There was a time not all that long ago (circa 2009) when the markets were still gyrating wildly after the initial shocks of the ’08 collapse. It was during those gyrations that there was a very perceptible, heavy, and “hidden hand” making itself ever-present.
This “hidden hand” came in only on one side: The Bid. i.e., Buy side. And buying was all it did, with such deadly efficiency, anyone caught on the other side.(i.e., Shorts) were either sent running for the hills, or, their accounts were sent screaming for bankruptcy protection.
So insatiably strong and uncharacteristic to the dynamics associated with what veteran traders along with anyone with a modicum of business acumen knew to be true (as in how markets react to all buying and selling) it was given a name. That name was “The PPT” which stood for “the plunge protection team.”
The reason why I make this point is this: when anyone insinuated that it (“it” being the PPT) was actively at work within the markets during that period? They were immediately dismissed as “kooks,” “conspiracy theorists,” “tin-foil-hatted nut-jobs,” or any other pejorative you wish to add. Nowhere did these insults or accusations emanate more vociferously than from the financial/business media in unison with their next in rotation fund managers, economists, or Ivory Tower academics.
All of it was hurled vigorously, and squarely at people such as yours truly and others like me who dared point it out. Now? It’s so openly accepted (aka QE) with some exchanges now supplying discount pricing models exclusive to central bank operations. But my oh my, how things change, and are going to change in ways all those noted previous have not a clue.
Just last week the European Central Bank (ECB) unveiled a self-produced exposé (as reported by ZeroHedge™) on its now openly celebrated trading operation. Only an Ivory Tower’d academic or Ph.D economist who’s never spent a day in the real world of business and/or market place could envision this as helping to bolster an image of surety or confidence. I am quite confident in the opinion it will do nothing of the sort, and, will in fact have the exact opposite effect.
This is the equivalent of some self infatuated wizard throwing back the curtain triumphantly as to display all his magic to squelch the ever-increasing questioning of his power in front of an audience of veteran magicians who can see from the back row – there’s no there – there. And now it’s those very people he thought he was impressing – who are laughing. And not just at the reveal, but at themselves for ever assuming there was anything “amazing” behind the curtain to begin with. Monty’s “bazooka” just made its grand reveal – and people with real bazookas are snickering. Trust me.
As tongue-in-cheek as that may seem, there’s another aspect that is far from anything funny. And it’s this: If you’re a person or persons responsible for the well-being of a company and the welfare of the employees under your employ in this stagnant, listless business climate, after seeing that reveal and understanding exactly what it truly represents, I’ll garner not only are you not laughing – you’re furious! I’ll explain more to this point as we go along.
Yet, the problem isn’t just for the ECB. No, the real problems may have just begun for all the central banks and the Fed. in-particular. All the ECB did was unwittingly throw the curtain back on all of them. What the Fed. has done with its latest edition of back-peddling and near incoherent messaging has just added more evidence that this folly of illusion is coming apart much like a sorcerer’s apprentice – not some all-knowing omnipotent wizard.
I also have a funny inclination it’s not going to be a fun time to be the media’s next in rotation fund manager, economist, or Ivory Tower academic in the upcoming future.
This latest “Full Monty” has just exposed all of them as nothing more than shills for crony capitalism. For there is no such thing as free-markets or true price discovery, let alone anything resembling free market capitalism, with such an operation as the ECB glowingly revealed. Period. End of story. To say different is either a willful act of ignorance at best, or, a brazen act of out-and-out lying. There is no other excuse. Again: period.
Some will say, “But it’s the ECB! Not The Fed.” as if that changes the facts. So with that said, yes, that’s true. However, what does one think QE enabled via proxies? Hint: does “up to 11” bring on any clues?
Let me illustrate this a little more clearly so those with a Ph.D can follow along and not feel left behind.
First off let’s begin directly with this “trading room” operation and the out-and-out perversion it represents to everything, and anything associated with free markets, let alone capitalism in general. The following example is, of course, oversimplified, as well as hypothetical. Nevertheless, the implications are all too real.
Say you’ve been building a great widget company and you’ve really started in earnest to eat your competitor for lunch. So much so their earnings reports of late have been horrible. All you need to overtake them and gain that market share is for their investors to realize how poor of a company they truly are and divest their investment to elsewhere. Hopefully that “elsewhere” is you.
