Tag: finance

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Martin Armstrong’s latest on Dark Pools

http://www.zerohedge.com/…real-dark-pools

Martin Armstrong continues writing his typewritten letters (from a detention center in New Jersey) regarding ongoing economic and political events. I’m no expert on Armstrong though if you’ve not heard of him, he was detained (imprisoned) for some seven years for contempt of court and only went to trial when the judge who had been detaining him was removed from the case by the NY Court of Appeals (source: wiki). There’s a pretty reasonable chance that Armstrong did nothing wrong other than crossing the State.

Oh and Armstrong had a number of models and forecasts he used to predict the market, some of which were apparently amazingly accurate. Who knows.

Armstrong’s latest letter is available on ZeroHedge, a finance-centered blog that has quickly become one of the most cited and popular finance blogs out there. Interestingly, the ZH writers are anonymous, taking on the names of various characters in Chuck Palahniuk’s Fight Club. Recently, ZH took their site off of blogspot.com and moved it to offshore servers to further protect their anonymity and the site’s often whistleblowing content.

Getting to the point. The letter is about Goldman Sachs and what Martin calls the “club” on Wall Street. The “club” is a group of extremely powerful individuals who are out to make massive amounts of money via the financial system. Importantly, the “club” attempts to do this not by making better bets (as in, speculating), but essentially by rigging the system and creating the perfect trades. The “club” accomplishes this goal by controlling inside information.

The letter is pretty lucid and provides an interesting glimpse into what goes on behind-the-curtains of Wall Street. What struck me most about the letter is that Armstrong works to dispel the notion that there is some conspiracy theory across all central banks to control the world. What’s really going on is that the central bankers are trying to do their jobs and maintain economic and monetary order. Unfortunately, they are clueless academics. Martin realized just how impotent and lost the powers-that-be were back during the 1989 crash:

It had dawned on me perhaps when there was the 19889 Crash. I had carried two cell phones many times when the model was reaching critical turning points as it did in 1989. The markets were going nuts, and my one cell phone ran[g] that was used primarily for very special clients. it was one of the G5 Central Banks asking me outright what the model was showing and did I think they needed to intervene? As I was explaining the focus was in Japan and that there would not be any abnormal correction and thus there should not be concern about intervention, my regular cell phone rang. It was another G5 member asking the same questions.

What became very clear to me, was they truly had no idea what was taking place any more than the rest of the world. Everyone was struggling to comprehend the new world that was emerging. Communism seemed defeated, markets were crashing, and the general expectation was – Should we be rejoicing?

Most of the central banks have a lot of PHDs, with no real world experience. They have read books, but have not been in the trench to “feel” what it is truly like. This is why government employees rarely have anything worthwhile that will ever contribute to society. …

Armstrong has seen behind the curtain and knows that the authorities (in this case the central banks) are clueless, self-interested, and incapable of working together to effect change. Often, outsiders see these authorities and point out their ineptitude, understanding they are clueless academics. And that’s where outsiders go from insightful to crazy — they go on to conjure up theories of impossibly coordinated efforts by the same incompetent authorities.

In other words, it’s just like the South Park episode — Mystery of the Urinal Deuce.

So what is going on when we see Goldman Sachs making money hand over fist? Simple: they’re doing what they do best, exploiting their inside information, political connections, and their current monopolistic status on Wall Street. Is it all that surprising?

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Mr. Taleb Goes to Washington

http://tbm.thebigmoney.co…goes-washington

Marion Maneker of The Big Money (part of Slate) has a nice article on Nassim Nicholas Taleb that discusses Taleb’s recent attendance at the Wall Street Journal’s “Future of Finance” conference in Washington D.C. The article describes righteous indignation at the ongoing and deepening financial calamity and what he suggests might be a more robust financial system. It’s a good read it is entirety, though below I’m saving down the major takeaways.

Taleb recently expounded upon the charlatan theme (and their positive advice) on his personal “blog.” Also, note Taleb’s closing words and see if you aren’t reminded of Jon Stewart’s big point in his recent interview with Jim Cramer.

… Taleb’s anger at the economic establishment [3] that drove us over this cliff—and populates the Journal’s conference—makes him a representative figure of ordinary people. Like most Americans, Taleb is seething with rage about the financial establishment’s role in bringing the about credit crash. “Nobody saw the crisis coming,” he says. “Bernanke, all these guys, I want them out. They proved incompetent, they crashed the plane.”

