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Double or Nothing: How Wall Street is Destroying Itself

Tyler Durden's picture




 

Submitted by John Azis of Azizonomics

Double or Nothing: How Wall Street is Destroying Itself

There’s nothing controversial about the claim— reported on by Slate, Bloomberg and Harvard Magazine — that in the last 20 years Wall Street has moved away from an investment-led model, to a gambling-led model.

This was exemplified by the failure of LTCM which blew up unsuccessfully making huge interest rate bets for tiny profits, or “picking up nickels in front of a streamroller”, and by Jon Corzine’s MF Global doing practically the same thing with European debt (while at the same time stealing from clients).

As Nassim Taleb described in The Black Swan these kinds of trades — betting large amounts for small frequent profits — is extremely fragile because eventually (and probably sooner in the real world than in a model) losses will happen (and of course if you are betting big, losses will be big). If you are running your business on the basis of leverage, this is especially dangerous, because facing a margin call or a downgrade you may be left in a fire sale to raise collateral.

This fragile business model is in fact descended from the Martingale roulette betting system. Martingale is the perfect example of the failure of theory, because in theory, Martingale is a system of guaranteed profit, which I think is probably what makes these kinds of practices so attractive to the arbitrageurs of Wall Street (and of course Wall Street often selects for this by recruiting and promoting the most wild-eyed and risk-hungry). Martingale works by betting, and then doubling your bet until you win. This — in theory, and given enough capital — delivers a profit of your initial stake every time. Historically, the problem has been that bettors run out of capital eventually, simply because they don’t have an infinite stock (of course, thanks to Ben Bernanke, that is no longer a problem). The key feature of this system— and the attribute which many institutions have copied — is that it delivers frequent small-to-moderate profits, and occasional huge losses (when the bettor runs out of money).

The key difference between modern business models, and the traditional roulette betting system is that today the focus is on betting multiple times on a single outcome. By this method (and given enough capital) it is in theory possible to win whichever way an event goes. If things are going your way, it is possible to insure your position by betting against your initial bet, and so produce a position that profits no matter what the eventual outcome. If things are not going your way, it is possible to throw larger and larger chunks of capital into a position or counter-position again and again and again —mirroring the Martingale strategy — to try to compensate for earlier bets that have gone awry (this, of course, is so often the downfall of rogue traders like Nick Leeson and Kweku Adoboli).

This brings up a key issue: there is a second problem with the Martingale strategy in the real world beyond the obvious problem of running out of capital. You can have all the capital in the world (and thanks to the Fed, the TBTF banks now have a printing-press backstop) but if you do not have a counter-party to take your bets  (and as your bets and counter-bets get bigger and bigger it by definition becomes harder and harder to find suitable counter-parties) then you are Corzined, and you will be left sitting on top of a very large load of pain (sound familiar, Bruno Iksil?)

The obvious real world example takes us back to the casino table — if you are trying to execute a Martingale strategy starting at $100, and have lost 10 times in a row, your 11th bet would have to be for $204,800 to win back your initial stake of $100. That might well exceed the casino table limits — in other words you have lost your counter-party, and are left facing a loss far huger than any expected gains.

Similarly (as Jamie Dimon and Bruno Iksil have now learned to their discredit) if you have built up a whale-sized market-dominating gross position of bets and counter-bets on the CDX IG9 index (or any such market) which turns heavily negative, it is exceedingly difficult to find a counter-party to continue increasing your bets against, and your Martingale game will probably be over, and you will be forced to face up to the (now exceedingly huge) loss. (And this recklessness, is what Dimon refers to as “hedging portfolio risk“?)

The really sickening thing is that I know that these kinds of activities are going on far more than is widely recognised; every time a Wall Street bank announces a perfect trading quarter it sets off an alarm bell ringing in my head, because it means that the arbitrageurs are chasing losses and picking up nickels in front of streamrollers again, and emboldened by confidence will eventually will get crushed under the wheel, and our hyper-connected hyper-leveraged system will be thrown into shock once again by downgrades, margin calls and fire sales.

The obvious conclusion is that if the loss-chasing Martingale traders cannot resist blowing up even with the zero-interest rate policy and an unfettered fiat liquidity backstop, then perhaps this system is fundamentally weak. Alas, no. I think that the conclusion that the clueless schmucks at the Fed have reached is that poor Wall Street needs not only a lender-of-last-resort, but a counter-party-of-last-resort. If you broke your trading book doubling or quadrupling down on horseshit and are sitting on top of a colossal mark-to-market loss, why not have the Fed step in and take it off your hands at a price floor in exchange for newly “printed” digital currency? That’s what the 2008 bailouts did.

Only one problem: eventually, this approach will destroy the currency. Would you want your wealth stored in dollars that Bernanke can just duplicate and pony up to the latest TBTF Martingale catastrophe artist? I thought not: that’s one reason why Eurasian creditor nations are all quickly and purposefully going about ditching the dollar for bilateral trade.

The bottom line for Wall Street is that either the bailouts will stop and anyone practising this crazy behaviour will end up bust — ending the moral hazard of adrenaline junkie coke-and-hookers traders and 21-year-old PhD-wielding quants playing the Martingale game risk free thanks to the Fed — or the Fed will destroy the currency. I don’t know how long that will take, but the fact that the dollar is effectively no longer the global reserve currency says everything I need to know about where we are going.

The bigger point here is whatever happened to banking as banking, instead of banking as a game of roulette? You know, where investment banks make the majority of their profits and spend the majority of their efforts lending to people who need to the money to create products and make ideas reality?

 

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Sat, 05/12/2012 - 13:41 | 2419949 LetThemEatRand
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Greenspan famously admitted that he underestimated the greed of the guys at the top.  Give them enough rope and they will always hang themselves.  Human nature.  Especially when they get to keep the profit and the taxpayer gets to keep the losses.

Sat, 05/12/2012 - 14:16 | 2420020 Aziz
Aziz's picture

Humans have always been greedy. Greed has not always been underwritten by taxpayers.

Sat, 05/12/2012 - 15:59 | 2420194 AlaricBalth
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And ravenous greed, coupled with illegal or unethical behavior, used to have consequences. The fear of ramifications such as prison or bankruptcy used to be enough to keep most unfettered greed in check. Now, without these fears, avarice is unbound.

Sat, 05/12/2012 - 16:23 | 2420217 macholatte
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Give them enough rope and they will always hang you.

Sun, 05/13/2012 - 00:42 | 2420722 LowProfile
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Nah...

I always save at least three bullets for myself (in case of misfires).

Mon, 05/14/2012 - 06:11 | 2422988 kiwidor
kiwidor's picture

that extra eye should give you 50% better aim....

Sat, 05/12/2012 - 18:00 | 2420317 Chartist
Chartist's picture

This is why public hangins need to make a return....You think China would put up with this?  Risk the economy for a bigger bonus in China probably gets you a bullet to the head.

Sun, 05/13/2012 - 12:37 | 2421304 Jim B
Jim B's picture

Most recent example.... Corzine, What a joke!

 

The man steals billions with NO consequences and regular folks are arrested for stealing a $1 soda! 

http://www.naplesnews.com/news/2012/may/08/man-accused-of-stealing-soda-from-mcdonalds-at/

Sat, 05/12/2012 - 20:43 | 2420457 SILVERGEDDON
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Every President through modern history has spent money like their hair was on fire. No exceptions. And, Congress approved an endless litany of unbalanced deficit spending budgets year after year. They didn't mind creating slavery for the tax payer, and printing free money compliments of the Fed for their banker / Wall Street buddies to bail them out of the mess created by the miracles of deregulation. lobbying, and corruption.
All accomplished regardless of which party or President was in charge. They are all cut from the same block of cheese, and they are all culpable.  I just hope we survive the end result of having criminals running the country for decades. Put your money in something tangible, because the dollar is going to continue to tank, resulting in way more inflation. And, banks may not survive the firestorm of margin lending, credit default swaps, and derivatives created that exceed 250 quadrillion dollars in total  - more money than the gross domestic product of the entire planet for decades.  

