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Tick By Tick Research Email - Anorexic Volume
Dear All
In 1873, a British Physician named Sir William Gull used his diagnostic skill to term a severe eating disorder that seemed to plague those experiencing a neurotic loss of appetite as anorexia nervosa. A condition that has become one of the most pertinent medical and social disorders of modern times with an estimated 1-2% of the westernised young female population experiencing the tell tale signs of the disease at any one time. The condition itself is one of the strangest phenomena in nature, counterintuitive to our primordial need to hunt and gather as much food as we can, some individuals feel the need to starve their body of the vital energy that it requires. The human body's reaction to this activity is to burn away excess fat deposits before moving onto our muscle proteins that provide the vital ability for our bodies to function. Moreover, when taken to its eventual conclusion, these proteins become so depleted that the heart begins to fail.
Much like food for the human body, trading volume and money movement represent the essential fuel to keep the financial sector functioning and overtime a deficiency of these vital ingredients can lead to a heart attack of a very different nature. Like it or not, the financial sector represents essential fuel to the global economy with an almost unparalleled skew towards more developed nations where society nears the conclusion of demographic transition. Hard-lined socialists may call us prostitutes to the industry; capitalists may say that our reliance is merely a function of the free market economy. Whichever you choose to believe, the substantive point does not changed, the industry makes up a substantial proportion of global GDP and provides both direct and indirect employment to millions. When this fuel is sucked from the system, it does not provide the sort of fast hitting effect of Cobra but rather the slow constriction of a Python.
"Rising prices and falling volume are abnormal and indicate a weak and suspect rally. This type of activity is also associated with a primary bear market environment"
Martin Pring, Technical Analysis Explained
The reasons for the apparent disappearance of financial flows can be tentatively linked to thousands of independent factors but there are a select few that continue to spook investors beyond all others, namely: Deleveraging, Central Bank Intervention, Political Turmoil and Resource Allocation. As David Einhorn so pertinently pointed out over the festive season, those investing right now lie within a feedback loop that focuses on the decisions of central planners rather than the relative strength of a singular institution or sector. An observation that looks certain to continue well into the next few years as the full extent of fiscal irresponsibility by both the public and private sector become gradually clearer. One only has to look at the billions of Government secured Transport bonds that have emerged since the Greek default restructuring to see how much of debt has been effectively hidden from plain sight. To think that Greece is the only offender in the hiding of "quazi-public" obligations would be nothing short of moronic. Anyway, we'll save that conversation for another day, back to volume.
For those whose job it is to service the financial sector directly, the effects of anaemic volume is clearly the most troublesome. With less business being shared about, margins become compressed and financial edge evaporates whilst firms continue to compete for the scraps of business that dribble down the phonelines. Merely ask a participant from rates, credit, equities or the derivatives that service any of these asset classes, and you will have no doubt hear confessions of just how quiet the markets are despite many analysts pumping out reports to encourage investors to dip their toe into the turbulent markets once again.
"There is a paralysis among Hedge Funds"
Jay Lefkowicz, Concept Capital
Despite the seemingly relentless rally in financial stocks and increased shareholder returns from the likes of JP Morgan, don't be fooled that the floor isn't creaking behind the scenes. If one is to step back and consider the business model of any institution that relies upon brokerage revenue, the sole two drivers are that of proprietary risk and client flow. However, when the flow starts to fall due to reduced volumes, the risk limits within banks do not position the company to increase proprietary positions; in fact, the converse opposite occurs and risk appetite falls as proprietary trading market share inadvertently rises causing the net exposure to systematic risk to sky rocket. And all of this is occurring before we account for the effect of the impending Volcker rule legislation that will, in so many words, ban Investment Banks from frontrunning running proprietary trading operations. Despite my skepticism over the successful implementation of the Volcker rule, the substantive point to be taken away is still that there will be pressure on many of the largest firms to make up a greater proportion of revenues via client flow. (Did anyone else just hear an axe swiftly cut yet more headcount across the industry...?)
"If this is such a good party, why isn't anyone here?"
Nicholas Colas, ConvergEx
For those outside the financial sector, what I may have just purported may seem like an abstract concept given the bullish sentiment that has emerged since the New Year but you must understand that a market only needs two participants - or algorithms - to rise to infinity. To add some context to my point, let me share some figures with you. The proxy for USD equity trading volume (NYSE volume multiplied by S&P 500 volume) is at the lowest point in over 10 years despite the growth of automated and high frequency trading; if compared to the pre credit crunch levels, that is a 50% fall. To see exactly what I am referring to, the team from Zerohedge has graphed this phenomenon over the last ten years for all to see (Available HERE).
