Why Traders aren’t Phased by High Inflation
- By FXT
- April 19, 2023
- FXT Analysis
What is inflation?
Inflation is an infection of the economy, where growth is often swamped by high interest costs and the value of money decreasing as fast as it is coming in.
Why was low inflation great for share investors and margin loan holders?
During low inflation periods, stocks and companies were able to borrow money and push growth activities with little effect from interest rates and low competition when it comes to racing against the value of cash declines. This meant that borrowing to invest in the right companies held good opportunity compared to a high inflation, high interest environment.
Why does high inflation make it harder to invest in stocks?
High inflation makes it more challenging to borrow to invest, to effectively beat the natural growth rate vs the inflation rate and interest rates that often follow. Effectively the cost of the borrowings as cash are decreasing in value, the stocks need to grow and at a higher rate than the cash you want to get out of it in the future (since the value of that future cash will buy less). This applies higher pressure to have to grow the portfolio value.
Margin loan holders will pay higher interest to retain loans against stocks adding even further pressure to leveraged shareholders.
Why are traders positioned well in this market?
While trading generally involves leverage, the swap rates (based on interest rate differentials) are charged overnight at a specified time, hence the term ‘overnight rates’ which are sometimes used interchangeably with swap rates.
This puts intraday traders in a great position as they can access leverage but exit positions before the swap rates are applied. The broker is no worse off either, making it a win/win scenario for traders and brokers.
In the event the market doesn’t grow at a higher rate than inflation, shareholders would be in a challenging position while their true cash value declines. Meanwhile, provided markets are moving either up or down, offering motion whether there is direction or not, traders are able to take advantage of these movements without the concern of interest costs or long term directional movements of an asset.
The skill of trading offering a sustainable future
Entering and exiting the market without feeling the crunch of swap rates or interest rates when markets aren’t going up, gives traders a sustainable way to earn long term regardless of the market conditions, regardless of the job market and regardless of lending restrictions and interest rates.
The skill of trading once profitability is achieved gives a level of financial comfort in knowing that as long as the market moves (either up or down), the trader can work their magic.
Trading with the right broker
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