The Federal Reserve is neither Federal nor a "Reserve". This private bank run by the "Bank of England" has been stripping the US of its assets since the days of Andrew Jackson.  If the $16,000,000,000,000.00 given away secretly, since 2007, to the member banks isn't reason enough to overhaul our entire government financial system then our country is doomed to financial failure.
You won't read this in the mainstream media....but it may emerge in the coming elections. Read about the first ever audit of the Fed and understand why we are in such trouble. 

 

Sun, 05/13/2012 - 11:40 | 2421143 emersonreturn
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"...but it may emerge in the coming elections."

 

perhaps...i've often speculated that one essential which separates western thinking from our eastern counterparts is our ability to believe wholeheartedly in the impossible.  we are icarus and don quixote.  dreams are our life's mitochondria.  i believe it's been one of our civilization's greatest gift, encouraging us to plunge headlong into a problem that by convential reasoning has been designated impossible and foolish, and to invent, discover or solve the puzzle or one of history's long out standing problems.  we naturally believe in santa claus, the easter bunny and that she was a virigin.  this allows us to aspire and reach for solutions beyond the rational and known.  hope, in our world, isn't an illusion or the sole remaining shelter for the hopeless and bereft but our intrinsic essential.

 

 

Sat, 05/12/2012 - 14:36 | 2420065 TWSceptic
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Greed is not the problem, it is merely a factor of life which can drive people to do good and bad things. But you did touch on the real problem: a mixed economy where government is responsible for bad behavior in the private sector. The solution: get government completely out of the economy.

Sat, 05/12/2012 - 15:41 | 2420159 LetThemEatRand
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I touched upon the "real problem" which is both a corrupt government and those who do the corrupting.  Your proposed solution addresses one of those concerns but not the other.   Think about organized crime.  Organized crime exists outside of government, and survives and indeed thrives even with substantial police and other law enforcement task forces charged with taking it down.  It corrupts who it can, and it terrorizes or kills those it can't.  It is in the business of making money and accumulating wealth, the ultimate goal of the "free market," yet the mob abhors a free market.  You arrest or kill one mobster, another takes over.   Take government away and the mob takes over completely by force.  No free market.  Keep some elements of government such as police and courts, and they bribe the police and judges or kill the ones who stand in their way.  Then where are you left?  Your solution is to let the strongest and most brutal rule us all with no check or balance whatsoever.  I realize that is not what you want, but it is what you'd get.

Sat, 05/12/2012 - 16:02 | 2420197 GeneMarchbanks
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'Take government away and the mob takes over completely by force.  No free market.'

Non sequitur. Your first sentence is the very essence of a 'free market' so how you can follow it up with the second blows my mind.

When any behavior is acceptable by society at large, the most forceful mob simply takes rule over the rest until it's displaced by another more ruthless one ad infinitum. This is the 'natural' state of affairs as Darwin identified by way of the 'natural' world and Marx in the human realm of resource distribution today known as economics.

The libertarian hallucination of preference is that they've discovered the source of all problems in government which needs to be kept 'small' since it is the root of all that plagues us.

Sat, 05/12/2012 - 16:23 | 2420222 James_Cole
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Don't forget socialism, the other boogeyman for simpletons - worker owned and operated is the devil's handiwork! So inevitably crony capitalism (corporatism) and socialism have become one and the same in American minds.

Incidentally, great article, far too many friends are victims of this dangerous investing strategy. I think some people get addicted to it, because when it's working it is wonderful, not so great when it crashes.

Sat, 05/12/2012 - 16:49 | 2420256 LetThemEatRand
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These are the same guys who drive down the interstate highway navigating with their GPS on their way to the airport to visit the Grand Canyon while they discuss how "government has never created anything.  It just steals."

Sat, 05/12/2012 - 22:35 | 2420575 GMadScientist
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The goobers created the Grand Canyon?!

 

Sat, 05/12/2012 - 23:09 | 2420637 StychoKiller
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You're assuming that airports, highways and GPS can only be brought into existence via Govt; check yer premises.

I seem to recall that the Wright Bros. perfected the airplane, NOT Govt;  Alexander Bell INVENTED the telephone, NOT Govt; James Watt developed the Steam Engine, NOT Govt; see where this is going?  (BTW, Govt DID invent ways to tax all these modern inventions!)

Sun, 05/13/2012 - 01:06 | 2420743 LowProfile
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Let's not forget that radio was developed by Marconi (not gov't again), and the chemical rockets that put those radio (GPS) satellite in orbit was invented by Goddard, (again, not gov't)...

The list goes on...

Sun, 05/13/2012 - 05:27 | 2420826 James_Cole
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"I seem to recall that the Wright Bros. perfected the airplane, NOT Govt;  Alexander Bell INVENTED the telephone, NOT Govt; James Watt developed the Steam Engine, NOT Govt; see where this is going?"

Funny argument StychoKiller, it proves another non-government discovery - 'two things are infinite: the universe and human stupidity; and I'm not sure about the universe.'

 

Anyway, personally I am an anarchist so I could care less about the government, but do wish the arguments on ZH weren't of the kindergarten variety.  

 


Sun, 05/13/2012 - 05:34 | 2420830 Psyman
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You are living in post-constitutional fascist America.  The very notion that such a ground breaking invention as the aeroplane can be invented/perfected by amateurs in 21st century America is laughable.  The fascist state would sooner murder the Wright brothers and give their invention to Boeing than allow such grass roots industry.

 

You need to accept that America is a fascist military empire.  Until you do that your analyses will be severely flawed.

Sun, 05/13/2012 - 14:35 | 2421601 Umh
Umh's picture

The roads are full of holes, the GPS satellites need to be replaced and the government is focusing most of it's efforts on the things it should not do at all.

Sat, 05/12/2012 - 16:44 | 2420248 LetThemEatRand
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The other common hallucination is that they would wind up on top of the heap.  

Sat, 05/12/2012 - 23:09 | 2420638 StychoKiller
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Your hallucination is that Libertarians WANT to rule!  Check yer premises.

Sun, 05/13/2012 - 01:06 | 2420746 LowProfile
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Don't confuse him with the facts, it distracts him from flogging straw men (to work out his authoritarian daddy issues).

Sun, 05/13/2012 - 09:36 | 2420952 HurricaneSeason
HurricaneSeason's picture

Libertarians need to give up their own government careers BEFORE they get their libertarian card.

Sat, 05/12/2012 - 17:43 | 2420301 Al Gorerhythm
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You all seem to miss the cruxof the problem and that is; the enabler of all this, FIAT currency. Even the author gets lost in the maze:

"The bigger point here is whatever happened to banking as banking, instead of banking as a game of roulette? You know, where investment banks make the majority of their profits and spend the majority of their efforts lending to people who need to the money to create products and make ideas reality?"

The bigger point is; What ever happened to creating wealth first and then using is as a basis for lending, rather than creating interest bearing debt first and then paying more for the creation of the same wealth?

Ledger entry money creation by banks is not lending money, it is the provision of debt. Banks are not in the business of lending their own or anyone else's money, they are in the business of extending debt.

The problem then arises; how do you extinguish the debt completely without putting the bankers out of business? You don't. It has to be by force or decree. They are not going to let go of that gravy train without a fight. Just ask Charlie Munger.


