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Cheap money, Broken markets and Stupidity
Would you lend money to Spain, Italy and the US at these ridiculously low levels? The answer is no. The World has during the past years experienced an explosion of sovereign Debt, but yields have been coming off, as a result of Central Bankers buying crap and therefore creating artificially low rates, which basically is pricing risk at totally "false" levels.
During the past weeks, people have been shocked by the equities collapse, but should they be surprised? No.
During the past year Mr Bernanke has bought close to 1 700 billion USD of Government Bonds and a 1000 billion USD of Mortgage Bonds, by expanding the balance sheet and postponing the problems the US Economy faces long term. So, would you lend your money to the US at these rates, and don't forget the US is not AAA rated. Below chart shows who is holding what in the US,
So, what would happen if these rates resume the historic trend, and revert to some kind of mean? Problems for the US would be significant, as payments for interest rates would be huge.
So much for the US, what is going on in Europe? Inspired by Bernanke, the ECB has been loading up on peripheral country Debt, ie crap nobody wants at these prices, thus creating another round of artificially low rates for countries most people wouldn't dare lending a single penny at these levels. During this week we have heard of countries implementing the Old rules of Short Bans, and we start hearing populist arguments of speculators driving markets lower, but that is a total fallacy. Politicians dare not dealing with structural problems of the Economy, and therefore focus on buying up Debt, and therefore create an artificially low interest rate level.
By flooding the system with cheap funding, people are "forced" into taking stupid decisions and many have been buying assets in a panic fashion, driven by fear of missing out on the rally. You know, the argument of money on the sidelines, is a fallacy as well. Only money on the sidelines, are happy to exit their longs, if we get an uptick again.
With QE 3 around the corner, many will soon again argue for buying crap at wrong prices, and we will ultimately create the mother of all bubbles.
The next big thing will be the unregulated derivatives market blowing up. Not many understand the Implications of Exotic products in the World, and there is no oversight of the asset class. The Trader has been arguing that the pricing of Risk and therefore volatility has been "wrong" for way too long. Remember when VIX was proclaimed dead by CNBC. We are now witnessing how risk is repriced overnight. This process is a direct function of cheap money having flooded the system, and created a belief of stability in the World, while Risk actually has been too cheap for many years. Below, this year's best report on volatility.
Cheap money has given us some prosperous years, with Bernanke ramping up asset prices. The Bernanke Put has worked well for years, and the buying of bonds at "wrong" prices has created a monster. Let's see if they are willing to save the markets, once again, and keep inflating the Bubble, by taking stupid decisions.
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So there you have it. The increasing size of the financial services sector in the last few decades in the first instance replaced the real manufacturing sector and has now prceeded to suck dry the pockets of the remaining productive sectors through volatlity, bad advice, bad management and inevitably a stumbling economy. The pimps are making their money regardless of whether their girls are getting sick and tired. Keep flogging the horse until it dies.
The average guy should be well out of the market and investing in PMs or farm land. Nothing else makes sense for anyone without an inside trading platform with an army of HFT robots. If you haven't already cashed out your 401k or taken a max loan against it to buy what's noted above, then it's your bad and you deserve your sheeple fate; shearing and then lamb chops.
I am thinking that you and I have very different views on who/what the average guy is. The average guy is a financial retard. The average guy lives paycheck to paycheck. The average guy enjoys following the crowd. The average guy will NEVER think for himself when others are more than willing to do it for him. The average guy will turn on you when things go south. The average guy actually enjoys being a victim, just ask Steve Wynn (as in Wynn Resorts). One thing I am pretty sure we can agree on is this, the average guy absolutely does not read ZH.
the bernanke will order qe three whyen aordered by wall street. Qe 2 got all the suckers who weren't long in, so the big boys could go short. the market also has to go low enough foor europena banks to blackamail the state to bail them out again. it may be a while.
