This page has been archived and commenting is disabled.
Charles Gave: "I Cannot Remember A Time When Less Thinking Has Ever Been Done In The Financial Markets"
By Charles Gave, courtesy of John Maudlin
The Apex Of Market Stupidity
In some 40 years of watching financial markets, my dominant emotion has been a mixture of curiosity, amusement and despair. It seems the stock market must have been invented to make the maximum number of people miserable for the greatest possible amount of time. The bond market, meanwhile, has just one goal in life: to make economists’ forecasts for interest rates look even more silly than their other predictions.
Over the years I have often observed how most market participants are able to concentrate on only one set of information at a time. For example, in the 1970s, the only data release that mattered was the consumer price index. In the days leading up to the CPI’s publication, everybody dropped all other considerations to speculate feverishly about what the number might be. And then following the release, they would spend the next week or two commenting sagely on what the number actually had been. Eventually Milton Friedman convinced the Federal Reserve (and from there the markets) that there was some kind of relationship between the money supply and the CPI. So everyone stopped looking at the CPI, and instead started to focus on the publication every Thursday evening of M1 (or was it M2?). Inevitably each week would see an immediate rash of commentary on these arcane matters from the leading specialists at the time, Dr. Doom and Dr. Gloom.
This gave way to a period in which the US dollar went through the roof on the covering of short positions established during the era of the minister of silly walks in the 1970s. For a few years, the only thing that mattered was the spread between the three-month T-bill yield and the three-month rate on dollar deposits in London (an indication of the shortage of dollars outside the US). The beauty of this one was that the scribblers on Wall Street could comment on it twice a day or more, which of course had no discernible impact on reality, except for the destruction of the forests needed to print so much waffle.
That era came to an end in 1985 with the Plaza Accord. At that point the Fed, under the wise guidance of Paul Volcker—my favorite central banker of all time, probably because he was the only one without a PhD in economics, which may well explain his success—decided it was going to follow a type of Wicksellian rule-based policy under which short rates were kept closely in line with the rate of GDP growth. Of course, this meant the Fed paid little attention to the vagaries of the financial markets, so there was very little to comment on. The result of policymakers’ lack of interest in financial markets was that from 1985 to 2000 the US enjoyed a long period of rising economic growth, low inflation, low unemployment and high productivity; a period dubbed “the great moderation”. The trouble was that no one was able to make any money trading on inside information provided by the politicians and central bankers. As an advertisement for Smith Barney put it at the time: “We are making money the old way. We earn it.”
Naturally, that wouldn’t do at all. After nearly 20 years of economic success, the US budget was in surplus, the pension funds were over-funded, and the “consultants” in Washington were on the verge of bankruptcy, having nothing to say. Clearly something had to be done, and it was: policy shifted to accommodate Wall Street, with forward guidance, negative real rates, the privatization of money, and a lack of regulation. This allowed Wall Street to make money, but it created nightmares elsewhere through the ever-successful euthanasia of the dreadful rentier.
Still, the shift to an economy driven by the decisions of central bankers meant the market commentators were back in business in a big way. For the last 12 years, the only thing that has mattered has been to know whether or not the chairman of the Federal Reserve has had a good night’s sleep. Similarly in Europe, the dysfunctional euro, created by a bunch of incompetent politicians and Eurocrats, bred drama after drama. Since nobody wanted to admit it was a failure, the most important man in Europe became the president of the European Central Bank.
In the last week, we have reached what is surely the apex of this stupidity. A bunch of algo traders programmed their computers expecting “Derivative Draghi” to be extremely dovish, as any proper Italian central banker should be. I am not sure I understand why, but some traders obviously decided that he had not been dovish enough. European stock markets plunged by -4%, while the euro went up by roughly the same amount in the space of a few minutes. What that means is simple: value in the financial markets is no longer a function of the discounted cash flow of future income, but instead is determined by the amount of money the central bank is printing, and especially by how much it intends to print in the coming months. So we are in a world where I can postulate the following economic and financial law: variations in the value of assets are a function of the expected changes in the quantity of money printed by the central bank. To put it in a format that today’s economists understand:
Delta (VA) = Delta * (M),
where VA is the value of assets and M is the monetary increase.
What we are seeing is in fact in one of the stupidest possible applications of the Cantillon effect, whereby those who are closest to the money-printing, i.e. the financial markets, are the biggest beneficiaries of that printing. This is exactly what happened in 1720 in France during the Mississippi Bubble inflated by John Law. The end results were not pretty.
