Bernie Sanders (and All Politicians) Should Learn the Painful Lessons of History

from Platts:

Bernie Sanders and onions

This is not going to be a steady "dump on Bernie Sanders" blog, though this is the second time in days that we have written about him. But a second proposal that the senator from Vermont made this week, if looked at through the prism of something written this week by one of the better market analysts out there, brings home how crazy it is for government to try to control markets by fiat.

Sanders introduced a bill that would require the Commodity Futures Trading Commission use its emergency authority to halt what he is calling sudden or unreasonable price movements in commodity prices. In a statement, Sanders said the usual: "The last thing people need now is to be ripped off at the gas pump because speculators on Wall Street -- some of the same people who received the largest taxpayer bailout in US history -- are allowed to jack up oil prices through price manipulation and outright fraud."

Right about that time, the weekly report of the estimable commodities research team at Barclays was released. The report, from the group headed by Paul Horsnell, is always insightful and also entertaining. There's always an obtuse question in there, usually too hard for me to answer, and this week's concerned the identity of a commodity that went bananas up and down in price before everything else did. No, it wasn't bananas.

The answer: onions. "The average price in the US went from more than $50 in April 2007 to less than $5 in December 2007, although we did not tell you that those prices are for a hundredweight of the commodity," according to the report. "(The) average price of onions did fall very sharply over that period. Indeed, they lost 96% of their value between April 2007 and March 2008, before quadrupling in the following month."

Now, what does any of this have to do with Bernie Sanders? The relationship is this: onions are the only commodity that has an outright ban on futures trading in the US, because of a bill in the late 1950's pushed through the Congress by then-Rep. Gerald Ford. The idea, of course, was that if we just got those greedy futures traders out of the onion market, everything would be fine. The swings spelled out by Barclays certainly are not what Ford
had in mind.

Ford's 1950's goal and Sanders' 2009 goal certainly seem to be in sync. The problem is that if futures traders cause prices to swing madly, why did the price of onions -- where futures trading is banned -- move in such violent fashion? Even oil didn't swing that much.

So maybe the conclusion that it's traders that produce volatility or make the price move too high ought to be considered carefully before being the basis of new law.

Trading - prices don't ONLY move up and down

We often assume, as traders, that prices only move in two directions. That's not true. While it is self-evident that prices can move up and down, there is a third direction that prices can advance -- sideways. When we take a position in the futures markets, we assume that it will move UP or DOWN, depending upon whether we go long or short. However, statistically, prices are more likely to spend most of their time progressing in a mostly stagnant, or consolidating pattern.

This is one of the factors that makes trading so difficult, because if prices are consolidating, as soon as they appear to take off in one direction, eliciting a long or short position, prices then reverse in the opposing direction. This is one of the reasons for having Rule #1 from Phantom's Gift:

Assume it is a bad trade until proven correct! Positions established must be reduced and removed until or unless the market proves the position correct.

I never maintain a position for more than a few minutes unless it become profitable almost immediately. It is not worth the stress and nail-biting! And as Phantom also mentions in his book, my judgment is better after I exit a position; my thinking becomes much more clear, and my perspective improves, because the emotion of the trade dissipates.

Feeling stress as a trader is one of the ways that we know we have made a bad trade. This stress is one of the body's warning signs of trouble. Time to exit quick when the stress level rises.