Unlike us … Taleb is comfortable with the theory and practice that undergirds the whole system of options, derivatives, and risk management that has spun so recklessly out of control. That talent mixed with his righteous anger makes him a rare bird: an Everyman who can do the equations. …

In normal times, the conferencariat are an arrogant bunch. This is something [Alan Murray of the WSJ] knows well from his travels on the conference circuit, which begins each year with the World Economic Forum in Davos. “Davos is usually filled with people who have all the answers,” Murray says. “What was so striking about Davos this year was all these people, for once, didn’t have all the answers. No one could tell you with certainty what was happening or what needed to be done.”

No one but Nassim Taleb. Before Davos, Murray read The Black Swan. At the conference, the newspaperman and the trader had many conversations over the course of four days. Murray came to the conclusion that Taleb was the iconic figure of Davos in 2009. “In my mind, he had the perfect message for the moment.” …

[As for the Future of Finance conference, Taleb] left after dinner the first night. While the 130-person conference debated the government’s new regulations that George Soros described as merely “tinkering” with the system, Taleb has a clear-eyed plan.

First, he says, we have to unmask the charlatans of risk like Myron Scholes. To Taleb, Scholes is the Great Oz in this Emerald City because his work on options and derivatives allowed the whole of the financial system to adopt poorly understood products-like the ones that brought AIG down-that hide risk. To Taleb, Scholes’ academic work, which enabled the widespread use of complex derivatives, was like “giving children dynamite.”

“This guy should be in a retirement home doing Sudoku,” Taleb says. “His funds have blown up twice [6]. He shouldn’t be allowed in Washington to lecture anyone on risk.”

With complex derivatives unmasked and, in Taleb’s vision of the future, outlawed, the next step is to create a more robust version of capitalism. Taleb calls it Capitalism 2.0. Robustness begins with a dismantling of debt. Leverage was the gas that inflated the financial system until it was too big, too fragile, and too volatile.

Over the past 20 years, the financial system has grown ever more complex. Building on a greater computing capacity and communication speed—”Bank runs now take place at the speed of BlackBerry”—Taleb recognizes that the financial system now possesses an efficiency that creates volatility. That cannot and will not go away.

We cannot have both debt leverage and a hyper-efficient system—the volatility is just too great. What Taleb explains—which no one else does—is that efficiency is already a form of leverage. A highly efficient system removes slack and magnifies small changes. Think of the efficient system as a high-performance aircraft. Each minute of steering input creates a rapid and violent shift of course, speed, or altitude. The system itself is souped up even before you add the debt. Once you do, the pilot is equally jacked up and twitchy, creating an explosive combination. Now imagine that fighter jet trying to fly in a 1,000-plane formation, and you get an idea of the world financial system in the 21st century.

We can’t erase the technology that created the planes, so we’ll have to make sure we fly sober, maybe even with an onboard computer that dampens the controls. That means getting rid of the debt. It’s that simple.

A deleveraged financial system is a stable one, especially if we increase the redundancy within the system. That’s an idea Taleb has taken from biology. But in finance, redundancy means two things: not having players in the game who are “too big to fail” and not allowing anyone—from the individual to the institution—to play with too much money. Redundancy means have cash on the side, not risking it all, and not becoming dependent upon financial assets for your economic well-being.

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How the United States will go Insolvent

http://www.oftwominds.com/blog.html

Charles Hugh Smith has a fantastic, easy-to-follow post today titled, The Road to National Insolvency. Therein Smith details the debt-rolling finance structure that the United States Treasury has employed to pay off existing debt, interest on said debt and new deficit spending. He then explains how current factors have kept a lid on borrowing costs (interest rates or bond yields) on Treasuries. Finally, he speculates on how going forward the dampened global economy and demand for yield by investors (i.e. investors will only accept marginal yields on debt for so long) will put enormous upward pressures on borrowing costs, thereby ultimately leading to much higher interest rates, sovereign debt-servicing costs and finally to U.S. insolvency.

I happen to agree with Smith, so I’m biased in that regard (Disclosure: short TLT via puts and long TBT). I think the biggest unknown is just when we hit the tipping point and yields start spiking dramatically. It could happen very quickly and with little notice. So be careful out there!

Well organized, written and worth the read in it’s entirety: the clip below is just CHS’s conclusion:

Four short years of $2 trillion deficits will effectively double the U.S. national debt and the interest it pays. The Social Security surpluses are “borrowed” every year without any notice, so the U.S. debt rose by $300 billion a year even when it supposedly ran a slight surplus; that $300 billion+ a year in new debt goes on top of the stated $2 trillion/year in deficit spending.

So the nightmare scenario is this: the debt doubles over the next 4-5 years, causing interest payments to double from $450B to $900B a year. But interest rates also double due to the global shrinkage of surplus capital and the monumental rise in demand for capital (borrowing). The $900B in interest then doubles to $1.8 trillion–roughly equal to Medicare, Social Security and the Pentagon combined.

