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SGM Metals: 'I Wouldn't Jack Up The Price of Rice & Starve Chinese Children...On Purpose!

The fairy tale we are sold regarding the 'investing for retirement' that has us buying & holding stocks & bonds is a death sentence. With quants, high frequency & prop traders jumping in & out of the markets all day we are simply along for the ride.

Inflation & speculators will destroy food budgets!
Inflation & speculators will destroy food budgets!
April 9, 2012 - PRLog -- The Guardian interviewed a ‘prop trader’: [ "We play with money, ha-ha, that's the short version of what I do. No. People like me buy and sell financial products on markets or over the counter [directly between parties]. There are two kinds of traders in banks. Market-makers use their client's money to make money for those clients, taking a commission. Then there are prop traders like me. We use cash given to us by the bank to make money for the bank.

"Prop traders have freedom because there's no client telling us what to do. Banks don't like to advertise this, but prop traders like me are quite profitable in terms of income generated per head. This is very useful for banks in times like these.

"How that works: I will have an idea about a pattern in the market, say, if the share price of two English banks with a broadly similar outlook diverge, they will most likely converge again very soon; they have a broadly similar outlook after all.

"That'll be my 'idea'. Next is statistical analysis, where I go back to historical data and look at the prices of these two banks at every day, minute, or even second, over the past one, three and five years. I run analyses and if the pattern holds, I work out the threshold at which we should buy and then sell again these shares.

"The greatest misunderstanding about prop traders? That we're evil. What outsiders are concerned about is speculation; if you trade large enough volumes you begin to impact the market itself, you 'move the market'. I would never consciously try to raise the price of, say, rice, and starve children in China. Quite apart from the morals, it is actually very difficult to make a profit out of morals. You drive up the price of something by buying more and more of it. The thing is, players in the market are going to notice that. And so they will quote rapidly higher prices to you since they realize that you want to buy a large chunk of the overall market with all your money. It's called price manipulation and regulators are really strict about that, you get sanctioned even if it happened by mistake and was really unintentional.]

Todays blog topic is a little out of the ordinary but I felt it was paramount that this be understood by every person who has money invested in any market so that you know who is competing with your money and how they go about it. “Prop Traders” are literally freelance wild card traders who are frequently ‘head hunted’ by the big banks who are looking to subcontract out their trading needs to supplement the lack of profits created by their unwillingness to lend money to the public. These guys are in the business of posting big returns at all costs and impressing the banks who employ them because there are thousands of unemployed Wall Street traders  who would love to get back on Wall Street, even its from their mother’s basement. This job is very attractive to any trader because they get access to millions of dollars to trade at no risk to themselves which comes with a six figure salary and a yearly bonus based on performance. With an financial enticement such as performance based bonus on top of a 6 figure paycheck you could imagine these guys looking to outperform there competition by getting creative with their strategies and this usually comes with severe disregard for others.

Lets compare this ‘subcontracting’ of the banks trading needs to the Pentagon employing military contractors to subcontract out some of the ‘stickier’ military missions that often border on the ‘grey area’ to keep the US military from having their hands on it directly. If a mission goes horribly wrong in lets say the middle east and the Pentagon can say “well this was a lesser known military contractor who we don’t regularly use and they went way of the reservation on this mission, we won’t extend anymore military contracts to them and cancel the current contracts they have”. That would make for a perfect break for the govt. and they could wash their hands of it because it was a ‘rogue military operation’ that they didn’t approve of to begin with. We have seen this play out in the Iraq & Afghanistan war many times already. Now imagine this dynamic in the investing markets with ‘rogue traders’ who cause a stock to crash or a flash crash when the DOW drops 1,000 points in 6 minutes, oh wait a minute we have seen this before haven’t we? Now you are starting to get the picture right?

Now imagine what he says above regarding two banks stocks deviating and converging again and he sets a trap to capture that variation. Doesn’t sound so bad at first glance, until you insert yourself into this dynamic. Now imagine that inside of your mutual fund you have invested in this bank stock because they didn’t lend at 50/1 during the mortgage frenzy and you are looking to hold it for the long term. While you are teaching class, or welding, or driving a school bus, this trader and his buddies pile into this bank stock because they see a deviation in the chart and are looking to drag that stock down with a massive short position and widen the drop in the stock. Now they are very successful in knocking this bank stock down and you suffer a 25% loss in the stock and your mutual fund manager decides to sell the stock to stop any further losses. As soon as he sells they reverse their short and profit on the snap back up and make millions for the banks who funded their trading and you suffered yet another loss. This happens everyday, countless times a day and you don’t stand a chance at combating it because you aren’t sitting in front of a computer all day trading to identify this behavior, nor can you stop it. So while we are told to hand our retirement monies over to stock portfolio managers and go about our daily routines they are fighting the banks who are subcontracting out freelance traders who have millions of dollars to play with at no risk to themselves and they are looking to design market volatility to exploit the gaps they create. This is counter intuitive to your retirement investing strategies and often results in tremendous losses for the ‘buy & hold’ strategies of long term retirement accounts.

When you have finally had enough of this system that has taken the idea of holding stock in solid companies for the long term growth strategy and pit you against trillions of dollars that are intentionally looking for short term plays often created by themselves at your expense, you might want to look for wealth preservation investments instead. Remove yourself from the slanted Wall Street game that is designed to exploit your stagnant investments inside your 401ks and IRAs that are sitting ducks to these exploitative trading strategies & used to create the profits for the banks who are refusing to lend you money to stimulate the economy. Establish your ‘Plan B’ in physical gold & silver bullion and begin to participate in the sound money debate with wealth preservation as your motivation. In these uncertain times a little stability and control of your money can go a long way. Imagine if after the dotcom bubble crash you decided to pull out of the Wall Street kill zone and moved your money into gold at $265 and silver at $4.00 and just held onto it where you would be today? That was during a period of massive inflation that Greenspan used to create yet another stock bubble and a housing price explosion that supposedly created prosperity yet nobody really has anything to show for it except the banks and Wall Street. Learn now that these bubbles are designed to make you feel like you are getting ahead in your investments, but they always end up correcting and the banks come out on top and you are told by them to stay in the market because ‘it’s going to go back up and you have to be in the market to get your losses back”. The definition of insanity is doing the same thing over and over again and expecting a different outcome. Sound familiar?

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SGM Metals strives to offer not only wealth preservation precious metals investments to offset weakness in the economy, but to help educate our family of clients to better identify the threats to their financial security.

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Source:SGM Metals & The Elemental Economist
Location:Palm Beach Gardens - Florida - United States
Industry:Banking, Business, Finance
Tags:SGM Metals, Elemental Economist, Gold, Silver, Prop Trader, Inflation, Wall Street, Greenspan, Stock, Bond, 401k, Ira
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