Week of 05/04/2020

The Financial Crack House
– by David Matthews 2

In the classic comedy film “Trading Places”, two obscenely wealthy brothers make a wager that they could trade a man of privilege and wealth with one of poverty and crime and both would adapt perfectly.  So they take Eddie Murphy’s character off the streets and insert him into their cushy world of money and they teach him how their brokerage firm works.  They explain to him how their firm buys and sells stocks based on forecast amounts, and that, no matter how things turn out, they get paid.  To which, Eddie’s character says, “Sounds to me like you guys a couple of bookies.”

Once upon a time, I would agree with that assessment. 

Today, I’d have a much different assessment of the financial world we call Wall Street.

Today, it’s more like a crack house than a booking ring.

I have said time and time again that Wall Street is not Main Street and it sure as hell is not your street or my street.  And that is the truth.  And yet we continually make the dangerous mistake of thinking that it is.  Hell, we have an orange-skinned narcissist in the White House that is continually obsessed with how Wall Street is doing and presuming that as long as it is doing well that the overall economy is doing well.

When the Great Recession hit, who got bailed out?  The banks and Wall Street.  And when they recovered in record time, everyone proclaimed that the recession was “over”.  Except that it wasn’t.  Not for the rest of the country.  Not for Main Street and certainly not for your street or my street.  Not for the hardworking Americans who got screwed over by the banks, screwed over by Big Corporate, and then screwed over by the government.  Hell, there are people today that still have not recovered from the Great Recession, and here we are, more than a decade later, in the start of yet another economic collapse!

So to treat Wall Street as some barometer for the rest of the country is simply an out-and-out Trump-level lie.

Wall Street is a microcosm in and of itself, based on money and fueled by greed.  They “speculate” on the value of things.  Commodities, corporations, and currency.  They speculate whether these things will add or lose value.  Hell, they even speculate and invest money into whether people will pay their mortgages on time or default on them!  Those are called “credit default swaps”.

The so-called financial “experts” love to claim that what their “clients” are really putting money in are how things will be in six-month’s time.  So when they buy or sell stock in the hypothetical company XYZ today, they supposedly do so based on how well the company will do six-month’s from now.  That’s what they claim, anyway.

There are a few problems with that concept.

First, this idea of a “future prediction” is subject to change every day and even every minute.  And that change happens in real-time, not in six months.  So if XYZ predicts they will make record profits next quarter, their stock goes up.  But then, later that day, there’s rumor of a trade embargo, so their stock goes down.  Then the next day, there is talk of a trade agreement, so their stock goes right back up.  But then those talks go bad, and the stock drops again.  Fast-forward six months, and XYZ makes those record profits as they predicted.  However during that time, there have been so many changes that the value of the stock is half that from when the prediction was first made.

Or, as it sometimes happens, our hypothetical company XYZ doesn’t make their predicted numbers, so their stock goes down, but then they announce that they’re laying off half the employees, and their stock goes back up.  The company isn’t doing great, it may not even last the next six months, but their stock is riding high because they’re laying people off.

So these “predictions” are really not so much “forecasting” as they are reacting to activities in the here-and-now.

That brings us right to the second problem I have with these folks.  You don’t really hear about these claims of “looking ahead” except when it comes to their “experts” and their friends in the financial media like CNBC and Bloomberg justifying how the market reacts differently to current events.

So you hear some bad news about unemployment going higher and higher and businesses laying people off and going bankrupt, and the market follows along and drops.  Nobody raises any questions about it.  The market can be great in six-month’s time, but right now everything is crap, so the market is crap. 

But if the opposite happens, if you hear unemployment going higher and higher and business laying people off and going bankrupt, but the market keeps going up, that’s when the so-called “experts” start going in front of the cameras and talking about “looking ahead six months”.  Funny how that seems to work.

That brings us to the third problem I have with the market.  The whole “fortune-telling” schtick might have applied when you’re talking about human beings making the trading decisions.  The idea that people are buying and selling on the exchange floor based on decisions of their advisors who are “looking ahead” would be somewhat credible because there are human beings making speculations.

However, a lot of those market decisions today are not made by advisors.  There are no humans involved in these decisions nowadays.  They’re all done by computers using algorithms.  You know, the same kind of programs that decide what sort of videos you’d like to see on YouTube or who you might want as a “friend” on Facebook and Instagram.  The same kind of programs that determine what sort of crappy ad they want to shove in front of you.  Those are the same kind of programs that make snap financial decisions on the markets, and to do so with lightning speed before any human brain can realize what is happening.  You go to bed with the markets closing up 300, but you wake up the next morning and the same market is ready to open down 500.  You’re in negative numbers even before you can call your broker to do something.

That leads to the fourth problem I have.  Because you are dealing with more and more automated transactions based on snap announcements of current events, it is easier and easier to game the whole system.

Think back to just this past year.  How many times have you heard of the markets rising or falling in huge amounts based on some “rumor” in the news?  There’s news of a threatened “trade war” and the markets drop.  It doesn’t even have to materialize and the reaction occurs.  There’s “rumor” of an agreement, and the markets soar.  Then someone says that the rumors are false and there is no agreement and the markets sink again.  Then there’s talk of an agreement again, and the markets soar yet again.  Then there’s a snag, and the market sinks.  Then it is on again, and the market soars.

How many times have we all heard this?  I personally have lost count of the number of days when that has happened just this past year.

Then there’s the COVID-19 global pandemic.  Death count climbs, markets fall.  A certain narcissist talks about a supposed treatment, and the markets soar.  The treatment turns out to be a dud, the markets sink.  Another drug is discussed, and the markets soar.  There’s no testing yet.  Nothing has been released, but the markets soar just on the talk of a cure.  Lather.  Rinse.  Repeat.

You tell me... speculation of future events?  Or just a knee-jerk reaction from financial addicts?

And remember, folks, that a lot of peoples’ retirement accounts are based on this group of addicts and their supposed “sage” advice.  You didn’t know that, did you?  Yeah, and we’ve seen how that worked with the Great Recession.  How many people lost their 401K retirement money because of those games more than a decade ago?  How many are going to lose even more this time around?

Let’s get brutally honest here... Wall Street has become nothing more than a financial crack house, dishing out “fixes” to the addicts obsessed with money and profits.  Divorced from the rest of the world, they are given preferential treatment by their friends in government as well as immunity from any accountability.  It’s their bottom line that gets bailed out first, foremost, and at the expense of the rest of us.

If we want that to change, then we need to be the ones to force it.  We can’t expect them to do it themselves any more than we could expect an alcoholic or a crack addict to clean themselves up on their own.  They see nothing wrong, because for them they can do no wrong.  It’s all just a game that happens to make them very wealthy.

Once upon a time, the financial markets were considered the speculative game only for the wealthy.  They were separate from the rest of the world because nobody was stupid enough to tie everything in like they do today.  Today, however, it is everyone’s game whether we want to be in it or not.  And it is now considered more important than the rest of us. 

Then again, that is what an addict does.  They make it all about them.