Wednesday 29 August 2012

Looney Tunes

The cult of the Looney is normally something to be avoided at all costs depending on which particular commonal variety of 'loon' you are dealing with.  There are some which prove to be entertaining such as The  Monster Raving Loonies, or the more ubiquitous Looney Tunes which many of us were happily brought up on.

Once you step beyond the fun side of things the descent is pretty rapid into crackpots and the 'here's some padded wallpaper and self-cuddling apparel to enjoy for an unlimited time period'. Of course not everyone who ends up in a psycho-ward is nuts eh Bradley? and vice versa, there are plenty of people out there roaming around who perhaps should be voluntarily checking themselves in to a secure establishment for the general benefit of the rest of the planet.

With the above in mind, and a dumper truck of other caveats thrown in you will want to have a listen to this rant from Ann Barnhardt. To say her general views sit in the more extreme category is possibly this months understatement of the decade but just because what you sometimes do or say is utterly bonkers doesn't mean everything always is.

So why bother featuring this particular stream, well...mainly because its a very necessary wake up call. Often an impassioned plea has more affect than just a matter of fact delivery and unlike much of the other stuff she bangs on about 99% of this is bang on the money - especially pertinent is her title quote of "If you are still in these markets you are either stupid or on drugs". This is of course a U.S. centric appeal but given the level of fraud and manipulation in the entire financial system it is without doubt a canary in the coal mine for all (well along with several other canaries - in fact, given how many are appearing it seems the mine is also producing viagra).

The suggestion that you should remove your money from the system shouldn't be news to regular readers as we picked up on this theme in the first P.I. blog dated 11th May and have just retweeted this from the Motley Fool. In really simple terms the risk of having your money vaporised into thin air with little recourse to recover it seems to have increased dramatically and this is the point Ann describes in some detail.

So lets stick with it a second because the wider implications are to be ignored at your peril. In the U.S. a savings plan is called a 401K. Its like a UK pension scheme which is often invested in equities or government bonds. The idea being you can't touch it until you retire. Under normal circumstances its not a problem but what happens when every market is rigged, excessive fraud prevails, there is absolute fragility inherent within it and the whole financial system is one massive Ponzi scheme? The most sensible approach is to disengage or as the computer Joshua concluded in the film War Games:  'The only winning move is not to play'  And this, as several others have pointed out, seems to be about the best advice there is at the moment but why?

We've already mentioned the vaporisation of client money from MFGlobal (and now Peregrine Financial Group) in a previous post and Ann highlights the legal ruling with respect to Sentinal Management Group:

However, what is most frightening is the recent ruling in the Sentinel Management Group case by the 7th Circuit Court of Appeals. The court ruled that the Bank of NY Mellon be placed first in line ahead of customers seeking return of their money.
 
“That Sentinel failed to keep client funds properly segregated is not, on its own, sufficient to rule as a matter of law that Sentinel acted ‘with actual intent to hinder, delay, or defraud’ its customers.”- U.S. Circuit Judge John D. Tinder
 
This ruling shows that not only does the Bank of NY Mellon move to the front of the line, but that using customer segregated funds as collateral is no longer considered a crime, and that co-mingling customer segregated funds with proprietary funds is no longer considered fraud. This ruling implies that customer assets held at a bank or trust are the legal property of any counterparty to loans the depository institution takes.

This might all be about the U.S. but don't think just because you are in the UK you are necessarily  immune. Did you know that when you put your money in a bank it is no longer your property only your asset. You have loaned your money to the bank. If the bank fails you may not be entitled to your money back. There is an £85,000 per account per separate institution deposit protection scheme in place but remember - its not forward funded and governments can and do change their positions especially if cornered. Nothing to worry about there then.

There is a lot more than just the above to consider as is covered in OUCH! and we will return to this in later posts but sceptics might want to have one eye on the £130 million bet Rothchild has placed on the break up of the Euro. I will be more shocked if we don't have the mother of all financial panics this side of Christmas than if we do. Have you arranged yourself accordingly? Of course you haven't - because there is nothing to worry about, right?





Saturday 25 August 2012

I printed you a miracle

I don't know which made me cry with laughter more, re-watching Jim Kerr's neck appendage take on a life of its own or reading in Thursdays's Evening Standard that the Bank of England is claiming QE ('printing money') has made each of us £10,000 better off.

