Here at Simply Finance we give you a high level of Financial Data alongside relatable stories that make it easier for you to learn and make Finance fun.
Let’s put some personality back in Finance.
Don’t be shy to hit the “like” button, share this post, and become a subscriber to this entirely FREE NEWSLETTER if you haven’t done so already!
That’s how we keep the lights on here.
Today’s edition is part of My Stories where I share vulnerable thoughts around my opinions in Finance.
Charts & Chit Chat will be the next edition coming out within a few days where I share Financial Data/Charts alongside quick takeaways that get right to the point.
After that is a weekly Video Post you can think of as a coaching call where I chat about whatever is most relevant over the last week.
For now, let’s get vulnerable.
When is the last time you got caught in the pain trade?
I ask myself what the pain trade is in markets all the time. What is the situation that is going to hurt the most people? Not just from a financial aspect either, but from an emotional one too.
The market is always trying to move in a way that will cause a combination of the most financial and emotional pain.
That’s why we love her.
The market wants to move in a way that makes you shake your head and say, “I can’t believe this is happening to me but I’m still addicted.”
The pain trade can happen on all timeframes. There’s a pain trade for the day, for the week, for the year, and for the decade.
What is the current pain trade?
We had an FOMC announcement on Wednesday. The FED raised interest rates by 0.50% to no surprise. This was priced into the FedWatch Tool Probabilities on Wednesday morning, which continues to remain undefeated on the announcement day for predicting what is going to happen no matter how great of a story someone has for why the FED could do something different.
The probabilities win again.
Probabilities are never going to stop people from throwing predictions out there though, not only about what the FED will do with monetary policy but also what that is going to mean for the direction of Financial Markets.
The narratives for the FOMC meeting were as follows:
If the FED cuts by 50bps they will spook the market into thinking they know something that we don’t, and that means we’re probably already in a recession. This will cause a massive down move in markets.
If the FED cuts by 50bps it will be a sign that they are about to stimulate aggressively, and with the economic data not showing any huge concerns of a recession at the moment that extra stimulus should push markets aggressively higher.
Both are very valid arguments, and which one is correct is something we will only know in hindsight over time.
There was a ton of chatter around this recent FOMC announcement. It was easily one of the most highly anticipated FOMC announcement since mid 2023 when the FED noted they were going to pause the interest rate hikes.
Both camps from above badly wanted an end-of-day move in the markets that justified their arguments on Wednesday. The 50bps bulls wanted to see the market skyrocket higher on the announcement, and the 50bps bears wanted to see the market move lower into the end of the day.
What’s the pain trade there?
The pain trade there is sideways — a big ol’ nothing burger.
Typically the market makes large swings on FOMC days. It tends to be choppy in both directions most of the time, and it’s very rare that it starts a trend into the end of the day. However, if any of them have a chance to start a trend that lasts into the end of the day it’s typically one that is highly anticipated like this one.
What did we get though?
A whole lot of nothing. It looks like the market did not care one bit.
Anyone that had a strong opinion for the end-of-day move was disappointed — both bulls and bears. They both did not make the money they wanted to and/or they both experienced some emotional pain.
The market loves to do that.
I’m always thinking about the pain trade that could play out on different timeframes. I like to focus on the longer term timeframes myself, and these days I am starting to ask myself what is the pain trade for the next 3-5 years.
What is going to cause the most people the most financial and emotional pain over the next 3-5 years?
It’s reasonable to say the most obvious answer to this — which is a big 2000 or 2008 style crash in the market. One that goes down -50% and stays depressed for a few years, or 15 years, depending on how you look at it.
That would obviously hurt people financially and emotionally.
But I’m not sure that’s the pain trade here — I don’t think that’s the trade that causes the most pain for the most people over the next 3-5 years.
Why?
Well, there’s so many permabears out here waiting to say, “I told you so.”
Most of them don’t have actual money on the line to back their doom and gloom predictions, but they would still feel an immense amount of joy replying to permabulls like me on the internet with the LOL emojis if the markets were to crash lower.