You (the widget owner) have built an extremely efficient company from the ground up. You can pay higher wages, your employees, as well as customers are quite loyal. Your product is head and shoulders above the competition’s. The other company (your competitor) is the antithesis of this. They’ve been around for years and have done nothing to innovate and seem to be merely existing.
Their product has lost all quality. They’re also financial engineering their balance sheets to such an extent it would make Bernie Madoff blush. By-right, their stock should be falling, or at the very least, their bonds should be showing severe signs of stress. But (and it’s a very big but) every time it looks like there’s a meaningful selloff in their shares – from out of nowhere comes buyer. And not some run-of-the-mill buyer trying to catch a falling knife. No, this one comes in with such a bid they send anyone caught short (and short with good reason) running or screaming. And not once, not twice, but for years on end.
And here lies the dirty unadulterated truth of exactly how this perversion kills free market capitalism and becomes the text-book example of cronyism within the capital markets.
You and your company desperately needs funding via share sales and more but can’t find a bid because? The “bid” is protected at the antiquated competitor’s. The result? You’ll go bid-less and subsequently out of business while that antiquated competitor is not only kept alive via an incessant bid provided by the lovely people within the ECB’s trading room operation; but more than likely; will be first in line to receive funding at bargain floor pricing to now buy you out on the cheap whether through a well-funded hostile bid, or – bankruptcy court. Welcome to crony-capitalism central bank style.
Want to add insult to injury?
All those nice, friendly, smiling faces residing within that trading room have one ultimate advantage in their arsenal which no other entity (other than another central bank) has, and it is this…
Every time they are wrong; or pay more than they should; or a trade goes against them? Just like someone does in a “paper trading” account – they can reload the balance to start all over again. (i.e., the power to create money ex nihlo) Only difference? Their refresh is with real denominated legal tender – not imaginary. However, what’s truly surreal is that you, and your great company, can be made gone not by free market competition, rather, by crony-capitalism fueled by central bank “trading operations.”
If you don’t understand just how perverted, offensive, exasperating and more the above is to everything we know to be free markets, as well as capitalism? Then you must be a tenured professor or Nobel Laureate from ___________(fill in your Ivy League of choice here.)
Here’s another observation I just couldn’t shake as I was looking at the people depicted within the article. (Note: this is nothing personal against those pictured, just an observation.) I would bet dollars-to-doughnuts by accessing the average age of those depicted that few, if any, understand let alone traded through such turbulent markets as witnessed beginning in ’07 finally culminating with the advent of QE in 2010.
To think (let alone believe) one understands market turbulence and can trade through with post ’10 as your base or real exposure to markets is sadly misinformed. The last 6 years have been a-one-way bet with an implied floor the last 2 years (aka “The Yellen Put.) Does one think anyone in those wonderful smiling and attentive pictures has the battle tested equivalent of working and trading in markets that are in “panic mode?”
Remember, and don’t let this point be lost on you: A person who has only traded in an account with the ability to reset the balance; at any time; with unlimited funds; regardless of how large they may have grown that account over the years; is no match in a head-to-head competition against a veteran trader who has traded his own or bosses money during turbulent times. Not even close. I’d put a million $dollars into the account of a “Natty-Gas” floor trader whose only bought and sold 1-lots for years in the pits before I would trust a dime in some “wiz kid’s” account that’s grown a $1,000 “paper money” account into a million.
Want a more relative example? Ponder this…
Do you think for a moment George Soros quaked in his boots after just announcing he is going to once again become active and is currently Shorting many markets after reading or hearing about the ECB’s trading room operation?
Now Mr. Soros may be rich, but he doesn’t have the ability to print. However, even at his age (and in reality he has a much younger, as well as battle tested group of protégés executing his positions) I’ll wager he is all but laughing. Because, when it comes to trading against the ECB’s operation? It will be just like he has the ability to print. Bet on it.
As I iterated earlier this is only one part of the upcoming issues that are going to avail itself to central bankers everywhere. Like I stated, this reveal punctuates what many of us have been stating all along. It’s proof positive: There is no market. Only the central banks.