Chuckle muscle worn flaccid? Here's why printing money as highlighted in OUCH! doesn't make you richer :

Imagine that you are a counterfeiter producing £5 notes. You are so good at your chosen profession that no-one can tell the difference between the fake £5 and the real £5. You print lots of £5 notes and start spending them. This has 2 effects:

1.      The total money supply of the country increases thus driving up prices because the purchasing power of the existing currency unit is decreased. This decrease is directly proportional to the amount of fake cash you put into circulation.

2.      You get richer whilst everyone else gets poorer. It changes the wealth distribution because whilst there is a general lowering of purchasing power per currency unit there is a disproportionate amount of money in your hands as the counterfeiter. If you are first in the chain you get the benefit.

The same reasoning is valid if the ‘counterfeiters’happen to be the government. By diluting the total by printing money it also acts as a wealth transfer mechanism to the state at the expense of the general populous.

Its really quite simple, if money printing made us richer then why not just print £10 million for every person in the country, dish it out and then we could all retire? Afterall what could possibly go wrong? Zimbabwe managed to get to 100 trillion dollar notes (worth about US$ 5.00) before their currency finally collapsed. Zimbabwe's annual rate of inflation in November 2008 was 516 Quintillion % that’s 516 followed by 18 noughts (516, 000, 000, 000, 000, 000, 000) - although they narrowly missed the world record inflation rate set by Hungary where prices doubled every 15.6 hours.

Why are various western central banks/governments resorting to money printing? 'Velocity' and a collapse in the money supply may be the raison d’ĂȘtre stated but peel back the layers of manipulation and the alternative is default - but why do it overtly when you can do it covertly? That way, you don't get the direct blame. However this game is not without consequence. As Tim Price points out in his latest newsletter, Bill Gross may have called it too early (exact timing is always tricky) but stated UK governnment debt was resting on a bed of nitroglycerine.

You may be being 'promised a miracle' but the reality you will be experiencing in the near future may not feel that miraculous when it arrives.

 





Friday 10 August 2012

Thursday 2 August 2012

Oh Boy, this should be fun

Most of us have experienced PMT, either first hand if you belong to the fairer sex, or vicariously through a loved one if you don't, but when it comes to HFT, the majority of either sex are probably using that other 3 letter acronym WTF?

For those of you unfamiliar with HFT (high frequency trading) you might want to alter that state of ignorance 'tout suite' ( as our cheese fondling brethren across the Channel might say). Why? Well something has just happened that demonstrates just how fragile and exposed the stock market is to rogue algorithms, these are a bit like Rogue Trooper but far more destructive.

HFT virgin? No problem. Pop your own cherry by having a look at this. Kevin Slavin's brilliant TED lecture concludes that "We are now writing code that we can't understand, with implications we can't control". As I say in OUCH! Who could have seen that coming?

Well obviously Kevin is one, and the other 'one' is the 1 million plus viewers who have watched it. So when this all goes horribly wrong and some numpty appears declaring it to be a black swan event - the rest of us will know better.

Let's get into the nitty gritty and take Slavin's observation one step further. We might be writing code that we can't control but we are also writing code we can. The problem being the motivation behind it isn't necessarily benign as we have seen with the Stuxnet worm. The New York Times reported on 24th June 2012 that Stuxnet was deployed by the US and Israeli intelligence services to target the Iranian nuclear programme. Clearly a genius move as no-one will ever consider writing one that targets the instigators instead, right?

But let's move on from alleged politically driven cyber espionage to your personal savings. Got anything invested in the stock market? You might want to re-think that cunning plan given what's just happened to Knight Capital. As usual, Zerohedge coughs up the beans allowing us to see what happens in practice when there is 'trouble at t' algorithm mill'.

Many claim 'buy low and sell high' is the first, simplest and best mantra for investment. So when an algorithm goes rogue and does exactly the opposite you have what is often referred to as a 'minor inconvenience'. Except what happens when those trades are being enacted every millisecond and you are losing money on every one? Your minor inconvenience has just switched to an instrument of financial torture and in extreme cases potential company insolvency. So if all this is eminently possible, and with Knight Capital we have just seen the minus $440 Million practical play out of it, what is to stop anyone writing malicious code in order to manufacture these situations? Well no-one gets involved in that sort of behaviour do they?

The solution of course is to stop all the HFT nonsense either by applying a minimum time limit to all trades or applying a tax per trade so the frequency element is penalised. Will this happen in advance of any disaster? Unlikely. We generally need a cataclysmic event to shift the mindset. Are we human, or are we dancer? The puppeteers are in town - you might want to bear that in mind and check your pockets.