Wed your spouse, not your trade
Wed your spouse, not your trade is an old adage among traders and seems to go to the heart of dissatisfaction being voiced across broad society with itself. Growing dissatisfaction within some segments of society being expressed through the demonstrations known broadly as Occupy - Wall Street, Chicago, Boston et al and commentary from within the world of economics and indeed across every segment of society that only grows louder by the day. Over time these general sentiments have been expressed by a diverse group of folks including central bankers Richard Fisher and Juergen Stark, business media contributors Rick Santelli and Jonathan Weil, economists Niall Ferguson and Nouriel Roubini, leaders of global finance Jamie Dimon and Lloyd Blankfein and the voices of broad society that combine to make Zero Hedge and other public venues what they are.
Some of the best of the recent front line observations come courtesy of the always fabulous Art Cashin of UBS on Wall Street and ag producers in California. First is Art's recent note expressing the belief that the disaffected occupiers should “take a shower”.
While California ag producers channel their inner Erin Brockovich in reply and ask if Art would like them to bring some water in special for him and his compatriots trading on behalf of their parent organizations in NYC and elsewhere so they can finally take their much needed shower.
[Note to Art, the Wall Street Frater's of Fermentation and my associates from various other chapters from across the nation from this monk of mutton and ale. We all know that when the water and wine turn sour one must make do with ale or scotch, especially when an irrigation ditch isn't available]
Where folks ranging from the traders in Chicago's CME pit's to ag producers in small town California meet is in this fine example of the misallocation of capital implicit in a TBTF economy. Misallocation where ANY means to support the free cheese from the reserve currency money tree MUST be allocated to keeping some sort of TBTF afloat within their collective epic failure. Fostering failure rather than permitting and fostering actual financial alchemy and price discovery in markets made as clearly regulated and free as possible from the ravages of socialized loss. I think Art, Rick and their associates whom I hold in high esteem would simply reply that the only truly TBTF enterprise going is reflected in the belief that society owes everyone everything. While to the Occupiers the same scenario applies to aspects of what have become broadly appreciated within their circles as placing the financial TBTF's at the apex of the social safety net making them and by extension their employees essentially the biggest welfare queens in the land. This perceived epic misallocation of capital unites these disparate groups against one another within broad society and directly undermines their belief in the “social contract”, however each individual perceives it.
Many folks seem clueless that the ongoing debates center on the competing orthodoxies of what is an "investment" v "trade". Lost in the hubbub is the idea that economics is simply a reflection of the intersection of finance and politics and not a monastery of high priests imbued with mathematically premised magical powers. Powers that enable them to not only administer the sacraments of the money tree economy, but smooth it into some sort of great moderation premised utopia. A utopia that is virtually guaranteed IF only folks would have confidence in the belief system and faithfully follow the economists prescriptions.
This can be viewed in the current debate as to exactly where within the various interconnected structures does ones claim to accrued “wealth” and position within the “social contract” reside. What has most folks pissed off is the realization that what many believe to be investments and contracts are really trades and with a trade comes the potential of loss. This is why experienced traders know and what economists, politicians, hell, everyone else should appreciate is that everything to do with the circulation of capital within a society is a form of speculation with P&L built in, supposedly.
The kicker is that all the 1%ers, be they at the CME, Wall Street, a motorcycle club, a union hall, political caucus, a demonstration or a neighborhood AARP meeting are all appreciating that their claims to what are perceived as their rightful returns on their investments and contracts cannot be made money good. The Ponzi has simply grown far beyond that. There is no longer treasure enough in the world absent super hyperinflation in nominal terms to make the claims whole. And everyone knows that hyperinflation regardless of how one defines it is just another way of realizing the same failure.
Along these lines flows the concept of a never ending “wealth effect” that underpins confidence that belief in the current orthodoxy will make one “richer” if they will simply adhere to the orthodoxy and its attendant requirements. All one need do is take a closer look at the long anticipated [by some of us] implosion of the Belgium banking money center institution, Dexia, a major player in European municipal funding, wealth management, retail banking and more. Folks are looking at the way Dexia has been allowed to grow, be maintained and now parceled with various protections and guarantees in collapse to garner a greater appreciation for these various dynamics at play.
On a micro level it doesn’t take a PhD in mathematics or a ThD in super macro econometrics to appreciate the arithmetic inherent in Any O. Citizen purchasing a home [trade labor, productive or otherwise for an abode] for $200.000 and to break even on an actual rather than a nominative basis over ten years. Given a realized 2% inflation rate the home must sell for $243.000 and change to “break even”. Of course fuel for the fire expressed in the outrage of the occupy wherever folks is the appreciation that a 30% decline over 5 years with a headline inflation rate far in excess of 2% has rendered their “investment” an epic tragedy that is incinerating their belief in the current orthodoxy. Just as is the appreciation that whatever nominative “gains” that were appreciated during the bubble to provide fuel for the churn within the economy were also an epic tragedy especially for those that are now toting the note. These dynamics especially translate to the churn that higher education has become as America is creating a lost generation of highly educated long term unemployed. What has so many economic, financial and political folks in a dither is that the various fragments of 1%ers that make up the 100% of society are all singing from the same hymnal, albeit different songs, but it's the same hymnal none the less.