Sun, 05/13/2012 - 14:51 | 2420357 Aziz
Aziz's picture

Yeah, I agree with you. The bottom line is we had faster growth, more stable banks and less income inequality during the gold exchange standard period than afterward. Use those facts (Bank of England study) the next time a hapless Keynesian cites Eichengreen and Sachs. 

The unvarying value of gold is cold hard fact. The eventual death of all fiat currencies is another. We will get there eventually.

Sun, 05/13/2012 - 11:58 | 2421174 robertocarlos
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And that's why you don't have to pay any loans back to the bank. You promised them your future labour, they gave you no consideration.

Sat, 05/12/2012 - 18:06 | 2420322 dugorama
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oh, and have no regulators /referees, courts, etc?  

 

Sat, 05/12/2012 - 19:39 | 2420405 Omen IV
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Ha !

the only thing Don Corleone was criticized for in his entire career by the other Dons was NOT SHARING "ALL" - the politicians and judges - the true foundation of neo-capitalism

 

 

Sat, 05/12/2012 - 15:46 | 2420170 AlaricBalth
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Since the inception of the Federal Reserve in 1913, the Dollar has lost over 98% of its value. I would have to say that their track record for destruction is well documented.

Sun, 05/13/2012 - 01:46 | 2420764 Al Gorerhythm
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Now who in the hell would junk a truthful observation? WTF? There are some weird and wonderfuls out there, eh? True believers. WTFU. (Wake The Fuck Up!) Dump and run trolls.

Sun, 05/13/2012 - 03:00 | 2420776 Al Gorerhythm
Al Gorerhythm's picture

Heh heh. Drew me in one.

Sun, 05/13/2012 - 13:39 | 2421507 Debt-Is-Not-Money
Debt-Is-Not-Money's picture

 

"Now who in the hell would junk a truthful observation?"

Two junks is how you tell that your comment(s) hit home! They never reveal themselves (no transparency there) just like banksters or their agents

Sat, 05/12/2012 - 15:54 | 2420184 Silver Bug
Silver Bug's picture

The QE time bomb is just itching to explode.

 

http://ericsprott.blogspot.ca/

Sun, 05/13/2012 - 00:54 | 2420736 RafterManFMJ
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You had me at 'Wall Street detroying itself"

Sat, 05/12/2012 - 13:41 | 2419952 Alcoholic Nativ...
Alcoholic Native American's picture

Monopoly:  End Game.

Sat, 05/12/2012 - 14:27 | 2420045 derek_vineyard
derek_vineyard's picture

Why are banks even permitted to 'trade' anything?

Their function is to take in deposits, loan money at higher rate of interest than they pay depositors and profit from that difference. Banks are supposed to be secure place to store your cash.  How the fxxk were they ever allowed to gamble with their deposits? What idiots deposited at banks that were gambling, so it became mandatory that most all banks gamble?

Us humans complicate the simpliest tasks.  The hedgies eventually will take out the banks...what a clusterfxxk.

Sat, 05/12/2012 - 14:49 | 2420082 bunnyswanson
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http://www.ratical.org/co-globalize/linkscopy/GlassSteagall.html

 

 

Provisions of the Glass-Steagall Act were directed at these abuses: [Return to Top]

 

  1. Banks were investing their own assets in securities with consequent risk to commercial and savings deposits. The concern of Congress to block this evil is clearly stated in the report of the Senate Banking and Currency Committee on an immediate forerunner of the Glass-Steagall Act.
  2. Unsound loans were made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets.
  3. A commercial bank's financial interest in the ownership, price, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own pecuniary stake in the transaction.

 

A Summary of the Rationale Leading up to the Enactment of the Glass Steagall Act [Return to Top]

The original (and in some measure, continuing) reasons and arguments for legally separating commercial and investment banking include:

  • Risk of loses (safety and soundness). Banks that engaged in underwriting and holding corporate securities and municipal revenue bonds presented significant risk of loss to depositors and the federal government that had to come to their rescue; they also were more subject to failure with a resulting loss of public confidence in the banking system and greater risk of financial system collapse.
  • Conflicts of interest and other abuses. Banks that offer investment banking services and mutual funds were subject to conflicts of interest and other abuses, thereby resulting in harm to their customers, including borrowers, depositors, and correspondent banks.
  • Improper banking activity. Even if there were no actual abuses, securities-related activities are contrary to the way banking ought to be conducted.
  • Producer desired constraints on competition. Some securities brokers and underwriters and some bankers want to bar those banks that would offer securities and underwriting services from entering their markets.
  • The Federal 'safety net' should not be extended more than necessary. Federally provided deposit insurance and access to discount window borrowings at the Federal Reserve permit and even encourage banks to take greater risks than are socially optimal. Securities activities are risky and should not be permitted to banks that are protected with the federal 'safety net'.
  • Unfair competition. In any event, banks get subsidized federal deposit insurance which gives them access to 'cheap' deposit funds. Thus they have market power and can engage in cross-subsidization that gives them an unfair competitive advantage over non-bank competitors (e.g. Securities brokers and underwriters) were they permitted to offer investment banking services.
  • Concentration of power and less-than-competitive performance. Commercial banks' competitive advantages would result in their domination or takeover of securities brokerage and underwriting firms if they were permitted to offer investment banking services or hold corporate equities. The result would be an unacceptable concentration of power and less-than-competitive performance.
  • Universal v. Specialized Banking. If the Glass-Steagall Act were repealed, the U.S. Banking system would come to resemble the German universal system, which would be detrimental to bank clients and the economy.
Sat, 05/12/2012 - 14:54 | 2420090 Manthong
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“the fact that the dollar is effectively no longer the global reserve currency”

OK… how many instances of proof of that are there? I can think of one off the top.. the fact that India, China and Russia trade oil (and other stuff)  with Iran in gold or national currency.

In the global landscape it may not be much, but other than that?..

Sat, 05/12/2012 - 16:42 | 2420244 BooMushroom
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So three or four of the worlds top economies are working to abandon something, and have already taken significant, real steps in that direction, and that's not much?

Once others realize we destroyed 98% of the dollar in 98 years, and we'll probably destroy 98% of what's left in the next 98 years, and there is an alternative, they'll go, too.

Sat, 05/12/2012 - 15:50 | 2420156 earleflorida
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This is what, 'we the people' had gotten, when we let the "GOPster's" gain complete control of Congress the last two years of the Clinton Presidency. Having a Supreme court packed with friendly Wall Street & Oligarchy Corporate advocates! Sound familiar?

http://en.wikipedia.org/wiki/Presidency_of_Bill_Clinton#Legislation_and_...

Note: 11/3/98 {Dem's didn't help?}__ 11/2/99 __ 12/21/00  **Pecora Commission and FDR's legacy wiped-out in two "Fucking Years"!

Ps. Obama was never qualified, period! But, whomever got the Dem's nod was going to win after the people's disgust with Bush #43. Today we've got two idiots to choose from and being an independent that voted for Obama [ashamed to admit], will never vote for him again. My only hope is that after the elections the congress is without a majority in either party. I'm hoping that Romney will at least give Ron Paul a seat in his cabinet. If Paul accepts and Romney comes around to Paul's ideologies?

Ps2. Larry Lindsey & Paul O'Neill would be excellent cabinet selections also.     jmo

Sat, 05/12/2012 - 16:51 | 2420260 dark pools of soros
dark pools of soros's picture

The President is THEIR salesman -  why do you think ANYONE in that position will change anything?? 

