Wednesday, February 08, 2012

Financial Market And Economic Update: The Magical Levitation

Let's step back and take a more detailed look at underlying factors in financial markets.   By doing so, I am going to pull together many posts over the years into a cohesive message that gives more insight into what is actually going on in the economy and financial markets today.  I hope many might appreciate this post.

We can start by taking a look at the SPY or the S&P 500 ETF over the last handful of months.  The first graphic is a normal candlestick chart.  In a normal, functioning market the opening and closing prices generally overlap.  In other words, the close today will be very similar to the opening price tomorrow.  But, what we see more so than at any time in the last one hundred years of equity prices are enormous gaps starting to develop between closing prices and opening prices.  This dynamic has accelerated over the last six months.  The SPY, as one example, looks like a shotgun blast.  Prices are all over the place.  Closing prices to not match opening prices in a large number of circumstances.  Recently, prices are often ramped up before the market opens then they  literally levitate in a small trading range all day.  That levitation usually lasts a few days and then the market is ramped again.  We see that behavior in the gaps between closing and opening prices.  There are two dynamics at work here.  One is derivatives that are used to manipulate and ramp markets and, thus, create aberrations in price and the second is market liquidity or a lack thereof.  The gaps that are so prevalent in this market are in fact gaps in market liquidity.  Gaps in market liquidity used to be the domain of thinly traded pink sheet stocks.  But today, it is now part of what used to be the most liquid equity market instruments in the world.  That should concern anyone who uses their head for anything other than a hat rack.

Additionally, as we discussed a few years ago, the movement of individual stocks are very highly correlated to the S&P index.  The highest correlation since 1987's crash.  1987 was a manifestation of derivatives and Wall Street's deluded beliefs that they could be used to provide protection against loss.  That same dynamic exists today but at a much more ingrained and broader level.  By ingrained I mean there is an incredibly high acceptance that the normal functioning of derivatives is just a given fact of life.  Markets and individual stocks are so highly correlated to the S&P because S&P index and future derivatives are the predominant trading method used to buy and sell this freak show of an Orwellian financial market.  In other words, computer programs buy or sell stocks in massive lots.  So, everything either goes up or everything either goes down.

I talked to an individual who was a member of a subscription trading service that heavily used derivatives in its strategies.  I told this person for months that they were playing with fire and at some point in this environment there were likely to be counterparty losses that would leave them holding the bag.  Indeed, this subscription service was using MF Global and lost all of its account for that very reason.  What I told this person was going to happen eventually came to pass.  Picking the dates for much of these dynamics and others are nearly impossible.  But as we have often discussed, this dynamic could clearly manifest itself in a much broader dynamic at any point in time without warning.  In fact, as Nomi Prins pointed out in a link I provided some months ago, Goldman Sachs apparently was covertly bailed out by the Federal Reserve late last year for a bad bet.  Without that bailout, we may have had the makings of another counterparty crisis on our hands.  So much for Obama's rhetoric during the State of the Union address that we would never bail out Wall Street again.  The Federal Reserve's actions continue to regularly bail out systemic incompetence in these systemically-dangerous firms.  The IMF, a tool of U.S. hegemony, even labels Wall Street firms as systemically-dangerous.   But politicians do nothing.  The only question I have is the president simply ignorant of what the Federal Reserve is doing or are his remarks disingenuous?  I would say the president is most likely an honest, although I believe very misguided, person so it's probably ignorance.  I only say this because I have yet to actually hear more than a few politicians ever utter anything intelligent about monetary policy, economics or Wall Street.

Back to the correlation dynamic.  A program I use to calculate correlation shows the equity market and many other financial markets are correlated to the S&P between 98 and 99.4%.  Pull up a 10 minute forex chart in real time and its actions will match that of the S&P exactly.  The same goes with Apple, as an example.  Or crude oil.  This is the manifestation of Frankenstein finance where markets move not because of fundamentals but because of massive computer programs using leveraged derivatives.  Leverage enabled by a corrupt monetary system.  Skynet is running global financial markets.  The outcome will be similar without reform.  That is, disaster.

