Why the Armageddon Trade Is Wrong
by Kevin CookDecember 02, 2011 | Comments : 0 Recommended this article: (0)
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While some preach economic collapse as the next path to riches, I'd rather buy and trade global prosperity.
You see their notices in your email inbox all the time.
"Stockpile food and ammo!"
"Sell your stocks and buy gold!"
"Run for the hills and prepare for the worst!"
"The worst economic storm ever is about to destroy your wealth and freedom!!!"
The relentless appeal of the "Armageddon trade" has many chomping at the bit. That's because the markets fall much faster than they rise. Bear runs of 5% to 10% in a single day, or 20% in a week, are far and few between, but they do make some people into instant millionaires.
But even more often than amassing riches, these investors get crushed. Their myopic view had some of them take on way too much risk, which became their undoing. Or others got locked into their position and froze up when the time came to switch gears to the new bull run.
I'm here to tell you that the Armageddon hawkers are way wrong, and not because they exaggerate or because their trades are so rare and hard to time. They are wrong for 3 important reasons. Discover them below along with a better path to wealth creation.
1) Fall of the American Empire is NOT Inevitable
There is a popular notion that great success must eventually fade; that it is destined to implode. It happened to the Roman Empire and other great civilizations so it has to happen here, right?
But look at the realities of a dynamic global economy that has survived some of the biggest "black swan" shocks imaginable: terrorism and war, systemic banking/housing collapse, devastating floods, tsunamis, and earthquakes. Yes, capital was destroyed by these events.
And yes, an "easy" Federal Reserve supplying fresh barges of credit can artificially re-stimulate the economy and create new bubbles and dollar devaluation. But is that false prosperity when thousands of American businesses are still creating valuable products, services and jobs for existing demand markets?
The idea that the American empire must somehow naturally suffer the fate of ancient Rome is good story telling and interesting "chaos theory". But there are no laws of physics or economics that prove it has to happen this way. Besides, the global economy is fantastically complex. And it is as resilient as it is subject to systemic risk and shocks.
Early birds are already snapping up spots in our brand-new alert service that follows the money trail of institutional portfolio managers. Guided by global markets expert Kevin Cook, it will take advantage of market swings with fast reflexes and Zacks Rank screening. It targets substantial 1-to-12-week profits, through long and short moves that include stocks, ETFs, and options. Access is limited and will soon close to new investors.
2) The US Economy is Far More Likely to Grow Its Way Out of Debt
The Dow 5,000 perma bears have some good arguments about our national debt and the structural problems intertwined with it. Housing, banking and overleveraged consumers all weigh on growth.
Complex systems like our economy might be subject to systemic shocks, but that is the reality of the world we live in now. Many genies have been let out of the bottle that cannot be put back...
- Death of Bretton Woods fixed exchange rates and birth of fiat currencies
- Derivatives explosion and financial engineering, now integral to modern economies
- Technology, which creates power, freedom and high-frequency trading
- Quantitative easing and the monetizing of debt
But the US economy is vigorous enough to produce $14 trillion in goods and services annually amidst this chaos. That kind of wealth creation is not easily destroyed. We almost did it with a banking system meltdown. But smart financial minds at the helm steered us out of those waters. You may not like the Fed's quantitative easing and the inflation it threatens. But 15 years of Japanese deflation is not the lesser economic evil here.
3) Money Seeks a Return
Should this complexity and systemic risk scare us into betting against growth that can sustain and pay down debt especially with S&P 500 earnings about to cross the milestones of $100 EPS and $1 trillion in net income?
I'm not saying the economy is headed for 5% growth and the market for new highs next year. What I am saying is that the most likely scenario is the middle way. Look at the fact that the S&P 500 has traded in a big sideways range from 1500 down to 700 and back for over ten years. The opportunities to participate in economic cycles and bull and bear markets have been terrific.
Is the US economy fully sound and without structural problems? Of course not. But money isn't going to run and hide again like it did in 2008. And even if it did, how long did that last? Money is going to run and seek yield, anywhere and everywhere it can. In emerging markets with double-digit growth, in commodities, in the sovereign debt of the next world's reserve currency.
Far more interesting and profitable than any Armageddon trade is to "buy and trade" equities from around the globe. Money moves too fast for you to worry about a depression or even inflation. Indeed, you can whip inflation every year with a sound investing and trading method.
Want some even better news? Legendary investors like Buffett and Bill Gross of PIMCO say we should have much lower expectations for returns (5%?) this decade. I think Warren said it in the last decade too. But really this is a huge opportunity for the small investor. The big guys have too much money and have to take too much risk to beat their benchmarks.
Your Investing Empire
The spoils in this environment will go to the investors who are nimble and armed with information. Contrary to what some of my day trader friends say (that the algorithm machines have taken over their markets), the playing field has been leveled enough that we can have a blastand a profitable one at thattrading the swings and following the money flow.
When I first walked on a trading floor at the age of 29, I was a recovering "radical socialist environmentalist" (tree-hugger), just like the people you see protesting in the Occupy Stupidity movement. Before I truly understood capitalism, and started reading less Thoreau and more Ben Franklin, I thought America was headed toward Armageddon.
But in the trading pits I suddenly saw the power and freedom of markets and how anyone could create their own empire of wealth with education and hard work.
In fact, you can build your empire without all that time and toil.
Starting today, I'll be guiding a new private Zacks investor group. Membership will be limited and is scheduled to close no later than December 12.
The purpose of this Tactical Trader group is to follow the money trail of institutional portfolio managers, spot "hidden bulls", and anticipate both upward and downward market swings. We'll aim for substantial short-term profits and fire every weapon in the Zacks arsenal to get them, going long and short with stocks, ETFs and options.
Members of our group will get a manageable number of precisely timed moves with explanations of why they're recommended. Available spots are already filling fast, so if this sounds interesting, I suggest you look into it now.
Kevin, a Senior Stock Strategist at Zacks, is a recognized authority in global markets. A former market-maker in the $4-trillion-dollar-a-day world of interbank trade, he developed the ability to track the movement of money, and trained his reflexes to take advantage of it. Today he directs the new Zacks Tactical Trader, providing commentary and recommendations.
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