What I find most hilarious is that some serious commentators have been pontificating at considerable length about what the market’s participants think. These days, some 70% of market orders are generated by computers, and many of the rest by indexers. And computers do not think. They simply calculate at light speed, which allows them to react to short term movements in market prices as they were programmed to do. And since they are all programmed the same way, the result is some big short term market moves. In essence, these computers act as machines that allow market participants to stop thinking. As a result, I cannot remember a time when less thinking has ever been done in the financial markets, which is why I find today’s financial markets infinitely boring.
We are swimming in an ocean of ignorance, just like France in 1720. It seems all the painful economics lessons learned over the last 300 years have been forgotten. I suppose that means we will just have to wait for another Adam Smith to appear. La vie est un éternel recommencement...
- 45 reads
- Printer-friendly version
- Send to friend
- advertisements -


Manipulated markets require no thinking. Just BTFD. Thank Old Yeller for her put.
America - the land of free money. Especially if you don't think.
"Thinking" doesn't matter, because what drives the market today is not logical. It is driven by criminal monetary actions and therefore, only the criminals can successfully speculate as to what will happen.
Charles Gave, financial markets aren't supposed to be fun and a gambler's paradise. They're supposed to serve an economic purpse - capital allocation and encourage investment.
Now they just reflect buy-backs and the Fed's balance sheet.
QE IV we need moar money.
Since the central banks are connected globally, they will be able to print to at least infinity + 3.
The central banks have no friggin clue. They got us in this mess and now they are frozen out of fear to take the necessary next steps. Unfortunately, the only way they can get us out of the mess without a radical change in thinking is via traditional methods of QE and interest rates. I have a feeling they will hike interest rates and increase QE at the same time just for the heck of it.
They must have a clue. They are doing what they're doing on purpose, without regard for the 99%.
One more great reason to learn how to use Bitcoin!
http://www.BitcoinTeaching.com
Computers most CERTAINLY do "Think"; in the exact way as the humans that programmed them!
Computer programs are just an extension of the human brain; our brain couldn't handle the processing task of what it wanted to do, so our brain invented the computer to "run the numbers" at complexity/speeds far beyond the brains capability.
So what are computers programmed to "think"...the FED has our back and is giving us FREE MONEY!...BUY, BUY, BUY!
What is this thinking thing you speak of? They ring the bell and the dog salivates......
Correct. Except by the manipulators, of course.
Algos run by black boxes take care of that
Wash. rinse. repeat
That is the same lack of thinking that is going on in the electorate. Bubba Trump for president
I think you underthink your conclusion.
There is thinking going on. They think, "how can we screw more people out of more money?"
You can't make money in this "market" by thinking. btfd. buy the worst most shorted trash equities. that is all. [/not advice]
Summed it up pretty well. I would go further and say a lot of smart people saw this coming. They did nothing to stop it. Just took the bags of cash. Sad really. The world of pain is upon us.
I think that instead of "less thinking" he meant to say "no thinking".
After all, it's not as if HFT requires anyone to be thinking.
The Fed seriously needs to be audited and investigated. Their stock buying scheme to prop up the market is becoming more and more obvious!!
This is what happens when US.gov captures the financial markets. If this trend continues, we'll see the day when every 'citizen of the world' has a MyRa, which is invested in 1 of a handful of 'portfolio options'. We'll all be choosing from UST (US .gov ass-wiping equipment @ 0.5% guaranteed annual interest and an auto-roll feature that NEVER requires principle return), US.gov "EVA" (enviro-approved), "MGD" (Multicultural global development or handout/make-work projects for niggers in Africa), and (my personal fave) War4EVA (all the machinery required to keep millions of mercs busily blowing shit and people up so that the first 3 portfolio options seem safe and/or offer high growth/appreciate prospects).
This is what happens when US.gov captures the financial markets.
you have that backwards
Just what TPTB want in a dumbed down society. Let Google and the machines do the thinking for us. Keep Merica strong by Farcebooking and watching teevee.
Just read the Congressional record to see who wants to dumb America down, and ask yourself - have they accomplished their goals?
http://www.uhuh.com/nwo/communism/comgoals.htm
Communist Goals (1963)
Congressional Record--Appendix, pp. A34-A35
January 10, 1963
Current Communist Goals
EXTENSION OF REMARKS OF HON. A. S. HERLONG, JR. OF FLORIDA
IN THE HOUSE OF REPRESENTATIVES
Thursday, January 10, 1963
Mr. HERLONG. Mr. Speaker, Mrs. Patricia Nordman of De Land, Fla., is an ardent and articulate opponent of communism, and until recently published the De Land Courier, which she dedicated to the purpose of alerting the public to the dangers of communism in America.