Sun, 05/13/2012 - 09:05 | 2420925 RockyRacoon
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You gotta understand that folks won't read past your first sentence if it conflicts with their world view.   Put the partisan comments at the bottom of your post.   I gave you a greenie because I read the whole thing.   Attention span deficit and all that comes into play when there are over 50 pages of comments to scan and evaluate.   Your negatives are due to your failure to construct a comment that pulls in the anti-partisan readers -- or those who have deluded themselves into thinking that politics doesn't matter.

Sun, 05/13/2012 - 14:48 | 2421643 Umh
Umh's picture

Most people put their main point in the first line or two. It does cut down on the amount of reading to be done. He'll probably not listen to you anyway. Besides when people get all that NLP stuff going it's best not read past their name.

Mon, 05/14/2012 - 02:33 | 2422834 MeelionDollerBogus
MeelionDollerBogus's picture

http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act

Pardon me any misunderstanding but I gave a red arrow for partisan nonsense that ignores the veto power of the President, Clinton, who is a Democrat.

Sat, 05/12/2012 - 13:44 | 2419959 Sudden Debt
Sudden Debt's picture

And as long as there are people willing to buy back your crap.
Now it's more like computer 1 is selling to computer 2
Both programmed to make a profit...

Sat, 05/12/2012 - 13:44 | 2419961 chunga
chunga's picture

don't ask don't tell throw jamie dimon down the well.

Sat, 05/12/2012 - 13:46 | 2419963 l1b3rty
l1b3rty's picture

Buy Silver Crash Wall Street

http://silvervigilante.com

Sat, 05/12/2012 - 13:46 | 2419966 xela2200
xela2200's picture

Fundamentals always win over arrogance.

Sat, 05/12/2012 - 15:39 | 2420158 besnook
besnook's picture

the market can remain irrational longer than you can remain solvent.

Sat, 05/12/2012 - 13:49 | 2419968 Martin T
Martin T's picture

http://macronomy.blogspot.com/2012/05/credit-interval-of-distrust.html

"Humans, however, exhibit a pervasive and surprising bias: when it comes to predicting what will happen to us tomorrow, next week, or fifty years from now, we overestimate the likelihood of positive events, and underestimate the likelihood of negative events. For example, we underrate our chances of getting divorced, being in a car accident, or suffering from cancer. We also expect to live longer than objective measures would warrant, overestimate our success in the job market, and believe that our children will be especially talented. This phenomenon is known as the optimism bias, and it is one of the most consistent, prevalent, and robust biases documented in psychology and behavioral economics."
Talit Sharot - The optimism bias - Current Biology, Volume 21, issues 23, R941-R945, 6th of December 2011.

Sat, 05/12/2012 - 14:18 | 2420026 Aziz
Aziz's picture

It's nice when scientists write insightful stuff.

It's even nicer when they're a hot blonde.

Talit Sharot >> Blythe Masters.

http://www.fil.ion.ucl.ac.uk/~tsharot/ 

Sat, 05/12/2012 - 14:31 | 2420051 DeadFred
DeadFred's picture

A possible alternate carreer on a ZeroHedge dating site where she could give her clients insights into their inner psyche?

Sat, 05/12/2012 - 15:31 | 2420150 GeneMarchbanks
GeneMarchbanks's picture

It's nice when scientists write insightful stuff.

Except psychology is about as scientific as economics.

Sat, 05/12/2012 - 15:39 | 2420160 Aziz
Aziz's picture

Point taken, Gene, but as a UK taxpayer her work is being funded as science, so I'll call it that because I am picking up the bill for her "science".

Sat, 05/12/2012 - 15:38 | 2420157 falak pema
falak pema's picture

there was a lady of sharott...

 

And by the moon the reaper weary,
Piling sheaves in uplands airy,
Listening, whispers, " 'Tis the fairy
Lady of Shalott."
...nearly there! 

 

Sat, 05/12/2012 - 18:22 | 2420338 falak pema
falak pema's picture

pity that ad said "Brain" studies...

Sat, 05/12/2012 - 19:10 | 2420380 malikai
malikai's picture

Further proof that "scientists" can't make webpages.

Sat, 05/12/2012 - 23:18 | 2420646 StychoKiller
StychoKiller's picture

Dharma:  Who is truly happy?  What is the greatest wonder?  What is the path?  And what is the news?

Yudhishthira:  He who has no debts is truly happy.  Day after day countless people die.  Yet the living wish to live forever.  O Lord, what can be a greater wonder?  Argument leads to no certain conclusion, the Srutis are different from one another; there is not even one Rishi whose opinion can be accepted by all; the truth about Dharma and duty is hid in caves of our heart: therefore, that alone is the path along which the great have trod.  This world full of ignorance is like a pan.  The sun is fire, the days and nights are fuel. The months and the seasons constitute the wooden ladle.  Time is the cook that is cooking all creatures in that pan (with such aids); this is the news.  -- "The Mahabharata"

Sun, 05/13/2012 - 15:18 | 2421721 MeelionDollerBogus
MeelionDollerBogus's picture

It is however useful to assume you'll have a longer life-span so long as the assumption is turned into savings that pay for food & medicine and comforts you want in old age - or enough morphine to go back to the shorter life span if the ending looks not so pleasant (cancer/worse).

Sat, 05/12/2012 - 13:50 | 2419971 Newsboy
Newsboy's picture

I'll see you and raise you ten.

Sat, 05/12/2012 - 13:54 | 2419975 PY-129-20
PY-129-20's picture

Alles oder nichts.

Sat, 05/12/2012 - 13:59 | 2419986 Newsboy
Newsboy's picture

"Jeder fur sich, und Gott gegen alles."

Sat, 05/12/2012 - 14:51 | 2420087 magpie
magpie's picture

Geiz ist geil ?

Sat, 05/12/2012 - 16:54 | 2420264 orangegeek
orangegeek's picture

tschuss.  : )

Sat, 05/12/2012 - 13:54 | 2419978 disabledvet
disabledvet's picture

To me Wall Street has a fatal attraction to mathematical theory. It's an addiction really that while amazingly effective at "creating a picture" of what's going on can all too easily become the measure of risk itself. In other words you can all too easily go from "how much of the firm's capital is at risk" to "is the trade working?" and treat both as if they are the same. The Goverent really has been giving them the best advice: raise more capital..but then they see Buffet and hear his harangues about "how cash is a bad investment" and the next thing you know "it's time to call the bookie and get a handle" and "it's off to the Eurozone we go!" I really don't think the American people understand a single thing these folks do. I know I don't.

Sat, 05/12/2012 - 15:12 | 2420120 keating
keating's picture

"In probability theory, a martingale is a model of a fair game where no knowledge of past events can help to predict future winnings." In other words, any strategy has the same expected output. Hence, an afternoon at the roulette wheel where winngs are returned to be bet again, a Martingale virtually guarantees a total loss, and there is a theorem to estimate the mean time, given the epected return, for gambler's ruin. Perhaps this term is used ironically, but the strategy suggested is as sure a loser as any other in a memoryless system.

Remember, Wall Street guys make their loot by borrowing money, and then reinvesting it in schemes with a higher return. Since these are often bets against long term events or black swans, you can make a good income until you can't when the black swan shows up.

And, more loot is made on Wall Street on sales commissions, and for those with the fast equipment, by price manipulation and frequent trades.

What is interesting to me is whether Wall Street prices are not truly Poisson or memoryless, but display the properties of Mandlebrot Fractals, in which case there may be some small measure of memory that prices retain, and for which there may be a strategy advantage.

