We can't stop laughing after reading this note from Bloomberg's Richard Breslow for one simple reason: in under 350 words it summarizes everything we have said since our initial "big" article from April 2009, "The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan Of Black Swans" in which we predicted how the onslaught of HFT would make a farce of trading at the micro level, and all our posts since then condemning central bank intervention, making a mockery of fundamental analysis at the macro level.
Good job Richard, and we are certainly happy that slowly but surely, everyone is finally getting it.
From Richard Breslow
Back in 2008, markets would take a theme and race with it for two to three days before a new piece of news made traders pivot en masse in the other direction. Everyone searching desperately for an answer to the existential question of economic survival. Investors found out that their well-diversified portfolios were merely different expressions of being long global growth. In that context, it made a lot of sense that everything moved together.
Today we have a different dynamic. No one is trading unless they have to or have microwave circuits for brains. Pension funds and endowments have tried to insulate their holdings from demanding tinkering. There aren’t stock-picking debates around the investment committee tables.
Banks are less active, and even fat fingers just can’t keep up. It’s left the field open to computers who have no investment horizon. If that were all there was, it might be sustainable for short periods.
But, wait, there’s more.
Policy makers are visibly flailing. Yet the system’s foundation rests on a presumption of their expertise. It’s what allows the leaps of faith necessary for financial transmission functions to work. Grand experiments, like the insanity of negative rates, are seen merely as the latest in making it up as you go along.
All this adds up to a genuine liquidity crisis. Churn and burn is being mis-portrayed as solid volume. In fact, as Goldman’s President Cohn said yesterday on Bloomberg TV, “small amount of buying and selling in any market today had a dramatic impact.”
There was logic in the “Harry Met Sally” delicatessen scene when the woman said “I want what she’s having.” That’s how we used to trade. In this environment, it feels like the algos are hooked up to Tinder, which is actually highly combustible material and we are all getting burned.
My blessing for Fed Chair Yellen today, is to say something that both she and the markets can hold to. If her imperative is full employment and wages, where do we stand? If it is still merely equity prices, be candid. The truth will set you free.
Sorry Richard, it's too late to change anything now. Just sit back and relax: a change, if any, can only come after the next, and biggest ever, market crash.