As we have uniquely discussed before, there is not enough demand for all of the financial wizardry that the psychopaths on Wall Street have created.   There are two fundamental reasons for this.  The primary reason there is not enough demand for traditional investing instruments such as equities and bonds is because Wall Street has shut down the money supply to our economy over decades of ever-increasing monetary treason.  That is why poverty and unemployment is rampant.  There is no money in our economy.  It isn't because people are lazy or stupid or uneducated or unskilled other equally ludicrous bullshit reported by the carnival barkers in the mainstream media, politics, human resource departments and corporate executive offices.  There are endless skills available in our economy.  They just aren't skills that necessarily serve the needs of the corporate state.  The second reason there isn't enough fundamental demand is that Wall Street has oversaturated financial markets with derivatives.  In other words, they have financialized every single speculative con game one could imagine using some type of derivative.  So, only "professionals" or Federal Reserve-funded institutions that are given endless supplies of free taxpayer-funded money have the depth of liquidity available to gamble endlessly in these schemes.   And, because there is no transparency into these products, these derivatives are used to prey on our schools, our corporations, our municipalities, our airlines and our citizens as counterparties.   With counterparties evaporating because of the self-fulfilling economic crisis Wall Street has unwittingly created, the only way the system as it is structured can replace that lack of fundamental demand in both of these situations is through the use of leverage.  Derivatives.  That is the only way financial markets are being levitated with a lack of fundamental demand.    That is even how Treasuries are being levitated; the Fed is leveraging up its balance sheet with Treasury purchases in lieu of fundamental demand.   This is all like the housing bubble except the leverage today is massively greater.  Millions of times more leverage in some instances.  I haven't been pounding my fist on the table for seven years that this is the biggest financial bubble the world has ever seen just because I'm bored.  We are living through history and massive change is headed our way.  Massive.  It isn't likely to be willing change either.  But change foisted upon us because of the inevitability of unsustainability.  There is absolutely no concept of risk on Wall Street.  How can you manage risk with leverage as we are seeing it?   All Wall Street CEOs, every politician involved in oversight of financial markets, all financial regulators and everyone at the Federal Reserve, CFTC, and other oversight agencies are systemically-incompetent for allowing this Frankenstein to continue to grow.

We wrote a few weeks ago that seven days out of more than one hundred comprise the entire move of this rally in the last five months.  And, not only that, but volume (liquidity) is horrendous and getting worse.  You can see this in graphical form on the second chart below.  The second chart is also the SPY ETF but it is not a standard candlestick chart but instead a candlevolume chart.  In other words, the width of each candlestick is the graphic representation of that day's volume.   Now, in addition to gaps, on this graphic we see the horrendous upward volume of this rally compared to substantial downward volume we saw in the correction last fall.   Recently, the upward candlevolumes are so small, you have to squint to see them.  Well, if you are my age, you do.  Low liquidity, highly leveraged, completely correlated rallies are not a sign of a healthy market.

Click for larger view

Click for larger view

What is happening in financial markets is the same thing that has happened in our economy over the last three decades or so since corporate power and elites have corrupted our political system.   In other words, monopoly is no different whether that is the market for capital, global economics or financial markets.  The same impacts on supply and demand affect the price of wheat also impact the price of equities or the financial derivatives markets dominated by quantitative finance.  As we have discussed, CDO prices don't represent anything other than a criminal enterprise manipulating the debt of Italy or Greece for personal gain at society's expense.  Equity prices don't represent any reality beyond the endless supply of money granted financial criminals to speculate prices higher and higher over the last twenty years until now the average equity price is massively overvalued comparative to even 1929 when prices collapsed 90%.  Earnings mean nothing to the future valuation of equity prices regardless of what intellectually-deficient Wall Street mobsters say.  It's all about supply and demand.   You simply believe they are intertwined for factors associated with correlation rather than any causational metric.