 

What suprizes me as well is that the market permits such enormous commissions in the purchase and sale of gold and jewelry, perhaps 500% higher than real estate, and 6,000% higher than normal stock trades. Why is it so expensive to buy a bar of gold Monday, sell it Tuesday, even though it has not been moved. EFT's do not count  as they are clearly only a proxy for the price of gold.

Is there a perfect investment? Yes, I believe that a personal fund made of the best DRIP stocks can eliminate short term commission expenses, provide addidional dividend income, and beat any average.

I am also surprized at the lack of REIT where a homeowner can organize 20 or fewer neighbors to purchase his or her home, in trust, and provide some sweat equity to maintain it, choose a new purchaser carefully, and help retain the value of their existing adjacent home....Bankers, I smell an opportunity for money here...

comments?

Sat, 05/12/2012 - 15:23 | 2420137 keating
keating's picture

sorry about the double post. It has been a while...

 

Sat, 05/12/2012 - 15:20 | 2420138 keating
keating's picture

Here is some information about DRP's

from Motley Fool

Advantages of Drips:

  • Drips give a cost effective way for Fools to put stock dividends to a better use -- purchasing more shares of the company rather than simply spending the money or having it sit in a money-market account. Almost all DRPs allow dividends to be reinvested at no fee.

     

  • Most companies allow investors to purchase additional shares through a Dividend Reinvestment Plan for nominal fees -- or often no fee at all. These are called Optional Cash Purchase Plans (OCPs).

     

  • Many Optional Cash Purchase Plans have very low minimum investments, allowing almost a Fool to purchase stock regardless of how much money they have. The amounts to participate can be as low as $10. There are limits on almost all of these plans, although many of them are in the thousands of dollars per quarter range -- well outside what the average Fool could invest.

     

  • Over 100 companies have DRPs that allow investors to purchase stock at a discount to the current market price. These discounts can range anywhere from one to ten percent. This gives investors an immediate return on their investment and sometimes balances out any fees associated with setting up the DRP or buying the stock. Some companies, however, only discount shares bought with dividends, not new shares.

     

  • DRIPs "force" investors to buy stock on a regular basis and hold on to that stock. As a result, investors adopt a long-term horizon and often invest small amounts of money on a regular basis -- money that they usually don't even miss.

    The only serious question is, if you are a financial advisor, are you not committing malpractice by not at least suggesting a DRP portfolio, where the probability of beating the Market is almost guaranteed.

Sat, 05/12/2012 - 15:55 | 2420183 GMadScientist
GMadScientist's picture

Really? They won't charge me to keep the money they were supposedly going to give to me?

How incredibly fucking generous of them.

Send us your momma's dentures, if they got gold in em!

Sun, 05/13/2012 - 14:56 | 2421656 Umh
Umh's picture

I like stocks that pay dividends, however DRIPS make keeping track of your cost basis a pain. Besides I like being able to invest the dividends where I want to rather than setting up an automatic purchase.

Sun, 05/13/2012 - 15:09 | 2421697 mammoth mo
mammoth mo's picture

 

Mind your position.

 

If there was a true stock market and a true real estate market you would be on to something.  The truth is a rising tide lifts all boats and when that tide goes out all boats get lower.  The tide is going out.

 

All stock in publicly held companies are now part of a global experiment.  That experiment is based upon which central bank blinks first.  The value of these companies may be 50% inflated by the Central Bank purchases are more.  The truth is I don't know and I don't think anyone does.  We may find out when the inevitable crash comes.  But whatever stock you own and purchase with drips will then lose value.  All funds invested before the crash will have purchased stock at an inflated rate.  In addition, it is not known if the crash will cause deflation or hyperinflation or stagnation.  The crash will also hinder most companies growth and business models making them less valuable.

 

Finally the cash basis of valuation is flawed.  The money printing has rendered all aspects of finances in this society illusionary.  Finances are no longer tied to labor but to a few guys who decide who or whom gets the lionshare.

Indeed, as you and I play watch our pennies there are some out there making a fortune doing massively wrong things. 

As far as real estate - the values are subject to the income producing power of the potential owners.  Not really a good bet lately.

 

Sat, 05/12/2012 - 17:02 | 2420271 I should be working
I should be working's picture

Sorry you lost me at Mandlebrot Fractals...

And yes dividend stocks outperform over time, you don't need a PhD in math to figure that out.

100 dollars invested in the Dow in 1932 = 13,000 today in price, but 380,000 with dividends reinvested.

The most insidious effect of the tech bubble was to convince investors that dividends don't matter. Yes they most certainly do...

Sun, 05/13/2012 - 03:39 | 2420771 Al Gorerhythm
Al Gorerhythm's picture

There once was a new nation of people that, from the fruit of their labor, saved one ounce of gold. The workers of the nation collectively created a factory that produced widgets, that could only be bought with tokens backed by the gold. The token (ounce of gold) bought the first widget off the line but then they produce another one. There was no other gold to purchase the next widget so the people of the nation voted to revalue the gold. They soon learned that it wasn't the gold that was revalued, it was the widget. The widget only cost 1/2 an ounce of gold, so they repriced the widget. They produced another 98 widgets and watched in awe as their widgets became less expensive. 1/100th of an oz for a widget. Boy, widgets were cheap.

The factory was then fully automated and the robots produced the widgets for them. They sold their excess widgets to overseas buyers and demanded payment in gold. The gold they collected was used to buy materials to construct factories that made gizmos. It too was fully automated removing the burden of work from the people who were able to focus their attention on their kids and the environment. They were debt free as the money of the realm was a store of their wealth and a valuer of goods and time. Their treasury produced a coin that the people could use for local trade. The treasury offered interest free notes to the people who wanted to work, where they created zoglets for the people to use.

The purchasing power of their wealth tokens grew with their developments. The people of the nation went fishing with their kids, grew crops in their gardens at their leisure, spent time reading to their children and had the need for only one person in the family to spend a portion of their day maintaining the infrastructure of their developments. The land was nurtured back to health and rivers ran clear and clean.

One day a banker came to the country, promising endless paper wealth.  He was able to convince the people that because their bank accounts grew, they were actually getting richer. The more he printed, the higher their accounts went. They were mesmerized by the growth of their accounts but couldn't figure out why things were getting dearer or why their working days grew longer as their pay bought less. Eventually the cost of goods became so exorbitant that the people couldn't afford them, even on two wages; both parents working two jobs. The children were placed in child care and were cared for by corporate government workers.

The nation became stressed and over-burdened with debt. The bankers charged a fee for their money which soon had the nation begging them for more of the paper money. The government had to borrow money from the banker with the promise from the politicians that the people's labor would be used as security (good faith and credit 'n all). It wasn't really money they were borrowing, it was credit they were extending. The bankers didn't have any money to offer, just debt. The people didn't realize tha,t even though they had money in their pockets, it wasn't really theirs; it belonged to the banks becaused it was borrowed from them.

Eventually, the cost of money and the cost of goods went up to a level that they could no longer be afforded. The nation was soon bankrupt and the yeild on their massive bank accounts wasn't enough to pay the interest.

One day a handsome prince came into town and kissed them all and woke them up. (Yeah, right, is that all it will take?!)

The people, on awakening from their stupor, saw the mess that the banker had created in their Shangri La and realized the theft of the nation's wealth hafd been thrusted upon them via purchase of politicians through offers of priveleged positions and bribes. The banker was hung from the nearest lamp post. 

Yield schmield.

Tell a Greek how wonderful it all is or a Spaniard, Latvian, Argentinian, Chilean, Mexican, Zimbabwean. Tell my kids how lovely it is to be born into the world a debt slave, working at high stress jobs that will never pay off the debts of their forefathers. We need to hang our heads in shame for being the "free shit" entitled generation.

