For Battle by Tristram Waye | September 22, 2022
The power of expectations and some broad elements that can affect your trading
The deeper you enter the trading arena, the more you will notice the power of expectations. Expectations shape prices and moves in response to news and events. They determine how market participants reflexively react and change positions, which in turn affects prices and policies. And that means expectations influence your trading decisions.
The Fed and economic data: We will focus on the US because the Federal Reserve can be considered the central bank of the world. These reports provide some insight into the economic conditions that are occurring. Some of them have a delay. Others are more recent. There are other reports that provide a more detailed view of business conditions and many other indicators.
- These data points have varying significance and importance depending on real-world circumstances. Thus, one data point may be a focal point in one period and a marginal one in another. And, of course, there are seasonal trends in many of the data points.
- Now the focus is on inflation. Controlling inflation rests with the Federal Reserve through its job and price stability mandate. For this, the Fed has at its disposal various monetary instruments. The most obvious is the use of interest rates.
- The Fed relies on a variety of data to make decisions about interest rates. And they have models and theories to make predictions about what they see.
- Professional investors try to predict what the Fed will do by reading the economic tea leaves. These investors’ predictions make up the consensus figure, AKA what’s expected. Outliers from this consensus or expected number are sometimes called whisper numbers.
- When you go to Finviz.com and scroll down the page about halfway, you will see the economic releases for the day. Here you can see the previous count, expected count, and actual count for the data points.
Consumer Price Index (CPI) The CPI number comes from US Bureau of Labor Statistics.
- The CPI number represents a basket of goods and services that the average consumer buys. The report is similar to a survey of goods and services. Each month, the CPI is measured, compiled and published for these various commodities.
- A measure of inflation in the economy is the change in prices. And when you collect multiple reports together, you can see trends and changes in trends.
- One of the criticisms of the report is that the methodologies have been changed before, so it does not reflect the actual changes that are taking place.
- Another is that it is an unrealistic measure of the prices experienced by real people. It is often believed that prices are generally much higher than reported.
- Inflationary environment
- For the past two years before unimaginable levels of liquidity were created. I believe that the money supply has increased by 65% y/y in two years. St. Louis Fed has a chart to show you how dramatic it is.
- One explanation for this change in liquidity is pandemic conditions. Now, the increase in M1 is also accompanied by gigantic congressional spending. As a result, there is an explosion of money in the system. This liquidity is believed to be the main driver of inflation.
- Another factor is inflation supply chain issuesespecially in energy.
- And then there was a conflict in Eurasia which has exacerbated this energy supply chain problem.
- Add to that a subtle working problem. The last ones actuarial reports for group life insurers and the recent spike in disability seems to indicate that something is happening to people of working age. The NFIB Small Business Survey points to the problem of labor in terms of quality for many businesses. And this despite many layoffs. Put it all together and the competition for skilled labor is fierce.
Work and energy: It’s not the only number that matters. There is also the producer price index (PPI), which measures the prices of inputs for businesses. To measure employment trends, there are jobless claims, ongoing claims, and the “job count.” There are also different reports from each Federal Reserve banking region. And there are the weekly EIA oil numbers that come out every Wednesday that shape energy prices.
- For most businesses, the two biggest costs are labor and energy. Changes in labor and energy prices are ultimately passed on to the consumer in the form of higher prices.
- It can also appear through shrinkflation, where the thing you normally buy costs the same, but you get less of it.
- There are different income requirements for consumers, many of which are included in the CPI.
- And this is all part of a system where the Fed has an inflation target of 2%. Why 2%? That’s part of the goal 2% stimulates capital inflows. This means that with a permanent loss of purchasing power, the system is designed to stimulate investment to overcome this deficit.
Understand expectations (including your own)
The future path requires an understanding of the role of Bitcoin and the various parts of cryptography in the current global asset mix. And that means understanding how trade is affected by other forces in the broader economic matrix. One of these forces is expectations and how they are formed.
- And if you look around, you’ll see that every article, every news, content, story, and evaluation of market actions shapes expectations. This is why it is so important to consider.
- In the future, the stories will change. There is many catalysts ahead which are much more significant than the CPI number. And in each case, a host of pundits, journalists, authority figures and chatterboxes will work hard to shape expectations.
- And knowing what the expectations are and when the catalysts should be can help you manage risks effectively in chaotic environment.
- All this will create significant trading opportunities.
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