😭
Then there is those, like me, who lean more permabullish. We’ve been able to reply to the permabear comments with the LOL emojis for almost 2 years now, since October 2022 — or over 16 years now, since 2008.
The US has only been in a “official recession” for 2 months in the last 16 years. That’s less than 1% of the time.
😂
You can re-define recession however you’d like, but Big Money doesn’t care about the alternative metrics you are using to define recession. They just care about the official reported numbers, and the sentiment it’s creating around other big institutions that trickles down to retail traders and shapes the next move in markets.
Perception is reality.
Gauging sentiment is what helps us identify the pain trade. It’s actually getting a little bit harder to gauge market sentiment online these days.
We all live in our own little internet bubbles.
We can find whole groups of permabulls, permabears, or even people that have a strong passion for making strawberry-jam on the internet. The rabbit holes on the internet are endless and abundant.
It also seems like the world is becoming more polarized over time. We clearly see that in politics today — why would Financial Markets be any different?
We all can’t wait to use that LOL emoji when the other camp says something stupid during a debate.
The combination of polarization and internet bubbles makes it harder to get a true feel on market sentiment, and thus what the pain trade could be over the next 3-5 years.
As mentioned, if the market crashes and stays down for several years that would suck.
On the other hand, if the market just continues to move higher at 20% per year for the next few years there are going to be a lot of permabears in need of psychologists.
A lot of people won’t be able to believe how this “house of cards” continues to move aggressively higher, and they’ll be angry with their sophisticated portfolio of “value stocks” that are underperforming against the market indexes and Big Tech for over 2 decades now.
Strong market moves higher are also causing a lot of pain these days.
So back to the question, what’s the real pain trade?
I think the pain trade over the next 3-5 years is similar to what the pain trade was this past Wednesday for the FOMC meeting.
Sideways.
People hate sideways. People HATE waiting.
I’m sure many of you have heard of the “Fear & Greed” index. The Fear and Greed Index is a tool that measures the stock market's emotional state and investor sentiment. It's calculated by CNN Business using seven indicators.
Bitcoin also has a similar Fear & Greed Index.
Bitcoin is trading around $60,000 today, which is the same price it was trading for about 6 months ago.
6 months ago as Bitcoin was breaking $60,000 the indicator was flashing Greed. Investor sentiment was extremely bullish and optimistic.
Today, at the same $60,000 price, that indicator is flashing Fear. Investor sentiment is extremely bearish and fearful.
It’s also worth noting that Bitcoin is up +120% in the last 12 months, and +41% Year To Date.
Can you imagine many other assets up +120% in 12 months and +41% in 8.5 months where the investors are fearful? What could possibly be the reason for that?
Simple. That asset might have a good 8 or 12 month return but it’s gone sideways for 6 months. The whole return came from just 2 months.
As the old saying goes, what have you done for me lately?
Investors and traders HATE waiting.
I caught myself asking a really stupid question to myself the other day. I saw someone making a $1 million dollar Bitcoin prediction by 2028.
I really asked myself out loud, “do you think you could wait 4 more years for Bitcoin to reach $1 million dollars Christos?”
I immediately started laughing at myself once I heard it out loud.
OF COURSE I CAN WAIT. WTF is my alternative?
I then justified it to myself by saying, “what I really meant is can I wait 4 years without selling a single piece of what I currently own if I knew there was a decent chance of seeing a $1 million dollar Bitcoin price?”
That’s a slightly different question, but in any event, the answer is YES. So long as I have money to pay my bills of course.
Therein lies the art of financial planning.
I don’t want to wait though, call me crazy. I guess I am a bit crazy, that’s why I talk to myself all day.
I’m in my apartment shouting, “Let’s get this show on the road and Bitcoin to a million already! Daddy needs a big boat and a high class Latina on it calling me Papi!!”
I've waited long enough.
So why isn’t the pain trade for me markets moving lower?
Well, I have cash right now.
Money market funds (products earning a 5% interest yield these days, or 4.75% now I guess) are at historically high levels. That could change in the future as the FED lowers interest rates, but right now that’s a sign that household cash allocations are higher than they’ve been over the last few years.