 I note that we have to borrow money from the elite at interest but the elite get to steal money from the people at no interest, when they need it for bailouts. Thanks Charlie Munger. Why do you get free money, you theiving, treasonous, dogshit encrusted, fucking tapeworm?

 Oh, and the politicians..... there they were, doing the hangman's two step, right there beside the banker bandit and his free shit, property grabbing, financial house, duded-up, crony buddies.

Sun, 05/13/2012 - 14:11 | 2421555 Cathartes Aura
Cathartes Aura's picture

inspired, eloquent writing, increasingly rare but all the more delicious when found, and savoured.

thank you.

Sun, 05/13/2012 - 15:05 | 2421685 MeelionDollerBogus
MeelionDollerBogus's picture

dividends smaller than 4% are a bribe to hold a losing stock.

I'm better off selling/shorting the peaks.

Sat, 05/12/2012 - 15:14 | 2420121 keating
keating's picture

"In probability theory, a martingale is a model of a fair game where no knowledge of past events can help to predict future winnings." In other words, any strategy has the same expected output. Hence, an afternoon at the roulette wheel where winngs are returned to be bet again, a Martingale virtually guarantees a total loss, and there is a theorem to estimate the mean time, given the epected return, for gambler's ruin. Perhaps this term is used ironically, but the strategy suggested is as sure a loser as any other in a memoryless system.

Remember, Wall Street guys make their loot by borrowing money, and then reinvesting it in schemes with a higher return. Since these are often bets against long term events or black swans, you can make a good income until you can't when the black swan shows up.

And, more loot is made on Wall Street on sales commissions, and for those with the fast equipment, by price manipulation and frequent trades.

What is interesting to me is whether Wall Street prices are not truly Poisson or memoryless, but display the properties of Mandlebrot Fractals, in which case there may be some small measure of memory that prices retain, and for which there may be a strategy advantage.

 

What suprizes me as well is that the market permits such enormous commissions in the purchase and sale of gold and jewelry, perhaps 500% higher than real estate, and 6,000% higher than normal stock trades. Why is it so expensive to buy a bar of gold Monday, sell it Tuesday, even though it has not been moved. EFT's do not count  as they are clearly only a proxy for the price of gold.

Is there a perfect investment? Yes, I believe that a personal fund made of the best DRIP stocks can eliminate short term commission expenses, provide addidional dividend income, and beat any average.

I am also surprized at the lack of REIT where a homeowner can organize 20 or fewer neighbors to purchase his or her home, in trust, and provide some sweat equity to maintain it, choose a new purchaser carefully, and help retain the value of their existing adjacent home....Bankers, I smell an opportunity for money here...

comments?

Sat, 05/12/2012 - 13:53 | 2419980 T.Gill
T.Gill's picture

Why do i keep hearing Sheldon Cooper's famous catchphrase "Bazinga!" every time i come across another Wall street adventure gone wrong!

Sat, 05/12/2012 - 14:03 | 2419992 malek
malek's picture

Exactly.

Which reminds me why I like the other, usually less mentioned, book about the LTCM debacle so much: "Inventing Money"

Sat, 05/12/2012 - 14:03 | 2419994 ISEEIT
ISEEIT's picture

"wall street" is arbitrage. They feed off the sociopaths who pretend to be our friendly 'military/industrial complex'.

AKA "government". And yes that does include the current train wreck in chief poseur, wanna be dicktater, barry almighty.

Regards.

Next time might be better.

 

Sat, 05/12/2012 - 14:05 | 2420004 williambanzai7
williambanzai7's picture

F-RISK THE CAT

Sat, 05/12/2012 - 14:34 | 2420059 Dien Bien Poo
Dien Bien Poo's picture

that cats got my tie. Damn.

Sat, 05/12/2012 - 15:33 | 2420154 falak pema
falak pema's picture

it says Jamie...

Sat, 05/12/2012 - 15:51 | 2420174 Hulk
Hulk's picture

That cat ties a beautiful knot !!!

Sun, 05/13/2012 - 00:19 | 2420708 blunderdog
blunderdog's picture

There's no dimple, but that's fair, he's got no thumbs.

Sat, 05/12/2012 - 14:10 | 2420006 falak pema
falak pema's picture

How wall street is destroying itself...how WS HAS destroyed itself...more appropriate... and continues down THAT road. Like all juggernauts, empires, once the momentum is in hiatus and it has been since GWB's election, as it peaked like peak oil and irak/aghan boil, and subprime RE leveraged collapse, leading to WS mountain peak in July 2007, which slid down to march 2009 landslide. So this is same hidden under the carpet ongoing game, only worse as its irreversible...now that its four times worse, thanks to FED bubble pump called QE. Modus operandi running out of air. Who will pay the four times higher mountain of fiat debt?

The chinese! Fixed it! 

 

Sat, 05/12/2012 - 14:27 | 2420043 TheFourthStooge-ing
TheFourthStooge-ing's picture

Ah, ah, very citizenish.

 

Sat, 05/12/2012 - 14:36 | 2420064 falak pema
falak pema's picture

nope, I don't take sides, I just say clash of empires! Juggernaut momentum!

Sat, 05/12/2012 - 14:46 | 2420080 TheFourthStooge-ing
TheFourthStooge-ing's picture

.

nope, I don't take sides

Pssst, don't let AnAnonymous know, but neither do I. My ulterior motive is the advocacy of Antarctic citizenism.

 

Sat, 05/12/2012 - 15:18 | 2420130 malikai
malikai's picture

You stay away from my island.

Sat, 05/12/2012 - 15:32 | 2420153 falak pema
falak pema's picture

Yes if you watch the net you will see a large recrudescence of zoophiles, watch out for the seals and the polar bears. They deserve better than human.

 

Sat, 05/12/2012 - 16:20 | 2420216 Thomas
Thomas's picture

I should add to the discussion that John presented an elegantly simple argument in this article. Another variant is called "gambler's ruin", which states that those with the most capital will eventually win in a paired battle because the black swan event is closer in a small bell of probabilities than a large one. I was pondering the $500 cap on the $2 blackjack table as put in place precisely to shut down the Martingale strategy--in theory, any limit will do it as long as there is one. 

Again, this was a really nice presentation.

Sat, 05/12/2012 - 19:22 | 2420393 BooMushroom
BooMushroom's picture

Martingale bets on a $2 table:
2 4 8 16 32 64 128 256
If you lose the $256 bet, and wanna go for the 512 bet, go to a bigger table.

The reason for the limit is to stop rich bastards from out-bluffing the poor bastards.

Sat, 05/12/2012 - 19:26 | 2420398 Aziz
Aziz's picture

For casino gamblers the main peril appears to be running out of money.

For Wall Street casino the main peril is running out of counter-parties.

Sun, 05/13/2012 - 00:22 | 2420709 blunderdog
blunderdog's picture

Repetition works, John.

Sat, 05/12/2012 - 15:57 | 2420187 GMadScientist
GMadScientist's picture

Penguin-buggerer.

 

 

 

Sat, 05/12/2012 - 18:19 | 2420337 TheFourthStooge-ing
TheFourthStooge-ing's picture

Ah, ah, those penguins are the main force of Antarctic citizenism. Polar bears, formerly known as Native Antarcticans, were brutally massacred by Antarctic citizenist penguins.

In what penguin historians refer to as the Ice Cube March (and polar bears call the Trail of Frozen Tears), the surviving Native Antarcticans were forcibly driven out of Antarctica. The penguins' hatred for the polar bears was so intense that it drove the bears to the Arctic, the place on earth most distant from Antarctica.