I want readers to consider something when looking at these charts.  Something we have discussed at least a dozen times since the rally started in 2009 and some of which we have discussed since our first posts on monopoly and their causational effects on economic depression seven calendar years ago.  These are dynamics no one else in the economic or financial community have discussed in that period of time.  If you don't understand the illness, how can you prescribe the appropriate cure?  What has happened with Wall Street's rigging of the game is that the corrupt Wall Street monopoly in financial markets has forced out more and more competition or counterparties in these markets.  Think of this as a rigged game of poker, if you will.  There are certain players whose bets are constantly being replenished by an endless supply of money.  And, they are actually able to see the other player's cards.  In other words, the game of poker is rigged.  Other players, or in this case, counterparties, have limited funds and no access to other player's cards.  Eventually, Wall Street is going to bet the other players or counterparties with limited funds out of the game.  So, these counterparties must eventually leave the game.  As time goes by, financial liquidity is drained out of markets and fewer and fewer counterparties remain, thus concentrating risk and loss.  This is the dynamic of monopoly applied to Wall Street's financial scams.  This dynamic is driven by an economy that isn't spinning off any capital creation or enough new investment to feed the financial Frankenstein.   And, the economy isn't spinning off any capital creation because Wall Street, and even non-financial corporations, control our money supply and are therefore choking off economic activity.  That rigging, both by financial firms and multinational firms in every industry, are diverting money out of places like Detroit, Cleveland, Buffalo, East Los Angeles and other areas of extreme poverty in our nation.  As that dynamic intensifies and affects more and more counterparties in the underlying economy, over time the middle class ends up as a loser in the rigged game, the tax base disappears and economic winners become concentrated into the hands of a very few.  Typically, those very few are the most willing to do whatever it takes to get to where they are.

"Power tends to corrupt, and absolute power tends to corrupt absolutely.  Great men are almost always bad men, even when they exercise influence and not authority, still more when you superadd the tendency or certainty of corruption by full authority." -- John Dalberg-Acton

So, with this dynamic, eventually quantitative finance are the only players left in the game.  Not only the game in financial markets but in the economic game.  So, we cheer these criminals as our economic heroes and young students rush to Harvard and Yale to learn how they can get to be a part of the rigged game.  Unwittingly, of course.  And, our society's values are then mocked and turned on their head.  Greed becomes good.  Virtue is for poor bastards.  All while engineers and scientists can't find or create sustainable employment because Wall Street is choking off our economy more and more over decades of bribery and collusion to rig the game of for-profit banking.  So, what do engineers and scientists do?  They adapt to survive.  They go to work on Wall Street to feed this Frankenstein even more.  They follow the Marching Morons we have written about.  They follow the most systemically-incompetent forces in our economy in order to make a living.  That would be the Wall Street banksters.

We have seen this market-rigging dynamic that eventually crowds counterparties out of financial markets  developing for a long time.   It started decades ago.  That is what happened in 2008 when Wall Street was trading mortgages.  That is also what happened with MF Global a handful of months ago.  MF Global made enormous bets but were a weaker hand that the Wall Street's rigged monopoly torched.  Ditto with Barclays that just reported massive losses trading commodity metals.  Even Goldman Sachs who had substantial losses in forex trading late last year.

As Nomi pointed out in her post, Goldman's forex trading losses added up to gains shown by other large firms.   And, Wall Street firms that just a few years ago were reporting profitable trading days every single day of its quarterly results, are now starting to report large losses on many days.  To compensate they are upping their risk profiles.  In other words, adding even more instability into the system.  Do you know what rising bad bets at major financial firms means?  The virus of economic suicide that Wall Street has created, the economic model of the United States, is working through to the very top of the economy.  With counterparties traded out of financial markets, Wall Street is now eating its own.  We have large, systemically-dangerous financial firms now betting against each other.  That is exactly what happened in 2008.  With counterparties gone, Wall Street is now taking major bets against other major international financial firms in order to keep this abomination going.  The financial reform act did nothing to solve anything.  As we wrote, it was simply more red tape meant to rig a corrupt game in Wall Street's favor.

