Keynes Dark Prophecy

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Keynes Dark Prophecy

Casino capitalism is what Keynes called it.

When speculation runs rampant in the markets.

In the 80’s, Warren Buffett famously lambasted financial derivatives.

He said they served no social value, and instead of doing the work of the invisible hand, they were “an invisible foot kicking society in the shins.”

He took to satire to expound on his grumblings, imagining what would happen if 25 brokers were shipwrecked on an uninhabited island.

“Faced with developing an economy that would maximize their consumption and pleasure, would they, I wonder, assign 20 of their number to produce food, clothing, shelter, etc., while setting five to endlessly trading options on the future output of the 20?”

For thousands of traders, the markets are indeed a casino.

The vast majority of those who trade lose money.

Just like nearly everyone loses in Vegas.

Think of the last losing trade you made.

You didn’t plan on it losing money.

But all that analysis you poured in (or listened to) didn’t pan out.

You went from excited to distressed as the trade moved against you.

And then finally relief as you sold out for a loss.

Most traders stay in the distressed phase for far too long by letting the trade move against them.

That’s not how trading was supposed to be right?

It’s never been easier to make a trade.

Commissions are at rock bottom prices.

Spreads have never been tighter.

Yet only a small percentage of traders make money consistently.

Keynes’ and Buffett’s fears have come true.

The stock market has been turned into the biggest casino in the world through derivatives.

As a researcher of the markets, the evidence is as clear as day.

The character of stock indexes completely changed in the early 80’s when index futures were introduced.

The indices used to trend well.

Now they are mostly in an anti-trend state.

You can use that to your advantage by the way with swing trading.

Here’s more evidence that speculation is rampant in both stock and short-term bonds:

The CFTC’s Commitment of Traders report says so as clear as day.

In the emini S&P 500 futures alone, there are 642,563 contracts outstanding from small speculators (those who have less than 100 contracts).

The emini is trading at 2131 right now, so a single contract is worth 2131 * 50 = $106,550.

So “mom and pop” traders have acquired $68 billion worth of index futures.

To put things into perspective, the entire revenue from all casinos in the United States last year was $71.1 billion.

And I’ve only mentioned the emini (did I mention they expire every three months?)!

As of today, you only need to put up $4,620 in cash to have control of $106,550. That’s 23-1 margin.

Are you starting to see the picture I’m building?

The bankers and quants have setup the largest “casino” in the world and allow you to play on 23-1 margin.

The Financial TV networks reeled you and I in with dreams of trading in the kitchen in our underwear.

Then you setup an account with your broker who makes money no matter how well you do.

Then you end up competing with people (and bots) way more experienced than you.

The system is rigged.

It’s like Vegas minus the hot girls, shows, golf, booze, clubs, and parties.

It’s just you in your underwear blowing money in the comforts of your own home.

Yet just like in Vegas, there are a few consistent winners.

There are the well-connected overlords like Soros that seem to be on the right side of big trends.

And there are the quants like Jim Simons that has used machine learning to go from relatively unknown 50-something to billionaire.

Insider trading like Soros was convicted of in 2002 is not my style.

So I lean towards the more innocuous method of evidence-based trading.

Remember the CFTC’s report I mentioned above?

It’s gold.

You get to see exactly how all the major (and minor) players are positioned every week.

It’s like taking off a blindfold in the middle of a heist.

All of a sudden you can see what’s been going right in front of your nose the whole time.

To learn more about how you can use the CFTC’s report to become a much more consistent trader (with a lot less headaches, frustration, and worry) take a look at this presentation >>

Trade smart,

Dan “Prince of Proof” Murphy