That adds up with me.
I’ve essentially been able to save up and replenish my cash for almost 2 years since the bear market ended, and I don’t think I’m the only one.
I think there's a lot of investors like me who bought assets aggressively in 2022 and have been able to sit and let their cash replenish over the last 2 years as asset prices have moved higher.
So if the markets want to crash again, well, we have cash to buy again.
While the market crashing will hurt us in the short term, as long term investors we know that it’s an opportunity to buy at a discount and compound larger sums of money into the future.
We like that.
We don’t necessarily want the market to crash, but we almost wouldn’t hate it… *Knock on wood a million times* for the market gods.
So what’s even worse than a market crash then?
Sideways. 5 years of sideways. That would actually kind of suck.
5 years of sideways would piss off both bulls and bears... A LOT.
As mentioned already, if the market doesn’t crash soon there’s going to be a lot of permabears in need of psychologists.
And if Bitcoin doesn’t go to $1 million dollars anytime soon I’m going to be left in this same rented apartment continuing to pursue discount Latinas on dating apps.
The struggle is real.
I won’t want to put significant cash to work because I’ll feel like I am buying high relative to where I already bought, and the last thing I want to do is empty my cash-clip right before a real market crash comes.
Then the permabears will be hitting me with the LOL emojis and I won’t even have any cash left to buy the dip with.
😭😭😭😭😭😭😭😭😭😭😭😭
That’s my worst nightmare.
So a sideways market over the next few years feels like it’s the most painful event. It’s the most painful for bulls and bears of all sorts.
It’s termed “time capitulation.”
People can capitulate by puking up positions in a big down move, or people can capitulate by giving up an idea because too much time has passed.
On one hand you might you sell your assets and give up after too much time has passed without your idea working, and on the other hand you might also add to your position aggressively right before the big crash actually does come!
Doh!!
Time capitulation is real. It sucks. It can force us into making poor decisions.
We are so damn impatient — if my webpage spins for 10 seconds before loading I am ready to throw my computer off my balcony. And my computer is worth more than all the furniture in my apartment combined at this point.
I’ve been in this damn apartment with the same furniture for 7 years now — show me the boat with the high class Latina sunbathing on it already!!
What’s a man gotta do to get a decent internet connection around here these days?
It’s a tough life.
That’s the pain trade. Sideways. It’s basically silence in the market.
My nephew just experienced his first pain trade.
He’s a freshman in college learning the ropes and he was telling me about this beautiful girl in his class who he was getting friendly with. He texted her one night and invited her to a function off campus. Turns out she was going with her friends already, and that made it easier for them to connect during it.
Everything went well, and the next day he texted her to meet up for some food.
They ironed out logistics — the idea of breakfast moved to the idea of lunch — and then the idea of lunch moved to silence.
She didn’t text back.
That’s the pain trade in that situation — he only needed 1 more text, 1 more big push higher in the market, but the market stayed stagnant. Silence.
With no clear yes or no (up or down) he doesn't know what to do when he sees her in class on Monday morning. Should he play it cool? Should he bring it up? Should he ignore her?
Welcome to the club kid. The pain trade gets us all from time to time.
I like that he’s throwing himself in the trenches, and that he called me up for some advice on that. I also like that her name is Porsha. Looks like he has the same exotic taste as his Uncle.
A little pain builds character.
I have a lot of exotic women in my phone who have left my messages on read.
I’m still addicted though.
It hurts so good.
I hope you enjoyed reading Simply Finance.
I write a small FREE NEWSLETTER and put out a lot of content. If you enjoy it, the best way to help me out would be to share it with someone else.
And don’t forget to subscribe so you don’t miss the next one!
Disclaimer: These are not recommendations and I am not a financial advisor. These are just my two cents, or two satoshis as the kids say. Remember to do your own homework before making any financial decisions. Also, keep in mind I usually have some personal investments in the things I discuss.
Heh!
Good points about waiting, Christos. My stock market teacher always stressed that the best traders are patient. That's the quality #1 to develop.