Can’t happen? Really? With tax revenues dropping along with profits, employment and assets, then where will the political will arise to cap entitlements and other spending? I predict the U.S. will continue borrowing trillions of dollars until it is no longer able to do so.

By then, the interest owed each and every year will crowd out all other spending. With the debt machine broken, the government will simply be unable to service its debt and fund all its mandated entitlements and other programs. It will be insolvent.

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Michael Lewis on “The End” [of Wall Street]

Michael Lewis wrote Liar’s Poker, a book I’ve seen referred to so often that it has finally ascended to my wish list (it should have been there a long time ago).

From the best I can tell having not read Liar’s Poker, it was about the rampant corruption experienced first-hand by Lewis in the mid-1980s (American Psycho anyone?). More recently, Lewis has written an update to Liar’s for Portfolio.com. You can find it here.

A snippet:

Both Daniel and Moses enjoyed, immensely, working with Steve Eisman. He put a fine point on the absurdity they saw everywhere around them. ?Steve?s fun to take to any Wall Street meeting,? Daniel says. ?Because he?ll say ?Explain that to me? 30 different times. Or ?Could you explain that more, in English?? Because once you do that, there?s a few things you learn. For a start, you figure out if they even know what they?re talking about. And a lot of times, they don?t!?

To sum up the article in just a few words, Lewis describes Wall Street as having turned into factory for imaginary clothes. That the dupe worked for decades is amazing enough. I gather that Lewis believes this crisis to mark the ultimate end of the con, and I hope he is right (Though I’m skeptical).

What brought the article home for me was how often I could relate to it via experiences from my prior job at Ga. Gulf, specifically when I was working with the then-CEO, CFO, Veeps, rating agencies, consultants and investment bankers (We had dual-bankers working the deal for us — Merrill and Lehman!) on the ill-fated billion-and-a-half-dollar deal to buy Royal. In short, the so-called experts used their authority to gloss over details, often being so short on understanding that they could not take the ideas they bantered about and tie them back to rational, coherent, non-jargoned core principles.

Of course, you only caught these “experts” at their legerdemain if you persisted in asking questions and staying skeptical, thereby avoiding the trap of their shaming you into silence with big-words and ostensibly complex ideas.

My most tragic experience of this appeal to authority, banker dodgi-ness occurred back around early June 2006. After having lobbed in an initial offer to buy Royal that was summarily rejected, we requested a day with Royal’s top management to go over their most up-to-date financials. They were hoping we’d become more confident in the deal, and up the ante. After the day-long conference call with Royal’s people, I was sitting in the CFO’s office with all the Veeps gathered around and all our investment bankers on the phone (Amazingly, for such an important meeting the CEO was actually absent — he’d dashed off to Louisiana for some reason and couldn’t even get on the phone!). This internal meeting was to have a final discussion about whether or not to continue pursuing Royal.

A quick step back for some background info: Royal was a building materials company we, a chemical commodities company looking for downstream integration of our PVC, were looking to buy. Everything we saw out of Royal (except for the Bain-prepared powerpoint presentations) was ugly. What we learned on that last-ditch day of diligence was that the multi-month slide was only getting worse. This new information made a clear case that we shouldn’t buy them at the price we had already offered, much less up the ante. Further, maybe we should rethink pursuing this company at any price. It was obvious that their business had managed to falter during the greatest housing boom of all time, yet we were contemplating paying for them going into the post-boom bust! I felt I had pieced together the big picture (as did the late CFO and a couple others who had been effectively shut-up by the CEO), thus in this post-diligence meeting, I took three minutes and laid out my case in full.

It was a treatise that hit on the economy, housing, Royal specifically and even interest rates. I left my thoughts open-ended, pleading to all parties present for discussion, feedback or criticism.

What did I get in response? A joke about bringing everyone down by being so gloomy. Everyone got a good guffaw and the joke was followed-up by one of the i-bankers on the phone immediately changing the subject to strategy on how to counter back and continue the buying process.

And that was that. Ga. Gulf bought Royal for a 40 – 50% premium (depending on which stock price you pick). Ga. Gulf’s stock price has dropped over 95% since that decision, and I believe Royal would have gone bankrupt had we just said, “Forget it; we’re not interested” and walked.

Between Lewis’ condemnation of Wall Street, my own experiences in corporate America (Oh the stories I could tell!) and having read Nassim Taleb’s The Black Swan, it’s abundantly clear that the great majority of so-called economic and financial “experts” who have been running the show in Wall Street are nothing but con(fidence) artists, whether they realize it or not.

It is a shameful history and a lot of hard-working people are going to be hurt in the fall-out as the con-game, which goes all the way back to the something-for-nothing printing presses of fiat currency, is laid bare.

Let’s hope this really is “the end” of it.