And those who’ve argued the opposite are losing credibility and more as the days roll on. And rolling is precisely the right analogy, along with – like a snowball down a mountain.
On Wednesday, just when every defender of the Fed’s credibility was lined up as to defend their actions, even they were left slack-jawed and aghast by the nonsensical, round and round non-answers for answers to what were deemed to be very simple questions. The revelations of even some of their most reliable stalwarts such as Steve Liesman of CNBC™ were shocking to say the least. To wit:
“I think the first rate hike cycle is over. What Janet Yellen said in response to my question, and if you look at what has happened to the rate hike cycle, is pretty profound. It’s as close to the Fed getting to capitulation as I’ve ever seen, about the efficacy of Fed policy, about the outlook for the economy.
I just want to read this: “I think all of us are involved in a process of constantly reevaluating where the neutral rate is.” Basically they see these headwinds to the economy as becoming part of the new normal. This five-eights decline to the Fed Funds rate outlook for 2018 is pretty profound and GDP remained the same. That’s very important. And I am going to give rick a blue ribbon because Rick represents the markets. Rick – the markets won. The Fed has completely capitulated to the market’s point of view. The Fed is not leading the markets here, the markets are leading the Fed. Every single time.”
I would like to add this one point because when I heard it, I knew they were now just grasping at straws.
When I heard Ms. Yellen trying to use “the neutral rate” as some form of evidence or proof of efficient monetary policy? I knew right then they’re now painted well into the corner – with an empty bucket.
The implications coming for the market should there be any meaningful sell off or test of the Fed’s omnipotence is going to reverberate in ways many are not prepared for. And at worst – never conceived happening so swiftly.
I’ll use one example where I know I’m currently alone in stating, but, I’ll wager those dollars and doughnuts again – not for long. For the place ripe for upheaval is none other than “the tech space” aka “The Valley.” And here’s why…
You can just about forget about future unicorn IPO’s. And I mean that whole heartily. If you haven’t IPO’d as of today I would stake your chances of it ever happening at less than 20%. And even then I believe I’m being generous. It could be less, and much less at that. Why? Hint: Microsoft™/ LinkedIn™.
Some will argue it was a deal such as this which will put the wind back beneath the unicorns wings, placing them once again squarely upon the IPO mountain of cashing-out riches. I say – Oh contraire…
With the IPO market currently dead in the proverbial water. What has now caught the attention of VC’s everywhere is the idea of: Why grovel for an IPO when we can accomplish the same (i.e., the VC’s can get paid) by skipping the IPO process entirely? (which is dead for no QE as I said it would)
They can sell out directly to companies that will need to put together shopping lists to fill the voids in their own poor fundamentals using the Fed’s latest stance to insure more cheap financing and the MS/LNKD for framework. i.e., Who needs to grovel or put up with unwilling founders to get our money via an IPO when we can just set up the conditions as to be acquired! Boom, once again thank you Federal Reserve!
Either way VC’s can get their money (or at least an equitable return) sooner, rather than later, and more control of the process to-boot. Unicorn IPO fever has just found itself DOA in my opinion. And I didn’t even mention how “affordable” these unicorns will seem (or become) once Non-GAAP is no longer accepted as balance sheet fact.
I am of the belief the MS/LNKD deal opened the doors (as well as eyes) of VC’s to the next phase that takes place at the end of a bubble era right before it all falls apart. This is the time when “the sclerotic begin buying up the stunted.” Can you say AOL™/ Time-Warner™?
With interest rates now capitulated to near zero via the Fed’s latest revelations the next game to be played in “The Valley” will be for VC’s to work diligently behind the scenes selling the prospects of their prospective unicorns to anyone capable of writing a check. And with it will come the tumbling of everything thought was so “different this time” into a bloody rubble of – same as it ever was.
Some from the tech space maybe thinking right now: “But what does all the above have to do with me? I thought it was the ECB that had the issue?” Great question, and here it is. Ready?
Remember the example I used for crony-capitalism with the widget company? Rather than “widget,” insert your unicorn of choice. And for that competitor?