It's strange to me how the 10 year is at record lows when the market isn't near the depths of the financial crisis. all of the usual pricing signals of the markets are broken.
risk is mispriced by too cheap money, but when the state always bails out the banks who do the mispricing why shouldn't they. As, an MD if I did the damage they do on a regular basis I wouldn't be allowed to practice anymore
At some point TBT will be the trade of the year. But when? I thought interest rates were near a bottom. Now, I have no clue. But will get the meat of the move when it all blows, and blow she will.
How can the average person not know what is going on and how they are being screwed. How can Americans be so stupid?
Re: QE3 rght arond the corner -- if that is correct as in around the corner is Aug26, then we will see a wild violent plunge Monday into Thursday. Dow will need to drop below 9600 on or by the 26th -- these are my calculations.
So........what needs to happen over the weekend into Sunday night such that Asia and Europe lead the way.......down?
Thank You, RR. Best exec summary I've read in ages!
August 19, 2011 If the gut-wrenching market volatility of the past few weeks has made you sick to your stomach , I have some bad news for you: violent volatility is the new normal - or more precisely, the new ab-normal.
After massive market moves last week, the Dow Jones Industrial Average tumbled 419.63 points yesterday (Thursday). And, while t hat may be bad news for average investors, it's something Wall Street wants.
If you're not a day-trader, high-frequency trader, hedge-fund manager, or institutional desk trader, reading this is going to make you mad as hell. But it's something you have to know, understand, and accept if you're going to be a successful investor going forward.
The reality is that in their crusade to manufacture extraordinary personal wealth, Wall Street insiders have engineered volatility into the capital markets.
This change is permanent.
Indeed, the same dangerous volatility that destabilizes markets creates innumerable trading opportunities for Wall Street's proprietary traders. These traders feed off each other and off their banking-industry clients.
The game is simple: Wall Street creates market volatility, some of which leads to panic. Panicked investors, in desperate searches for safety, turn to "experts" for protection. And Wall Street rakes in the profits - not just from their market-crushing trades, but from the investment fees they charge individual investors, companies and nations.
It's similar to how the mafia might trash your business and then offer to "sell" you their protection services.
By increasing volatility in stock, bond, commodity and real estate markets, The Street has created a self-perpetuating moneymaking machine.
Obviously, without the manufactured volatility, markets would be more stable, predictable and better serve economic development and growth. But there are no extraordinary gains to be made in calm and stable markets.
So Wall Street for decades has worked to make market volatility the norm.
Exodus: The Beginning of Volatility for Profit
The roots of manufactured market volatility can be traced back to an obsession Wall Street has with disadvantaging the public while giving itself every advantage it can.
In 1969, Institutional Networks Corp. launched Instinet, the original off-exchange "communications network" designed for private use by institutional traders and dealers.
Instead of placing their orders and transacting on the principal exchanges where stocks traded almost exclusively, Instinet provided its members a competing venue where they could show each other bids and offers that the public wasn't privy to.
The club became so successful (I was member myself) - partly as a result of its exclusivity - that it eventually spawned competition.
In fact, it spawned a lot of competition.
What eventually became known as electronic communications networks (ECNs) proliferated in the 1990s. Eventually the multiple electronic exchanges, fashioned after Instinet and the over-the-counter (OTC) exchange that became Nasdaq, ended up competing for orders from brokers, dealers, institutions and a new breed of gunslingers known as "day traders" .
All of this competition dispersed trading to such a degree that it was difficult to know where to go to get the best price when trying to buy or sell stocks. But Wall Street eventually saw the benefit of the wide price discrepancies across multiple trading venues: It increased volatility, creating new trading opportunities.
Working (Over) the SystemOf course, nobody on Wall Street believes you can ever have too much of a good thing. The first result was that big-name trading shops and old-world exchanges bought up the more profitable ECNs. Then they went on to start other private exchanges and trading conclaves known as "dark pools ."
In order to drive business to their trading venues, these synthetic exchanges pay for "order flow" and offer incentives to attract bids and offers for blocks of stocks.
The game, invisible from the surface, is designed to accomplish several things. If you control a venue that generates a lot of buying and selling, you can "internalize" the order flow. That means you don't have to trade outside your house - you match orders internally because you have so many buy and sell orders coming in. And then there are transaction fees.