The current financial structure is founded upon the concept of the capital asset pricing model that stipulates sovereign credit to be risk free risk with the reserve currency and its credits at the very foundation of this structure. This is the magic that tells the misguided mathematically premised social scientists that hold a ThD in economics in charge of this intersection of finance and politics that there are no limits to how much currency those that control the reserve currency can put into circulation. Or, as Ben Bernanke said so well:
"Balance sheet considerations should not seriously constrain central bank operations"
What Ben and many others fail to appreciate is that there is a place for social sciences else we would not gain a better understanding of human behavior. The problem comes with the hubris attendant in creating an orthodoxy centered upon the concept that social science can be empirically calculated and engineered over broad human society with any long term success. Heck, physics is constantly being surprised with what greater intellectual illumination reveals. This has been illustrated most recently through the discovery that there are particles that travel faster than the speed of light rendering E = MC2 to the same fate as steady state. Given this it’s no wonder that anyone attempting to render human activity using these tools should also appreciate that the attendant "truths" of their belief system will one day be so relegated to the dust bin of history. Or, as a trader would observe; “That trade is toast” while the Thd would say; "You need to adhere to the orthodoxy more closely to be successful'.
This is the essence of the trader’s truism regarding spouses and trades as the only truth in a trade is P&L at execution and that cannot be engineered away. One can hedge, but ultimately the trades will settle. Well, hopefully, IF ones counterparties remain solvent AND the rules of the marketplace aren't changed post tense. In the final analysis it’s all speculation and can only be made money good through the ceaseless application of contrarianism to one’s own view as currently appreciated. It seems that the 1%ers in the pits and in broad society are coming to appreciate that their freedom to ceaselessly quest information and trade upon that information is premised upon the structures put into play by the very crossroads of finance and politics. These are expressed by the rule of law, regulation, margin requirements, the ThD's of economics and more. The pursuit of information and trades premised upon that are being fatally undermined in the name of maintaining stability of an ever more catastrophically unstable and unsustainable structure.
Fact remains that the occupy wherever folks are coming to the same conclusion as the traders, just from another direction. Or, to use micro examples from Muniland in the persons of Governor's Christie of New Jersey with pension funding and Brown of California with redevelopment issues. These examples of simply manipulating the rule of law in the name of deference to the same essentially render the organizations with which they have been entrusted in default of its obligations. These defaults however limited place them into the same boat as Rick Santelli's imprudent mortgagee or Occupy Wall Street's imprudent lender. After all, no one can trade without access to capital else the good folks in the pits or anywhere else wouldn't say; "Bring your cash". Since so many members of society look at these and so many other actions or lack of same by those that hold sway over the crossroads of societal interaction glaring them in the face that demonstrate they hold the rule of law in lawlessness then no wonder nearly everyone is so incredulous. Especially when these actions are committed by those holding public trust having risen through the ranks of wielding prosecutorial power or other specialized professions with their attendant knowledge.
So, the swirl in society v itself seems to surround where in the mezzanine structure ones claim to their “rightful” returns on their “investments” and “contracts” resides. This process of discernment is made all the more challenging when those charged with enforcing said investments and contracts can no longer be trusted to faithfully discharge their duties in the eyes of broad and not simply fractured society. Given these operative conditions ever greater portions of broad society are learning to appreciate that all of the claims have been made mezzanine and there are no longer any truly super seniors left.
This reality is being made clear to ever more observers of all stripes as evidenced by the advanced state of deterioration within the microcosm that is the EMU as reflected by Dexia, other money center credit and CDS, short term paper and the sovereign paper that weighs down the balance sheets of these banks and other host nations within the EU/EMU. Reuters put up a really cheesy interactive that attempted to reflect the capital shortfalls given a set of haircuts to various sovereign credits and tier 1 capital adequacy standards within the EMU.
What this bit of 411 failed miserably at is in quantifying or even addressing the huge impacts upon the shadow financing world by such events or their ripples across broad social systems. The shadow financing world dwarfs sovereign credits to an even greater extent than the way credit dwarfs stocks. In this the Bank Of England would need to QE at an effective rate of 100X the amount announced yesterday, 75bn pounds, to even have a hope of temporarily cauterizing this wound within their own society. And anyone having the slightest clue of these dynamics knows that effort wouldn’t last long in our interconnected and globalized economy. Traders are coming to appreciate quicker than most everyone else, but more folks are catching up to the facts of life. These facts are there simply isn't enough treasure in existence to make this structure stable so folks are now fighting ever more for the remaining scraps. As Abba Eban noted; Men and nations behave wisely once all other alternatives have been exhausted.
What is bubbling to the surface now be it on the floor of the CME or on the streets outside is that precious energy is being wasted in an effort to keep the good ship lollypop afloat so more cheese can be extracted when that energy needs to be husbanded and directed to resolution of this tragedy and the fermentation of genuine societal and its attendant financial alchemy.
Meanwhile, in other news, Detroit sends New York packing.
Cheers from off South Main Street