Of course, the history taught in the Antarctic educational system portrays the Native Antarcticans as the aggressors, and explains that polar bears were placed in Arctic reservations for their own protection.

 

Sat, 05/12/2012 - 14:19 | 2420032 yoganmahew
yoganmahew's picture

You don't even have to run out of money yourself. All you need is for there to be no-one willing or able to take the other side of the bet. That is the fatal flaw in Martingale.

Unless of course, you end up betting against yourself, which is what it seems JPM ended up doing (the value of their positions rose as they increased the size of them).

Sat, 05/12/2012 - 14:29 | 2420048 Aziz
Aziz's picture

Yes, you got the point. You need a counter-party.

Sun, 05/13/2012 - 00:22 | 2420710 blunderdog
blunderdog's picture

Repetition works, John.

Sat, 05/12/2012 - 14:24 | 2420036 W10321303
W10321303's picture

yes boys and girls, can we say psychosis?

The 'system' is run by blood sucking vampire ZOMBIES, we knew that! And of course, musn't forget about the Stanford, Uof Chicago, Harvard, Yale.....lap dog politicans who range from the mediocre to extremely  venal and pathological....

"Here lackey Here LACKEY, give us a song and a dance"

Sat, 05/12/2012 - 14:28 | 2420046 I am Jobe
I am Jobe's picture

Fuck the Whore Street banksters and their families. Sins of the past and present will haunt them forever and ever.

Sun, 05/13/2012 - 04:36 | 2420793 Al Gorerhythm
Al Gorerhythm's picture

I don't think they will ever feel haunted as they're the entitled ones. Our kids will though.

Sat, 05/12/2012 - 14:30 | 2420052 ebworthen
ebworthen's picture

"Double or Nothing:  How Wall Street is Destroying Itself"

Can't happen soon enough.

Sat, 05/12/2012 - 14:36 | 2420062 q99x2
q99x2's picture

'a Martingale strategy starting at $100, and have lost 10 times in a row, your 11th bet would have to be for $204,800 to win back your initial stake of $100.'

You certainly don't have to take it 10 times you silly. And you don't have to implement against a bet that doesn't have a wall or limit. Within the market of all those numbers there are conditions that allow you to go up against the house where the house hits a wall at 4. Look for them they are there. You can still get corzined but you make more than your Corzined losses and you don't play with huge amounts going up against any one wall.

Sat, 05/12/2012 - 16:06 | 2420076 Aziz
Aziz's picture

A-ha.

You have to get the house to Martingale. 

That's a winning trading strategy.

That is the game Spitznagel at Universa plays, buying frequently-losing low-cost high-reward products.

Unfortunately, not all people can do this at once. Anti-Martingale traders need a Martingale sucker to feast off.

Fortunately there are plenty. 

 

Sat, 05/12/2012 - 14:55 | 2420091 Snakeeyes
Snakeeyes's picture

On top of the derivatives beating, the economy is NOT improving. Since July 2010, more people went on disability than the decline in unemployment! Plus, the average length of unemployment is still increasing!!!!

http://confoundedinterest.wordpress.com/2012/05/12/something-wicked-this-way-comes-disability-and-average-weeks-unemployed-skyrocketed-since-mid-2010/

Sat, 05/12/2012 - 15:12 | 2420119 xcehn
xcehn's picture

"The central banks of the West--the US Federal Reserve, the European Central Bank, and the UK bank--are totally committed to the prosperity of the mega-rich. No one else counts."

http://www.globalresearch.ca/index.php?context=va&aid=30799

Sat, 05/12/2012 - 15:15 | 2420125 Joe The Plumber
Joe The Plumber's picture

Nassim Taleb described the risky process of betting huge amounts of money for small frequent profits as eating like chickens and shitting like a dinosaur

Sat, 05/12/2012 - 15:53 | 2420178 besnook
besnook's picture

self interest leads to self destruction or greed kills or pigs get slaughtered or pride before the fall.

humans are the stupidest animals on earth. we are the only animals that think there is more to life than food and fornication and are willing to die for them..

Sat, 05/12/2012 - 16:11 | 2420209 Vince Clortho
Vince Clortho's picture

You can go double or nothin forever when there are no consequences.

If they bet right they win.

If they lose they get bailed out.

We would all do the same thing if the taxpayers would guarantee that behavior.

They can't believe they're all not in prison yet.

Sat, 05/12/2012 - 16:29 | 2420225 Hannibal
Hannibal's picture

Capitalism will selfdestruct,... a mathematical certainty.

Sat, 05/12/2012 - 16:42 | 2420245 Vince Clortho
Vince Clortho's picture

Capitalism?  We should try that out sometime.

Sun, 05/13/2012 - 07:13 | 2420860 MeelionDollerBogus
MeelionDollerBogus's picture

Capitalism never self-destructed before. It's got a built-in safety feature: the only way you can get fucked over is by your own deeds and only if you're really stupid & this benefits everyone else who continues to use capitalism.

What we have today is the opposite: Wall street takes all the profits but someone else takes all the risk, 100% anti-capitalist.

Sun, 05/13/2012 - 09:34 | 2420949 Almost Solvent
Almost Solvent's picture

Plus, if a company fucks up, it goes out of business and it's shareholders are personally liable for the company's debts after it's chattel has been liquidated.

And corporations should not exist for an indefinate time, otherwise they're just another type of government-like power.

Then maybe shit might look like actual capitalism again. 

Sat, 05/12/2012 - 16:30 | 2420228 deepsouthdoug
deepsouthdoug's picture

Wall Street banksters want to play Russian roulette with three bullets in the chambers - just like the boys in the Deer Hunter.

Sat, 05/12/2012 - 19:44 | 2420410 BooMushroom
BooMushroom's picture

No, they want to play regular Russian roulette, for cash, with the following caveat: before the pull the trigger, they get to look at the chambers, and if the loaded one is up, they hold the gun to YOUR head.

Sat, 05/12/2012 - 16:50 | 2420259 John Law Lives
John Law Lives's picture

This is a really good article.  The comparisons re. the Martingale roulette betting system are right on the money in many ways.  Good stuff!

Sat, 05/12/2012 - 16:55 | 2420262 I should be working
I should be working's picture

Call it the Martingale Paradox.

I always used to wonder why you couldn't make money at a casino just by doubling down on every loss. I believe casinos have rules to prevent this.

I'm so glad Obama reformed the banking system so we will never have to bail out these guys ever again.

Can you say bullshit?

Sat, 05/12/2012 - 16:59 | 2420269 orangegeek
orangegeek's picture

Markets reacted / over-reacted to the upside on Q1 earnings.  Still a few month away, but let's see what happens in Q2.

The SP500 weekly shows down in elliott wave and from a MACD perspective.

http://bullandbearmash.com/chart/sp500-weekly-11-2012/

 

There is another down market likely to, like the 2007 sell off, and it's only a matter of time.  But this will be a process, not an event.

Sat, 05/12/2012 - 17:02 | 2420270 blunderdog
blunderdog's picture

     ...whatever happened to banking as banking, instead of banking as a game of roulette? You know, where investment banks make the majority of their profits and spend the majority of their efforts lending to people who need to the money to create products and make ideas reality?

They decided to pool resources and create a "superbank" that would eliminate the difficulty of determining appropriate interest rates, as it's far easier to get the government to intercede and "save the currency" than it is to run a profitable bank.

History.  You can read all about it.

Sat, 05/12/2012 - 17:11 | 2420276 Stuck on Zero
Stuck on Zero's picture

If all the banks, traders, hedge funds, sovereign funds, and all the others are consistently making money in Wall Street who is losing?