At Mrs. Nordman's request, I include in the RECORD, under unanimous consent, the following "Current Communist Goals," which she identifies as an excerpt from "The Naked Communist," by Cleon Skousen:
[From "The Naked Communist," by Cleon Skousen]
CURRENT COMMUNIST GOALS
1. U.S. acceptance of coexistence as the only alternative to atomic war.
2. U.S. willingness to capitulate in preference to engaging in atomic war.
3. Develop the illusion that total disarmament [by] the United States would be a demonstration of moral strength.
4. Permit free trade between all nations regardless of Communist affiliation and regardless of whether or not items could be used for war.
5. Extension of long-term loans to Russia and Soviet satellites.
6. Provide American aid to all nations regardless of Communist domination.
7. Grant recognition of Red China. Admission of Red China to the U.N.
8. Set up East and West Germany as separate states in spite of Khrushchev's promise in 1955 to settle the German question by free elections under supervision of the U.N.
9. Prolong the conferences to ban atomic tests because the United States has agreed to suspend tests as long as negotiations are in progress.
10. Allow all Soviet satellites individual representation in the U.N.
11. Promote the U.N. as the only hope for mankind. If its charter is rewritten, demand that it be set up as a one-world government with its own independent armed forces. (Some Communist leaders believe the world can be taken over as easily by the U.N. as by Moscow. Sometimes these two centers compete with each other as they are now doing in the Congo.)
12. Resist any attempt to outlaw the Communist Party.
13. Do away with all loyalty oaths.
14. Continue giving Russia access to the U.S. Patent Office.
15. Capture one or both of the political parties in the United States.
16. Use technical decisions of the courts to weaken basic American institutions by claiming their activities violate civil rights.
17. Get control of the schools. Use them as transmission belts for socialism and current Communist propaganda. Soften the curriculum. Get control of teachers' associations. Put the party line in textbooks.
18. Gain control of all student newspapers.
19. Use student riots to foment public protests against programs or organizations which are under Communist attack.
20. Infiltrate the press. Get control of book-review assignments, editorial writing, policymaking positions.
21. Gain control of key positions in radio, TV, and motion pictures.
22. Continue discrediting American culture by degrading all forms of artistic expression. An American Communist cell was told to "eliminate all good sculpture from parks and buildings, substitute shapeless, awkward and meaningless forms."
23. Control art critics and directors of art museums. "Our plan is to promote ugliness, repulsive, meaningless art."
24. Eliminate all laws governing obscenity by calling them "censorship" and a violation of free speech and free press.
25. Break down cultural standards of morality by promoting pornography and obscenity in books, magazines, motion pictures, radio, and TV.
26. Present homosexuality, degeneracy and promiscuity as "normal, natural, healthy."
27. Infiltrate the churches and replace revealed religion with "social" religion. Discredit the Bible and emphasize the need for intellectual maturity which does not need a "religious crutch."
28. Eliminate prayer or any phase of religious expression in the schools on the ground that it violates the principle of "separation of church and state."
29. Discredit the American Constitution by calling it inadequate, old-fashioned, out of step with modern needs, a hindrance to cooperation between nations on a worldwide basis.
30. Discredit the American Founding Fathers. Present them as selfish aristocrats who had no concern for the "common man."
31. Belittle all forms of American culture and discourage the teaching of American history on the ground that it was only a minor part of the "big picture." Give more emphasis to Russian history since the Communists took over.
32. Support any socialist movement to give centralized control over any part of the culture--education, social agencies, welfare programs, mental health clinics, etc.
33. Eliminate all laws or procedures which interfere with the operation of the Communist apparatus.
34. Eliminate the House Committee on Un-American Activities.
35. Discredit and eventually dismantle the FBI.
36. Infiltrate and gain control of more unions.
37. Infiltrate and gain control of big business.
38. Transfer some of the powers of arrest from the police to social agencies. Treat all behavioral problems as psychiatric disorders which no one but psychiatrists can understand [or treat].
39. Dominate the psychiatric profession and use mental health laws as a means of gaining coercive control over those who oppose Communist goals.
40. Discredit the family as an institution. Encourage promiscuity and easy divorce.
41. Emphasize the need to raise children away from the negative influence of parents. Attribute prejudices, mental blocks and retarding of children to suppressive influence of parents.
42. Create the impression that violence and insurrection are legitimate aspects of the American tradition; that students and special-interest groups should rise up and use ["]united force["] to solve economic, political or social problems.
