Buddy, Could You Spare Five Trillion Dollars?
By
John Mauldin
Jul 13, 2009 11:20 am
Almost 9% of world GDP needed to fund the new government debt.
First I want to direct the attention of those in the US finance industry to a white paper written by Themis Trading, called Toxic Equity Trading Order Flow on Wall Street. Basically, they outline why volume and volatility have jumped so much since 2007 -- and it's not due to the credit crisis.
They estimate that 70% of the volume in today's markets is from high-frequency program trading. They outline how large brokers and funds can buy and sell a stock for the same price and still make $.005. Do that a million times a day and the money adds up. Or maybe do it 8 billion times. It requires powerful computers, the complicity of the exchanges (because the exchanges get paid a lot), and highly proximate computer connections. Literally, the need for speed is so important that to play this game you have to have your servers physically at the exchange. Across the river in New Jersey is too slow. Forget Texas or California. This is a game played out in microseconds.
The retail world doesn't get to play. This is only a game for big boys who can afford to pay for the arms needed to fight this war. But the rest of us pay for the game, as that half cent is like a tax on transactions, not to mention the increased daily volatility, which skews pricing.
Think it doesn't affect you? That tax is paid by mutual funds, your pension fund, and every large institution.
Frankly, this is outrageous. The more I read, the angrier I got. And it's going to get worse as computers get faster and software more intelligent. We need rules to level the playing field. Themis suggests a simple one: just make it a rule that all bids have to be good for at least one second. That would cure a lot of problems. One lousy second! In a world of microseconds, that is an eternity.
Goldman Sachs (GS) went after an employee who stole some of their latest and greatest software this past week. The US assistant attorney general that the software had the potential to manipulate the market. Imagine that. I'm shocked. There's gambling going on in the back room? Gee, Commissioner, I had no idea.
All this "algo" (algorithmic) trading also gives a very false impression of volume. If you're a fund and see 10 million shares a day traded, you might feel comfortable holding one million shares and exit your trade easily. But if 80% of the volume is false algo trading, that volume isn't really there. You may have a position that will be difficult to exit, and not even know it.
No positions in stocks mentioned.
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Reply
2009-07-13 12:18:13
Monetization- What Monetization?
John,
Another excellent article. Regarding:
"I'm still trying to get my head around this. Let's optimistically assume that they made a mistake and it's "only" $4 trillion. Where do you find that kind of money in a global deleveraging recession?"
Well, they can either not spend the money. Maybe this is what really happened in the 1930s?
Or they would have to monetize. Jim Rogers is talking about it. There are already rumors of a bank holiday coming in the Fall(Marketwatch article, schultz).
And remember Uncle Ben says he won't monetize.
I hope we don't monetize, but that would mean the long "muddle through"
Another excellent article. Regarding:
"I'm still trying to get my head around this. Let's optimistically assume that they made a mistake and it's "only" $4 trillion. Where do you find that kind of money in a global deleveraging recession?"
Well, they can either not spend the money. Maybe this is what really happened in the 1930s?
Or they would have to monetize. Jim Rogers is talking about it. There are already rumors of a bank holiday coming in the Fall(Marketwatch article, schultz).
And remember Uncle Ben says he won't monetize.
I hope we don't monetize, but that would mean the long "muddle through"
2009-07-13 12:37:41
High Frequency Trading
John,
"They" make the argument the HF trading lowers bid/ask spreads. But what it is really doing is putting money into the few program traders hands. Without HF trading the bid/ask might be larger, but on average the trader would win some and lose some, therefore, no net cost.
What this software trading does is rewards clever algorithm design, and has absolutely nothing to do with rewarding the creation of value. The creation of that value being represented by stocks and other financial products (and what capitalism is all about).
You are correct, it is a tax, that is paying for some ones Hamptons beach house.
If we as a county could focus a little more on the basic capitalistic principle of creating value, we will do just fine. But if we focus on gaming the system, allowing lobbyists to set out priorities, etc. we will continue to have problems.
"There is no free lunch" -Robert Ringer
"They" make the argument the HF trading lowers bid/ask spreads. But what it is really doing is putting money into the few program traders hands. Without HF trading the bid/ask might be larger, but on average the trader would win some and lose some, therefore, no net cost.
What this software trading does is rewards clever algorithm design, and has absolutely nothing to do with rewarding the creation of value. The creation of that value being represented by stocks and other financial products (and what capitalism is all about).
You are correct, it is a tax, that is paying for some ones Hamptons beach house.
If we as a county could focus a little more on the basic capitalistic principle of creating value, we will do just fine. But if we focus on gaming the system, allowing lobbyists to set out priorities, etc. we will continue to have problems.
"There is no free lunch" -Robert Ringer
2009-07-13 13:29:33
HFT
GS will be able to show fantastic profits thanks to TARP and the HFT it does and also because it dominates that side of trading and it also has a special program that rules the world too!