Sat, 05/12/2012 - 23:47 | 2420654 DarthVaderMentor
DarthVaderMentor's picture

They are not consistently making money. Therein lies the "pain" aspect of the Martingale paradox.

When they win their gamble in the market casino, pensions, other sovereign parties, and investors lose. Investing in Greece debt, for example, as they win, the Greek people lose.

Normally when they would lose they'd go bankrupt. In the past they couldn't really safely bet too much of their money before but that changed when the Republicans killed Glass-Stegall and it was endorsed by the Democrats. Both political parties where corrupted and paid off with bribes by a greedy banking industry full of unremorseful inverterate gambling addicts called CEOs.

The problem is that thanks to Bernanke and Turbo Timmy with the tacit approval and endorsement of both the crooks Bush and Obama, when the TBTF banks lose, the American taxpayer and any holder of the Federal Reserve Debt Note (aka among sheeple circle as the US Dollar) lose.

The TBTF banks don't lose ever in the casino of Bush and Obama. The same will be the case with a Mittens administration. Why wouldn't anyone be not a gambling addict when "Gentle Ben" provides free gambling crack and it's endorsed and supported by either an Obama or Romney administration?

The United States is trapped in an economic death spiral designed by and for gambling addicts fomented by amoral Ivy League professors which is wrapped inside and protected by an unsolvable (unless you vote Libertarian and they win or there's not enough votes for a candidate to win) political paradox.

We have created an economic system which has endorsed a society where the business leaders (CEOs, CFOs, etc.) are really amoral gamblers with no sympathy for fellow man. That's why bankers are gamblers and multi-national corporation CEOs actually enjoy destroying people's lives. The Bible was right, the meek have statred to inherit the earth. They have inherited our so called economic system and markets, finding it a great place to satiate their greed and egos.

 

 

Sat, 05/12/2012 - 23:48 | 2420678 dolph9
dolph9's picture

Look in the mirror.

Sun, 05/13/2012 - 00:27 | 2420714 Walt D.
Walt D.'s picture

If you are sat at a poker table and you don't know who the patsy is ............

Sat, 05/12/2012 - 18:02 | 2420318 tony bonn
tony bonn's picture

a perfect ode to tbtf and the psychopathic frat boys running the cuckoo's nest....and this country worships higher education as the path to majesty....it is all a crooked sham....

at the root of this problem is the debt based fiat system whose exorbitant price of interest is a cancer on the currency and hence the economy. kill mammon or it will enslave you.

Sat, 05/12/2012 - 18:06 | 2420324 Walt D.
Walt D.'s picture

The problem is that, when things go well, the amount of money that banks make on this type of trading is an order of magnitude larger than they can make on traditional lines of business. When things go bad, nothing to worry about - the Fed's got deep pockets. Since the last crisis TBTF has grown even bigger. Also TBTF is also too big to jail.

Better to know the judge (or the attorney general) that to know the law.

Sat, 05/12/2012 - 21:19 | 2420427 NuYawkFrankie
NuYawkFrankie's picture

What, my friends, is The Real Question?

If you know that, there IS hope.  If you don't.... well, look at where you are now - you're goin' down... down for the count.

You don't know how to ask The Real Question since you have never considered "IT" to be questionable - have you?

In the meantime, have fun chasing your collective tail. 

Be seeing you.

Sat, 05/12/2012 - 21:27 | 2420508 tom a taxpayer
tom a taxpayer's picture

John Azis - Thanks for the excellent analysis and great insight. With the Martingale and Fed analogy you have made it easier to understand just how big the stakes and potential disaster are.

Sat, 05/12/2012 - 23:47 | 2420676 BlackholeDivestment
BlackholeDivestment's picture

...this is what I see when I hear Blankfiend say ''market maker'' and ''gods work''  http://www.youtube.com/watch?v=Jn0yH6i-9ys 

 

Hey Greenspan, and you too Summers and Rubin,  Brrrrr oooksley Brooksley  Brooksley Born, aaaah Brooksley Brooksely Born.  http://www.youtube.com/watch?v=7AmQLmuLvnk&feature=relmfu 

...oh, and that $ for your foreheads is aaah wait'n. http://www.youtube.com/watch?v=DdPrMxFgLUo&feature=related

Sun, 05/13/2012 - 00:07 | 2420694 Species8472
Species8472's picture

Green 0 and 00  mess up the betting on roulette.

I'm sure there is a finance equivelent.

 

Sun, 05/13/2012 - 07:43 | 2420870 Zero Govt
Zero Govt's picture

"The bigger point here is whatever happened to banking as banking, instead of banking as a game of roulette?" 

There are some 8,000 banks in America and amoung them are good bankers and good banks

the problem, as always, is when Govt is put at the core of society and the top of the food chain... you cannot expect a massive institutional parasite in society to produce anything but complicity and protection of other parasites feeding off the productive (people) and ultimately economic destruction

Govt is the (big) problem, not banking

Sun, 05/13/2012 - 10:53 | 2421056 resurger
resurger's picture

"Martingale"

Sun, 05/13/2012 - 12:41 | 2421326 SeattleBruce
SeattleBruce's picture

"The bigger point here is whatever happened to banking as banking, instead of banking as a game of roulette? You know, where investment banks make the majority of their profits and spend the majority of their efforts lending to people who need to the money to create products and make ideas reality?"

Think about what brought down Enron - endless speculative investment 'products', that no one, not even the leadership could truly understand (perhaps that was the point.)  Eventually reality, and even semi-solid accounting rules brought down this $100 Billion dollar mirage company to the ultimate damage of hundreds and hundreds of thousands of people.  Enron started with real products. 

But with FASB rules and the absence of Glass Steagal walls suspending reality on the toxic housing waste within the ugly monstrosities that are the TBTF banks/'investment' houses, the ultimate demise of these morphed creatures that resemble nothing of traditional banking and banking practices, have taken much longer to happen.  Ultimately, can we not blame this all on the Creature from Jekyl Island, and those behind the FED?

Sun, 05/13/2012 - 15:17 | 2421717 cristo
cristo's picture

I just heard a rumor over the grapevine regarding bankruptcy of attorneys being brought into meetings RE JPM.. I cannot tell you if this rumor is true.. We will find out on Sunday. http://youtu.be/A9l4bN-e1T0

Sun, 05/13/2012 - 15:37 | 2421766 mammoth mo
mammoth mo's picture

Close but the real problem is now the Michael Vick analogy.

 

M. Vick grew up admiring the dog fighters in his community.  When he got some money he wanted in on the game.  Yes it was a horrible and cruel  and criminal game and one that he should have had no part in - but that didn't happen.  He wanted in and got in.  Not only did he get in he became the biggest player in the game.

Alas, he now had no one to bet against - and no one who wanted to even go against him and his empire.  Now he had the cost of keeping  his empire going which was far more than he was earning from the infrequent bets he would win - when someone wanted to fight one of his dogs.

When things went bad - he was really the only one who had something to lose.  All the other small time hoods and operators were basically on his payroll or hated him for keeping them poor.

We can't make a little money on our bets because no one will bet against us.  The cost of maintaining the illusion of a stock market is now as much as whatever we are making on any small bets.  We are winners and losers in every trade and the losses are no exceeding the winnings.

We have an unlimited ATM but can't place a bet because "retail" refuses to get in the game no matter how much you tell them they can win.

The three card monty dealers that have bribed the police can't pay someone to pick the Queen because everyone knows the game is rigged.

 

Like Vick - the FED has moved into a game - became the dominant player - controlls all aspects - yet losses money daily because it is too large and has no one to bet against that can muster up 1/100 of the money they have.

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