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Wall Street Hypocrisy Knows No Bounds

Thursday, September 3, 2015

"Rich" is a word that can mean different things in different contexts.  Wall Street is "rich" - but not just in terms of income or wealth but also in irony and hypocrisy.

Today's MarketWatch.com tells of Wall Street types crying in their beer (seeing as the head has dissipated and the glass doesn't have anywhere near as much beer as the Fed... er... the bartender had them thinking it did) about a trading strategy called 'risk parity'.  This is just a fancy word for 're-balancing' - you know, that thing they taught you about at work when your 401(k) administrator made their annual presentation.  Apparently this is now automated and is blamed for causing excessive selling on the downside.  Here is my favorite quote.  I have added the boldface:
Kolanovic warned that rapid rebalancing by such funds could make for chaos as 'price insensitive flows', determined by algorithms and risk limits, threaten to push the market away from fundamentals.
Now that is rich.

Since when has the 'market' been aligned with the 'fundamentals'?  For at least 20 years now, starting with the 'Greenspan Put' (I'll explain that in a second) the market has traded to Federal Reserve sentiment and intentions, not to market fundamentals.  As I have pointed out numerous times, the Case/Shiller Price-to-Earnings Ratio shows this clearly.  The recent downturn has seen it drop slightly, but it is till higher than only three other times since 1890.  The upswings cannot be explained by companies all of a sudden becoming more valuable.  The timing of the upswings makes it clear that it is a 'sink' for the inflation of the money supply each time Wall Street speculation gets ahead of itself - which is happening more and more often - as a result of the inflation of the money supply.

David Stockman, former budget director during the Reagan years, calls out the insufferable whining as well here. (Interestingly, Stockman calls the sham that has become of the market "card counting" just as I have done for quite a while.)

For the rest of us it will help to understand a few terms we will likely be hearing again on the news.  This 'Greenspan Put' is one:  A 'Put Option' is essentially an insurance policy.  If you own Microsoft  stock (MSFT - which closed out at $43.50 today), in a volatile environment you might want insurance again the possibility it drops over 10% within the next week.  A 10% drop would be a 'strike price' of $39.55.  If I 'sell' you a put option on MSFT I am agreeing to buy your shares at the strike price if it falls to that level within a certain amount of time. Under this arrangement two things might happen:

1) The 'expiration date' of the option might arrive without the stock dropping to the strike price.  In that event the option has 'expired' and I have collected the premium and booked it to my investment account, but you retain the stock.

2) The stock drops to the strike price before the expiration date.  In this case you can exercise your 'option' (which I have sold to you for the premium) to require me to take the stock off your hands at the strike price.  I still collect the premium. But I am also on the hook for the cost of taking the stock off of your hands.

The 'Greenspan Put' is a Wall Street term for the Federal Reserve's willingness to expand the money supply when stocks begin to slide.  It is almost as if there is a strike point in the stock indices at which the Fed loosens the money supply, sending this extra money chasing after stocks, thus arresting the decline - and creating a subsequent bubble.  Again, the Case/Shiller PE Ratio shows this dynamic better than any other metric.

What this means is that Wall Street can speculate with increasing abandon, believing that the Fed will goose the money supply should this speculation get ahead of itself.  As the money supply is increased, the cost of money decreases, creating even greater incentive for risky speculation.  The cycle of speculative collapses only gets tighter (crises happen more often) as the volume of money increases.

This, not 'risk parity', is what makes the complaint about pushing the market "away from the fundamentals" patently ridiculous.

Lastly, I just learned that the building which houses the Federal Reserve is called the 'Eccles Building' (after Marriner S. Eccles).  This made me laugh because the Greek word for 'church' is 'ecclesia'.  It really is the Temple of the Free Market and the FOMC are the new Bishops who have turned it into a den of thieves.  Read here about what happened last time there was a fight over the appointment of bishops.

Where is Jesus with his whip when you need him?

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