43. Overthrow all colonial governments before native populations are ready for self-government.
44. Internationalize the Panama Canal.
45. Repeal the Connally reservation so the United States cannot prevent the World Court from seizing jurisdiction [over domestic problems. Give the World Court jurisdiction] over nations and individuals alike.
It's TEEVEE, alright? Not teevee. Show some respect!
What you're seeing is the high cost of getting something for nothing.
The actual humans aren't doing muchl thinking either. Momentum trades FTW.
"This is exactly what happened in 1720 in France during the Mississippi Bubble inflated by John Law. The end results were not pretty." - Charles Gave
John Law Lives
FUBAR.
It's an era, that I believe,is coming to an end. Then we'll all turn back into penny pinching grandmas until the next group of criminals swindle all of us. Which may not happen because we may get WW3 as a result of all this.
So is this it?
Should I fill the water barrels and smoke the last of the meat?
Check metal stocks?
God I have never seen such a world of panic.
Be nice to see the kids one last time.
Was just reading a book about the French Revolution and angry people guillotining any powerful person they could find....makes you think about collective anger
It might happen in America as TPTB manipulate the sheeple to to attack the remaing private business owners. See Ferguson.
The kangaroo court scene in the second to last Batman movie comes to mind.
" Paul Volcker—my favorite central banker of all time, probably because he was the only one without a PhD in economics, "
You could put that one on my tombstone.
If you only read one book on fiat money, you must read "Fiat Money Inflation in France". It is a small book of some 60 pages written around 1914 by the founder of Cornell University.
Public "allocation" markets not to be confused with private "investment" markets
I suppose you can still call it the Financial Markets, but we don't have the Market that we all had historically. That ended about 10 years ago when first the Fundamentals and Technicals no longer mattered.
We found that ALL Markets became Manipulated to the Highest Degree ever seen before. Major Numbers are fudged, and only a select few know what they will be, and that's BEFORE they're reported. Essentially "The Markets" are for the sole benefit of the fraction of the top 1% who know which way the manipulations are heading + the FED and Big 5 Banks
December is one of the most dangerous months to speculate in stocks. The others are: July, January, September, April, November, May, March, June, October, August and February.
Must read artcle on cascading bankruptcy effects, Z/H.
p.s. A brain is a terrible thing to waste so read the damn paper, eh!
http://arxiv.org/pdf/1002.1070.pdf
To take the elementary concept underlying this complete debacle, FRAUD, and waste so many resources attempting to create excuses and imaginary mathematical solutions is just plain stupid.... But it SEEMS to be working. So there's that.
Agreed on the fraud, but the paper ain't 'imaginary' and the solutions offered are mindblowingly sound IMHO. Frankly, I am blown away by the intellects that wrote the paper, and I have never seen anything quite like their synthesis pre, or post-Lehman Chapter 11. The fraud angle is most assuredly the problem and I agree with you on that.
It is possible the math is over my head, but I do not see how the fundamental issue of a hollow market structure can be upheld indefinitely. Mathematic models always look perfect on paper, real world implimentation is another story. Eventually these business's have to produce something and people have to buy those things.
For now I suppose one good fraud calls for another ;)
Investing is a risky business. But despite some of the obvious risks when you invest, you actually face a host of different risks, many of which you may have never even thought of.
http://www.greekshares.com/uploads/image/selfish.gif
That's right. Just write algos to look at the headlines and BTFD.
Occasionally tweak the headline search strings.
Every algo is doing it. It's what they call a market these days.
How hard is that?
Think like a monkey and you'll be rich. Think too hard about and you'll be poor.
I, for one respect and admire our fascist financial overlords and wish them prosperity and long life as all the outsiders swirl down the drain. Who did you think you were?
The message is clear. It's so easy. Unplug your brain and buy the dips.
You start thinking about it and you might make the mistake of shorting equities or buying gold.
Silly wabbit. I have the financial accumen of Tommy Boy, and even I know you have to BTFD.
All losers should call my Suicide Hotline @ 1-800-Go Ahead. (1 800-462-4323)
Outstanding!
today's market reminds me of the auto pilot feature in airplanes. piklots rely on the auto pilot so much they have to train to manually control their planes and several planes have crashed because of pilot error. the pilot didn't know how to fly a plane.
at least the pilots get to train for real flying. there is an entire generation of traders that have been on auto pilot. when this market breaks agin no one will know what to do?
Anybody who talks about Wicksel and Cantillon in the same post gets 10000 up ticks, in my opinion.