Archive for July, 2013

A forex primer and some good educational videos

Monday, July 29th, 2013

Since I lived in Korea for 12 years, and since those 12 years were pretty much my entire adult life, until recently all my personal wealth was in Korean won (KRW).

While in Korea, I saw the won fluctuate between 900 KRW per 1 US dollar to about 1300 KRW to 1 USD. Obviously if I could consistently buy 1300 won per dollar and then buy dollars for 900 won, I’d make some money. If you’re not quite sure how the Forex market works, these educational Forex videos will take you from the very basics like what is Forex (think exchanging your currency for a foreign one when going on vacation).

The hard part is knowing when to buy and sell. When we were leaving Korea we wanted to turn some won into dollars. The exchange rate was about 1150. We exchanged about 75% of our money into dollars. A few months later, the exchange rate was 1050. We could have had thousands of dollars more had we waited. Now the excahnge rate is 1145. There’s lots of fluctuation here – lots of chances to make money, but also lots of chances to see things go the wrong way.

Now my experience trading currencies has always been with money I have, but, like you can with stocks, you can also trade currencies on margin. There’s a video for that too, in the link above, which explains how trading on margin is similar to buying a home with a mortgage – you use more money than you have in your account. With Forex, that means you can lose more money than you have in your account but you can also increase profits by making bigger trades that you could have otherwise.

In conclusion, the volatility of the currency market means you can do well for yourself – change is opportunity. But the market could always go against you – for example, every time the crazies in North Korea start talking about nuclear missiles, the Korean won suffers and my stress level increases.

The Time Bernanke got it wrong

Friday, July 19th, 2013

Worship at the alter of Bernanke helped fuel the fiscal crisis. As the New York Times article chronicles, on of the sources of tinder for the massive upswing in risk-taking during the middle of the last decade was the theme being pushed by Bernanke in his writings and speeches as deputy Chairman of the Fed, entitled “The Great Moderation.” The basic idea was that, largely as a result of the brilliant economic management by Central Banks, the amplitude of swings in major economies had become muted.

What Bernanke ignored was that the combination of cheap money and nearly infinite access to derivatives (with his boss fighting hard to prevent better regulation) was encouraging banks (and others) to massively leverage up their balance sheets to take advantage of this perceived decline in economic volatility. The result was a wonderful lesson in chaos theory: how positive feedback loops in a nonlinear system can cause the entire system to go spinning out of control.

In simpler English, lower perceived economic swings = more leverage and risk-taking, and ultimately, vastly wider economic swings.