If you are the "house," you can also take the other side of any trade you want, which has its advantages.
But the biggest advantage these venues have is that they "see" what orders are coming into them. And, regardless of whether or not it's legal, they trade against them and take advantage of knowing the specifics of other pending orders that can be used to backstop losses. I'll get to that is a moment.
Another piece of the market-volatility puzzle was neatly fitted with the advent of "decimalization."
Beginning in 2000, and finally encompassing all stocks on July 9, 2001, trades could take place in increments of one cent. Prior to the implementation of decimalization, stocks traded in increments of eighths. Stocks used to trade in increments of $0.125, $0.25, $0.375, $0.50 and so on. You couldn't buy or sell a stock for $50.01 or $50.05, for example. You would have to transact at $49.875, $50.00, $50.125, or $50.25.
Even though changing to one-penny increments was sold as a way to reduce spreads and transaction costs, the hidden agenda was to increase volatility.
Decimalization didn't make for more liquid markets. It simply encouraged more risk-taking. Trading and holding horizons became shorter. And institutions stopped putting down big limit orders, because traders used those orders as backstops to sell into if their speculative buying didn't work out.
Markets got "thinner" and less liquid as a result of smaller orders being put up. Instead of lowering transaction costs, decimalization increased transaction costs: It now takes a lot more trades to buy or sell large blocks. It also can take a lot more time and expose buyers and sellers to steeper price moves.
The increased number of venues combined with more risk-taking to increase volatility exponentially. It was all working.
But there was still one little problem that Wall Street wanted out of the way.
The New AbnormalWall Street finally got what it wanted on July 6, 2007, when the Securities and Exchange Commission (SEC) did away with the "uptick rule." As of that day, it was no longer necessary to wait for a stock to go up in price before short-selling it. Without the uptick rule, short-sellers can short any stock, at any price, at any time.
There's plenty more that Wall Street has done to ratchet up volatility. It has flooded the world with derivatives that aren't regulated, and blessed high-frequency trading. It also introduced innumerable securities and financial instruments that it can arbitrage for healthy profits against unsuspecting institutions and the public.
Not surprisingly, market volatility is now a tradable product. And now that Wall Street has taken us down this path of entrenched, institutionalized volatility, there's no going back.
Don't expect any respite from what's going on in the markets now. On the surface, it's all about Europe, debt, downgrades, earnings, fundamentals and technicals. But underneath all those prime movers are the real shakers, the greasy palms of the markets hidden hands.
http://moneymorning.com/2011/08/19/new-abnormal-permanently-engineered-m...
I have to say that I look forward to your and Bruce Krastings' posts. Keep up the good content!
I've about given up on the couple K I have in the (4) 101 K.
My new plan for future savings is aluminum cans, copper pennies, nickels, and "real" dimes, quarters, halfs.
Food. Diapers.
That, and of course some steel to project the lead to protect me and my 2 year old.
I would suggest some fire extinguishers as well.....
I am also not sure if I ever get the money back I put in the stockmarket, I could pull out now with a 50% loss or wait .. idk
It is amazing every two or three generations we have to repeat the failure of easy credit and monetary expansion.
"But it feels so good. I just cant stop myself."
Yep, it goes back to Cain and Abel. Cain got life - banishment from society. As the first sociopath, he started a bank.
24K,
I always liked that tale of Cain and Abel, but as a kid I remember wondering how we got girls if there was only a boy between the first two. I'm not a bible person, so do you have any idea of how that tale developed into this tale where there are six thousand million of us?
Another question that arose over these later years is: how can we expect to be naturally 'good guys and good girls' when we started with the 'bad blood' of Cain? An oldman continually ponders these unponderable thoughts---it is part of the job as much as continually having to rebalance the universe. A lot of people think this is easy, and it sometimes is, but usually it is just 'a lot of work' as our ex-president was so fond of saying.
So, just two questions today----not so much re-balancing to do at this time.
thanks om
deceased
ZIRP has not and will not save the dead banks, but it most certainly kills free markets and the economy.