So, in the future, we could expect to see substantial losses and even failures in derivatives markets as counterparties make massive bets against firms without the necessary liquidity to make payoffs.  Wall Street has essentially opened Pandora's Box by creating a self-fulfilling liquidity trap of sorts.  If Wall Street continues to make these massive, unfunded bets against other equally systemic firms, they will continually require the Federal Reserve/other central banks to squirt more money into financial markets or monetize more government bonds to inject more money into the economy to re-liquidate counterparties to their betting parlor.  Endless bailouts be they covert or in the open as was 2008.

Look, we wrote this was going to eventually happen literally at least a dozen times over the years.  Wall Street has won nothing through the bribery of politicians and rigging of the economic game.  The virus is instead working its way upward and will eventually infect the entire system without reform.  There's no way to stop the virus without transformational economic and monetary policy reform or more and more bailouts.  Monopolies crowd out competition and money.  That is what has happened in financial markets as well as the economy.  Wall Street has unsuspectingly sealed its own fate due to its endless greed, corruption and manipulation.

Money's velocity hasn't imploded because of a massive debt burden.   The massive debt burden exists because true economic monetary velocity has been imploding for decades as corporations gained greater and greater control over our money supply.  That people show monetary aggregates exploding higher and warn of inflation is ludicrous.  It shows how little anyone in the system actually understands.  There isn't a mainstream financial blogger, economist, Wall Street "expert" or politician who seems to get it.  Millions of Americans get it because they are living it.  Trickle down economics and private, for-profit banking are both a fucking joke.  Excuse the French.  I am bored of politically-induced freedom fries.

When an engineering firm can manufacture the next iPhone in our country or a shoe designer can manufacture shoes in this country, and this is accomplished through a living wage, our democratically-guaranteed economic determinism will be realized.  Our economy will then be on its way to recovery.  And, we don't need President Obama or any other politician being the gate keeper to economic freedom by telling us who gets subsidized for investing in the U.S. and who doesn't.   That's more political dunces picking winners and losers.   That's why we are in this mess.  We need democratic economics not political economics.  Only the government can fix this mess by unrigging the game they rigged to create this mess.

Does anyone buy the endless rhetoric that this environment or our economy are ever going to recover through some magical words of a politician?  Is our economy better than when Obama took office?  Are you kidding me?  Tens of trillions of dollars in bailouts and backstops, more homeowners wiped out, no increase in employment, jobs continuing to be cut and replaced with lower wage, often benefit-less jobs.  Republicans or Democrats, it doesn't matter.  It's right versus wrong and they are both wrong.

"A leader is best when people barely know he exists.  When his work is done, his aim fulfilled, they will say, 'We did it ourselves.'."-- Lao Tzu  

We need government leadership that knows how to lead.  Not another talker like Obama or bankster like Romney or demagogue like Gingrich.  Someone who knows how to unleash the creativity, desire and ability of any and all Americans who have an ability to create and express themselves economically.  We need a monetary and banking system controlled by democracy to serve democracy.  We need to restore merit and virtue to leadership and economics.  We need an economic constitution and a public banking system.  We need to ban corporate personhood.  We need one person, one vote publicly-financed elections, and not a rigged election process controlled by money.  When that happens, politicians won't be able to tank our economy regardless of how much buffoonery they can dream up.  Let the government do what government is supposed to do.  Help those who cannot help themselves, provide a fair set of rules provided for economic creative expression, make investments that benefit and protect democracy and provide for the defense of our nation.

Get the Marching Morons, who rigged the game from one of freedom to one of control, out of our economy and our politics and let the citizens of this country do what we do best.  That is, repair the damage caused our economy and our democracy by financial criminals and political idiots.
posted by TimingLogic at 11:14 AM

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