This may sound trivial to many, but their are millions, if not billions, of individuals who will all be affected in some form or another. Whether through personal employment (direct or indirect), negative savings yield or the continued trend of deflation in long term holdings vs necessity asset inflation of commodities such as food and fuel as a consequence of deleveraging vs monetary easing; almost of all of us will feel the pain.
"Investors have been scared...they are not fully engaged or confident in the recovery and it's going to take more that a few economic data points"
Richard Repetto, Sandler O'Neill
More interesting as we look forward is where we expect replacement revenue to come from across the board, both in terms of financial flows and economic growth. The trend within Finance has been to create continually more complicated financial products (Leveraged ETF's, Exotic Structured Products etc) or replace human skill with computer code and models. However, like all developments, these moves have structural limits and many induce long term negative consequences; just read Grant Williams' latest Things That Make You Go Hmm (link below) to see an example of Credit Suisse's financial folly and the vast sums that both retail and professional investors have lost along the way. Whether you represent a financially orientated firm or not, the main development that we undoubtedly need is some form of clarity and recognition of the issues that are plaguing the accuracy of any forward looking projection. Instead, we all find ourselves within a period of monetary and fiscal experimentation where even the sharpest minds struggle to decipher the mixed messages scrolling down their news feed.
Economic food for thought...
After that short introduction, I would like to introduce a number of articles and videos that are well worth viewing as we enter the new US tax year. Firstly, we have a must watch video and article from George Soros that looks to explain just how bad things have got in Europe. Secondly, Grant Williams takes a look at the increasingly complicated ETF's that banks are creating to lure investors into the marketplace. Thirdly, we have a visual and creative take on explaining the ECB's LTRO operation using what can only be described as incredible illustrations from Mark Flood. Penultimately, we have a particularly interesting article from Neel Kashkari of Pimco that looks at the margin pressure that continues to plague the equity markets as institutions seek a bumper top line. Finally, and by no means least, we have two graphs from the US Census Bureau that show the diverging population pyramids of China following its one birth policy and the future growth region of Indonesia; i'll leave you to make your own decision about their fate. Enjoy!
1. George Soros - Project Syndicate (HERE) and INET (HERE)
2. Grant Williams - Things That Make You Go Hmmm... (HERE)
3. Punk Economics - LTRO Explained (HERE)
4. Neel Kashkari (PIMCO) - Newtonian Profits (HERE)
5. US Census Bureau Demographics - Indonesia (HERE) China (HERE)
Best Regards
George Adcock
Founder
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Comparing an economy - a functional system allowing human to relate to each other in a social system for the distribution of goods and services, to the human body, a natural system built to function under specific parameters for a relatively known length of time, is like comparing illusions to reality.
Just because we have the current economic system, doesn't mean it is the only or best economic system possible. it is only the best one allowed by the functional elites, those who control the choke points by virtue of wealth or birth or accident of life.
Wall street has no more right to my money and investment than the King has the right to rule me as given him by god himself.
If you live in a house of illusion (wall street) eventually you may find it difficult to entertain reality, and may come to view your illusions as real. A hard fall usually follows as you can't depend on what doesn't exist.
Realize that finance became a large portion of gdp not because it was necessary for gdp, but because of economies of scale and arbitrage between markets, as markets integrate into a global network, arbitrage flattens, and finance dwindles as a mechanism to make money easily. how will you trade currencies when there is only one currency? How will you trade government bonds when there is only one government?
globalization doesn't just fuck labor, it fucks capital as well.
The global economy runs on oil, not money.
The starvation is due to diminishing net energy (no more cheap oil).
All the other issues are just symptoms.
Truth be told, a global collapse is now inevitable sooner rather than later. The "markets" require trust as an element to function, but the elite pigs, in an effort to save their own private banks have broken all trust and our so called leaders have condoned their actions. Its end game time... now we sit and wait.
Markets are abysmal because of the one thing the spin-author chooses to ignore: FRAUD. Its not deleveraging (printing), its the lack of integrity and unsound money.
The faggots killed the golden goose, now eat your bones.
The global economy runs on oil, not money.
The starvation is due to diminishing net energy (no more cheap oil).
All the other issues are just symptoms.
Nice George - thanks.
Soros? Kind of a turd in that report punchbowl. Other than that? Kudos.