Look at this clip and see why the housing bubble still hasn't popped and the government bubble blowers want to keep things from going back to reality..
http://www.youtube.com/
watch?v=nSH9KE
F8Rso&eu
rl=http%3A%2F
%2Fzerohedge.blogs
pot.com%2F2009%2F07%2Fhousing-tunes-acme-
cheap-credit-
vs-wile.html%23d
isqus_thread&feat
ure=player_embedded
(please delete paragraph/ spaces in link to view)
Look at this clip and see why the housing bubble still hasn't popped and the government bubble blowers want to keep things from going back to reality..
http://www.youtube.com/
watch?v=nSH9KE
F8Rso&eu
rl=http%3A%2F
%2Fzerohedge.blogs
pot.com%2F2009%2F07%2Fhousing-tunes-acme-
cheap-credit-
vs-wile.html%23d
isqus_thread&feat
ure=player_embedded
(please delete paragraph/ spaces in link to view)
2009-07-13 13:34:29
High Frequency Trading
This market is a casino that is rigged in favour of GS and the others that have these super rule the world computer programs that the ordinary person is not allowed to have.
GS dominates the market so is now too big and should be broken up!
No one or one company should have the lions share..
How can they say their program would be bad if it got into the wrong hands? Who tells them what to do and how to use it? Who are they to say they are the powers of good and all the rest are evil? They themselves.
It reminds me of George Orwel and Animal Farm
All animals are equal but some are more equal than others!
GS dominates the market so is now too big and should be broken up!
No one or one company should have the lions share..
How can they say their program would be bad if it got into the wrong hands? Who tells them what to do and how to use it? Who are they to say they are the powers of good and all the rest are evil? They themselves.
It reminds me of George Orwel and Animal Farm
All animals are equal but some are more equal than others!
2009-07-13 14:24:00
HFT and other abuses
Thanks, in particular, for the Themis Trading white paper.
While lambasting the industry via comments to the SEC, please remember to also pick out the "dark pool" as being unfair, preventing price discovery, creating an un-level play field, etc.. In fact, a careful reading of the white paper suggests that "pinging" orders are a response to the "dark pool" trend.
I suspect HFT began as a simple bid-ask spread taker (the life-blood of the market-making industry), evolving as a result of competition; to the point where, indeed, there is at least an appearance of automated front-running. Having said that, what part of HFT would you regulate out of existence ? The slope seems slippery.
While lambasting the industry via comments to the SEC, please remember to also pick out the "dark pool" as being unfair, preventing price discovery, creating an un-level play field, etc.. In fact, a careful reading of the white paper suggests that "pinging" orders are a response to the "dark pool" trend.
I suspect HFT began as a simple bid-ask spread taker (the life-blood of the market-making industry), evolving as a result of competition; to the point where, indeed, there is at least an appearance of automated front-running. Having said that, what part of HFT would you regulate out of existence ? The slope seems slippery.
2009-07-13 14:38:10
My Garage Sale was a Huge Success
I got pretty close to my asking price on everything. My wife handled the sales and cash while I stood in the back bidding against the buyers. Of course I got stuck with some of it but the really good news is that I printed the money to make those purchases… so I have all the money I was counting on and can sell the rest of the stuff in the garage at a later date (and in the same way!).
Some folks think it isn't fair to compete in my own sale or to print the money to buy my own stuff back, but hey the govt does it at their auctions. Maybe you also think it is not fair to not just have a reserve price that is stated, in case I don't think I am getting a fair bid – well, the govt doesn't do that either… and it is a govt of the people, by the people, and for the people (and I am just a peeps, too).
True, printing money has the effect of devaluing the currency but most everybody thinks deflation is a bigger problem…. and even the govt thinks it will be years before prices start increasing, so I am willing to help out there.
Somehow I am not being afforded the same protection as the govt, as I can have my books audited and be prosecuted for fraud and counterfeiting. Time to have the laws changed to level the playing field, I think. Heck, if the Federal Reserve can't be audited (and they aren't govt either), why should I be?
Five Trillion would be a real challenge for me -- a lot of Hundred Dollar bills.... but we know know that $1.34 Trillion in bonds will fit in the false bottom of a suitcase.
Problem solved!
2009-07-13 14:41:19
Monetization- What Monetization?
If the govt was not monetizing already the Fed and Treasury wouldn't need all the secrecy and allow an audit, eh?.
How do you think the interest rates were bid so low last week?? Good demand for bonds:-) Bet the govt was providing a lot of the demand.
How do you think the interest rates were bid so low last week?? Good demand for bonds:-) Bet the govt was providing a lot of the demand.
2009-07-13 14:44:24
My Garage Sale was a Huge Success
Correction -- that should have been $134 Billion in a false bottom... 5 Trillion should fit if ya leave out the false bottom!
2009-07-13 21:45:47
Good article, but..
Re this: Do you want to be a senator or congressman running for office next year with unemployment nearing 11% (my estimate), with all of the problems mentioned above, and with a record of having voted for the largest unfunded deficits in history?
He** YEAH. Especially if I'm a politician that knows that this is all THOSE PEOPLE'S fault and the peasant serfs in my congressional district are typical `mericans; meaning superstitious, semi-literate, and angry at THOSE PEOPLE who RUINED EVERYTHING. Throw in Faux News stirring up the morons and you can't lose. So grab yer guns - and your woman-folk - because we're all gonna be in a fascist paradise in about 5 years.
He** YEAH. Especially if I'm a politician that knows that this is all THOSE PEOPLE'S fault and the peasant serfs in my congressional district are typical `mericans; meaning superstitious, semi-literate, and angry at THOSE PEOPLE who RUINED EVERYTHING. Throw in Faux News stirring up the morons and you can't lose. So grab yer guns - and your woman-folk - because we're all gonna be in a fascist paradise in about 5 years.
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