.
If it isn’t that function, then what is it?
What he is actually saying makes a tonne of sense and it’s how traders think Vs the regular man on the street.
For example, man on the street has a pension of £25k (UK Average). When the stock market falls 50% he will lose 50% of his wealth (possibly more). A trader will
hedge the position by shorting the market and first protect his wealth. Whether the market is going up or down, it’s not a traders job to argue with the market, it’s to make sure that he always makes money (consistently) from the current environment.
On his comments about “hoping we go into a recession” – he is saying that because he is probably set-up to profit from the market going down. That’s ok. It’s not
just him who can make money from it. Any person in the world can short the market to protect their wealth or profit from its fall. That’s why it exists. Shorting is a capitalist mechanism for people to protect wealth. It’s not a bad thing. Anyone can come
to my seminars and learn how to do it.
The way the man on the street thinks is totally different to the way traders think and operate;-
Firstly, most people don't save money, so to blame a man who does save his money and who is trying to protect his wealth is totally ridiculous. If you haven’t earnt,
or you have and lived beyond your means then it’s not a traders fault, it’s yours. If you haven’t saved then what right does anyone have to pass judgement on the actions of a man that has?
Secondly, on hedging. Hedging is simply negating risk. The man on the street thinks shorting (one way of hedging) is a bad thing because they read what the press
like to print and it sells newspapers and makes people watch TV programmes (Sensationalism). Shorting is simply one way of hedging. Another example of hedging might be to buy the shares in the electricity company that supplies your own home with electricity.
After all you might pay them £1,500 per year for electricity. If you buy £30,000 of the stock and it yields 5%, you will receive a dividend of £1,500 per year. That can pay your electricity bill every year, which means your hedged. If you don't have £30,000
then go and get it. It’s not a traders fault that the man on the street doesn’t have it.
The man on the street likes to blame other people for 1) not realising what hedging is 2) not having the means to do it. The man on the street simply hasn’t figured
out how the world works.
Another example of hedging would have been to short the banks in 2008. When every “man on the street” globally saw Lehman Brothers go bust, the initial reaction
was to point the finger at the bankers and begin to play the blame game. Instead of putting this energy into playing a blame game, a trader puts their energies into protecting their money and “hopefully” profiting from the event. Whether it s a negative “surprise”
event or a positive “surprise” event.
Another example of hedging. If you know this year that you are going to fly a lot more (more business travel and more holiday travel) you might expect to buy £2,000
of flights maybe up from £500 last year. Hedge yourself by buying an airline stock. If you are doing it, then it’s very likely that society will be doing it. If you buy £20,000 of an airline stock and it goes up 20% next year, then you will make £4,000. This
will pay for your flights for the next 2 years. That’s another way of hedging.
So yes. I agree with the Alessio Rastani in many respects. He is simply pointing out to the general public what is the blatantly obvious to guys like him and I.
The fact that the general public can’t see this or understand it is not his fault. If 1,000,000 people watch that interview and hedge themselves accordingly he will have saved those people collectively, billions of dollars.
On another note. Of course I don't like the idea of “hoping” that we go into a recession. However if I am short the market for very good reasons I would also be
hoping for that. I would have taken a short bet, to either protect my wealth or to profit from the fall. Same way if i simply held a £25,000 pension. I would hope the market went up. It’s an uncomfortable feeling to hope for disaster, but after doing a tonne
of analysis, if a trader believes this will happen and takes a position to be short, its obvious that he isn’t going to hope that the market goes against him. If only 3% of the world’s population increases their wealth in an economic downturn who’s the fool?
The 3% or the 97% that ignored what they saw coming and didn’t do anything about it?
On the idea that “Goldman Sachs rules the world” - I don't believe its Goldman Sachs that rules the world. They are but one player in the capitalist system and due
to money they have influence. There are many operators that rule the world. Politicians, central bankers, the media etc etc - We are supposed to live in a democracy in which the people rule the world. Unfortunately, if you mix democracy with
capitalism, the most powerful vote is the money note. Lots of money = Lots of power = FACT. If the world wants to change that then they can do. The mechanisms exist. Socialism and Communism however have been proved not to work. So if you want to operate successfully
in this system, start by making lots of money, then by hedging and profiting. If you want to operate unsuccessfully in this system, spend your life pointing the finger and blaming those that have realised how the system works. However, just be aware that option
number 2 will not put food on the table, will not give your children the best education available, will not provide your family with a good home and the resources required to live a good life. If you want option 2, maybe it’s better for you to outsource your
families resource allocation function to the government by voting in a communist government who will plan your resource allocation for you and decide what you will eat tonight, or even perhaps make a move to North Korea ??? If you live and operate in this
system, just realise how it works and get on with it. if you don't want to live in this system, I’m sure there are a few billion people globally that would be willing to swap places with you.