As I’ve warned countless times “the only thing that matters is whether or not its on some central bank’s buy list.” And many of those “competitors” are. And with that in hand – you can start hypothesizing which companies are in the running as to be your new boss. Or, just ask any of your current VC’s because I know they are already putting lists together of potential suitors. Again – bet on it.
Like I said, “welcome to crony-capitalism central banking style.” I bet it feels a little “different this time” when thinking about central banks and their meddling in business and capital formation fundamentals when seen via this light, yes?
And all of this is just the tip of the iceberg, for it truly is “different this time,” and for reasons a whole lot of people in the so-called “smart crowd” haven’t even contemplated.
I’ll close with just two. However, by no means are their impending implications going to be minuscule. Far from it. Here’s the first: China.
Does anyone for one moment think the politburo within Beijing looked at that ECB release and thought “Whew, well, looks like they’ve got things under control if needed.” If you do, you’re either an Ivory League’d academic, or, delusional. (redundant is for you to judge)
I would wager the reaction was more along the lines for seeing it just the way I stated at the beginning: for the farce that it is. Not to mention the infuriating sense of double standards they feel every time other central banks or politicians point their fingers and wag at China for meddling within their own markets. As to whether it’s good or bad the way China meddles is irrelevant to the discussion.
If you think China is going sit still while being on the receiving end of any detrimental currency positioning or competitor disadvantages via other central bank manipulations within markets as those central banks prints the means of that meddling ex nihlo all the while telling (and demanding) China is wrong for essentially doing the same? Can you say sell or dump _________(fill in the blank) and everything else China holds regardless of price in Chinese? I bet they can.
There’s already evidence this is already taking place within the U.S. Treasury market. But there’s another more subtle thing happening that I believe many are not truly understanding the future implications.
China just announced some form of reprisal against Apple™ stating a copyright infringement on its phones therefore halting future sales. The reports have been mixed. Some say it isn’t true, some say it is. As of this writing I’m not quite sure myself. But what made this allegation stand out to me was the most recent public statements from none other than Alibaba™ founder Jack Ma when he stated “fakes are better than originals.”
That wasn’t all. He went on to make other assertions such as this. To wit:
“The problem is the fake products today are of better quality and better price than the real names,” he said during a speech on Tuesday at Alibaba’s headquarters in Hangzhou. “They are exactly the [same] factories, exactly the same raw materials but they do not use the names.”
I would advise you to read the entire article and come to your own conclusions. But from my standpoint, it was one of those things that make you go hmmm…
Why such a statement unless…you’re moving closer and closer to what China wants (or is demanding) you to accept. i.e., we make the stuff, start taking the credit and now openly state you’re going to take the money associated with it. Trade agreement or no trade agreement. Besides, agreements? We don’t need no stinkin agreements – we make the stuff! See my point?
Then there was another which is also going to reverberate in ways few will anticipate at first. And, I believe, will be shocked at just how disruptive to the current “market” system enjoyed by the now laser driven, parasitic, front running, HFT cabal. Disruptive, but in a good way. To wit:
IEX™ of Michael Lewis’ “Flash Boys” fame has won approval to be a competitive exchange against the likes of all the HFT infested exchanges. This begins to change everything back to possibly regaining some semblance of sanity to what we used to know as free market capital formation. But to think it won’t cause some unintended or unwanted disruptions across all markets would be unwise in my opinion.
Once IEX is operational I can’t imagine any sane, responsible fiduciary not jumping at the chance to trade shares on an even playing field rather, than the current cesspool we now know as “markets.”
But with that will also come disruption. As funds relocate the venues that were built these last few years to front-run and gorge off the central banks and large block traders are going to stamp their feet and not play nice in my opinion. How that will manifest is anyone’s guess. But much like a drug addict reacts once their “fix” is denied – all bets are off. However, there is one thing which is certain. And I found it ironic as I thought about it, and it comes from none other than the divinely worshiped man himself John Maynard Keynes. To wit:
“When the facts change, I change my mind. What do you do sir?”
Well, I know what one very real, very successful trader has done seeing the latest facts emanating from the central banks: And he’s publicly announced he’s Shorting. (“he” being George Soros)
But not to worry. The fact is the ECB and the Fed. would like you to always remember: They’ve got your back. They believe it should still work. Shouldn’t you?