"This Is Why We Trade" - Jay Kaeppel

Jay Kaeppel, Optionetics.com October 1, 2008

This is why we trade. When the world goes to heck in a hand basket around us and seemingly cataclysmic events swirl round us completely out of our control. The value of our house may decline. The business that supports our livelihood may suffer anywhere from minimal to major damage. Our 401K may start to look like a 201K. Politicians on all sides blather on attempting to assess blame as far away from themselves as possible. Talk of the next Great Depression may become more common. Yes, the perception may be that it is all imploding down around us.

This is why we trade.

Not because it’s cool or fun, or an interesting hobby. Not because we have all of these fast computer and lots of data and an endless array of tools and techniques to work with. Not because we enjoy exchanging ideas with other individuals regarding the latest and greatest methods and techniques. Not because we enjoy telling our friends about or latest conquest in the markets or draw comfort from commiserating with others regarding our most recent losing trade.

We trade because trading is the only business that allows us the opportunity to make money regardless of the events that go on around us. Granted we must be on the right side of those events – or at least not be on the wrong side for very long – in order to prosper. But that is a given. Unlike true gambling related endeavors, if we make a bad bet, we can with as much haste as possible, pull our bet off the table and wait for a better opportunity. Most “red-blooded Americans” have an aversion to selling short. Too much risk, too much uncertainty, and doggone it we like it when things go up not down. And in a perfect world that would be great. If you dare take your hands from over your eyes and survey the current state of affairs the odds are good that you will conclude that this is presently not a perfect world.

But you see, this is why we trade.

When those things around us are good we can take a long position and prosper. When those things around us head south we can sell short and do the same. Wait a minute. Doesn’t that make us “evil speculators?” Not by any sane definition. By any sane definition we are simply people who prefer to shape our own destinies rather than rely on others to do it for us. We are simply people who when faced with adversity would rather take responsibility rather than sit around and whine and complain that no one is bailing us out. People who trade are the true capitalists. And while some seem to be taking great glee in disparaging capitalism these days, the fact is that those people are fools.

Freedom – not only freedom to live as you choose but to make your own way in the world – is the single greatest “entitlement." Slowly but surely this right seems to be slipping from our grasp. More and more the “powers that be” attempt to assert greater control over the everyday lives of others. This more than anything explains the great unraveling that we are witnessing today. And we also must recognize our own culpability in all of this. Perhaps if we had looked up more often from our big screen TV’s and laptops and BlackBerry’s, if we had not assumed that rising home prices – which entered a somewhat parabolic ascent in the early to mid 2000’s, the ultimate kiss of death for any asset – like rising stock prices, were a sure thing, perhaps we might have elected officials who had more in mind than serving up another entitlement program in order to garner votes for the next election.

Somewhere in the past two decades too many people came to the conclusion that because we now have high technology that we are somehow impervious to the economic cycle. So let me be the first to say, “Welcome back to reality.”

Still, this is why we trade.

Unless and until they close down the exchanges and simply have government set the price for everything, we have the opportunity to continue to live a decent lifestyle. Until the income tax approaches 100% (somewhere, some politician just read this and thought, “why didn’t I think of that?”), we can take steps to continue to make money as other avenues dwindle. No politician is going to solve the current state of affairs. Only “the people” can do that. And this week some of those people actually stirred from their slumber.

The “Bail Out”

I’m going to be brutally honest here. I don’t really understand all of the details involved with the attempted bailout that failed on Monday. I do know that Monday was quite obviously a cataclysmic day. In fact, I never thought I would see the day when the sight of the stock market dropping 7% to 10% in a day would arguably be “the lesser of two evils." I mean I know that they keep telling us we have a “financial crisis” on our hands and that “government must act” or things will “collapse." And I admit that there is a part of me that would probably had breathed a slight sigh of relief if the bailout bill had passed. But at the same time if my choices are to:
a) watch the stock market melt down and allow a potentially dangerous situation to continue, or;
b) allow the federal government to massively assert control over a huge part of our economy using our own tax dollars.

I have to say there is not a lot to choose from. Yet there is a part of me that is content to “let the chips fall where they may.” I understand that doing so might unleash something worse. Still, would you buy all those bad mortgages with your own money? If not, why is it OK for the government to buy them with your own money? Just a thought. One idea I heard floated that sounded good to me was for the government to sell banks insurance. If a mortgage goes bad, fine the government picks up the tab, as opposed to buying up the whole lot. Its sort of like an insurance company that has a choice to, a) insure a bunch of firetrap buildings and paying off when one does burn down, and, b) buying all the buildings so that they already own them when they do burn down.

Just a thought.

Politicians will always be happy to assume more control over things. Not the responsibility to make those things work mind you, but definitely the control part. Likewise, politicians will always be happy to spend your money. In fact, the more the better. But before deciding how you feel about the whole “stock market meltdown versus incredibly expensive government takeover” conflict, consider the following. The reason that the bill failed to pass was because so many politicians heard from so many angry constituents voicing their objections to the bill.
So let’s see. The choice was either to have a Congress comprised of self-serving, semi-socialists with an approval rating of 20% take money out of your pocket in order to assert more control over your life with the promise that “this will make everything all better”, or to have those same politicians actually vote “the will of the people." Hmmmm. Interesting concept that. Of course with this particular group that sounds more like using the voters as an excuse. I mean when have they listened to the voters up until now? And do “the people” really understand what is at stake here? If banks start collapsing left and right “the people” will then start carping about why Congress didn’t pass the bailout.

In the short run the stock market may well have “breathed a sigh of relief” had the bill passed. But there is no guarantee that the bill – and isn’t it interesting that they can’t get anything done for months at a time but when it comes to “saving us from ourselves”, they claim to be able to sort that out over a weekend – would actually make things better. The market knows all. Eventually it is going to go where it is going to go. And no politician can change that fact.

Summary

This is an investment column not a political op-ed. So I want to make sure I play this down the middle. So here goes. There is an election coming up (perhaps you’ve heard a little something about that). The majority of people gravitate to one side or the other and then look at events through a prism that shows their favored side in a more positive light, then proceed to argue talking points with those looking through a different prism. Not enough people take the time to actually look at facts anymore. Hey, this is America, you can do that if you want (at least for now). And with all of the blame passing and scape goating going on it is fairly easy to take comfort in your own preconceived notions. Nevertheless, given the current state of affairs it is incumbent upon all citizens to open their eyes and their minds and to truly analyze how we got where we are today. And to carefully consider the best way to move forward (hint: it might take more than a weekend).

George Bush has been president for eight years and Republicans controlled government for six of those eight years. So there is no way they can avoid their culpability. At the same time, it is a matter of record that a few years back Republicans called for investigations into alleged problems at Fannie and Freddie and Democrats killed the idea. And one could argue that things have gone south since Democrats took control of the Senate and Congress in 2006. Meanwhile deficits soared under George W. Bush.

There. Now I have sufficiently ticked everyone off. But that’s fine. You should be ticked off. And by that I mean ticked off enough to actually examine “the facts” rather than relying on any personal political bias. Waiting around for this current batch of politicians to “save our souls” does not appear to be the most prudent of ideas.

As I said, this is why we trade.

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Jay Kaeppel Staff Writer and Trading Strategist
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