Sunday, January 25, 2015

There Are No Such Things as Financial Markets Anymore

Let us take a very simple concept.

Bill wants to raise money for his new company that he, personally, does not have enough money to launch.  Bill goes to the "financial markets" which is no different than the fruit market or "farmer's market" except instead of fruit or veggies, he is looking for capital.

Providers of capital (called "investors") meet and bid over Bill's business through a slightly complicated process of "going public" which is assisted by investment banks and brokerages.  Still, this market operates no different than any other.  There is a demander for capital, there are suppliers for capital, and they haggle and negotiate on a price.

Now in the farmer's market or even the grade-school-play-ground-baseball card market the only things to affect the prices, supply, and demand would be items that are relevant and pertinent to those markets and the wares traded therein.  And so too should it be the same with the financial markets.  But just because something "should" be doesn't mean it is, and thus welcome to our modern day "financial markets."

The truth is the financial markets no longer represent the news and information that is relevant to stocks, bonds, and other forms of financing new or to-be-acquired businesses.  And the reasons for this are multi-fold.

First, the majority of money being supplied into the market no longer comes from interested investors, keen on launching new companies. It comes from retirement planners who are socking away their monies in the idealistic and outlandishly naive hopes of retiring by 65 (33 if you're a government worker or teacher).  Matter of fact, these sheeple aren't even investing their money in new business ventures.  They're buying stock on the secondary market, looooong after investment banks and hedge funds have gotten the majority of equity and capital gains out of those stocks.

Second, you have speculators who have no real legitimate business being in the financial markets in the first place.  Oh yes yes, I know, they do make markets more efficient, except when they don't.  Their mere existence moots and destroys the concept of a financial market in the first place.  Now, instead of just investors looking to supply budding entrepreneurs with capital, you have some idiot in California using an ECN to make .0005 cents per share profits on a butterfly, triple lindee, hybrid spread (if you don't know what that is, that's alright, you're not hip like all those people on CNBC). 

Third, machines.  Yes, machines.  Specifically machines that execute trades based on algorithms perhaps maybe even programmed by humans.

Are these machines there to provide business opportunities with capital?
Are these machines there to fund entrepreneurial ventures with much needed funds?

No, they're, once again, there to speculate, even manipulate prices, driving them up and then driving them down.

Now we can go on, but I didn't really realize how fully divorced today's "financial markets" were from its literal namesake until I was driving down I4 near Orlando listening to "A Finance Podcast."

The host of the show had followed me on Twitter and said, while he does like what I say, he cannot tolerate the cursing or swearing.  Fair enough, but I, always with a road trip in front of me and hours of time to fill, downloaded and listened to all of his podcasts.  It wasn't until I was just outside Orlando did I realize something about his podcast.

The majority of his commentary and interviewees did NOT discuss the actual financial markets as much as they were:

Government moves
Government legislation and
Central banking

And it is this that is the proof that the financial markets are anything but, and should be named something else.

If you look at the media currently dedicated towards covering the "financial markets," you have to ask yourself the question:

"How much time do they spend addressing/responding to moves by the governments and central banks, versus the factors that actually should affect the companies and the industries therein????"

And at least in this little trial balloon, I realized that the majority or at least the plurality of time was spend addressing governments and central banking.

This proves just how far from free markets we've moved.  When the "financial" markets move, nay, hinge on every word and move from the central bank and monetary policy, and dismiss all that annoying "background noise" of what's actually going on with the individual company, you need to ask precisely what does this "market" represent. 

Does it represent the investors looking to fund the entrepreneurs like it was intended to?

Or has it morphed into this multi-trillion dollar, amorphous, cross-breed Frankenstain monster between government, the retirement planning industry, central banking, crony capitalists, and politicians?

Because one can be reasonably measured, studied and pursued as a discipline by students of finance and economics.

The second is one where even the greatest financial and economics minds are merely observers whose guesses are purely that - guesses.  Because by that time, they all might as well become political scientists and everybody knows that is not a real nor legitimate field of study.


Aaron said...

Right, and when the FED stops printing cash, as it must, the market will panic. It will crash so far, so fast, it will make the last crash look like a dimple.

Chad Young said...

So what should I invest in?

Anonymous said...

Today's financial markets exist primarily to fund existing and proven business that want to expand their business and have a market study and competitors study to back up their expansion project.

Also, such companies also have collateral in the form of real estate and real capital assets to backup the funding.

Exporting companies, manufacturing companies, established consumer electronics and software companies all have ready access to funding.

Startups are best advised to self-fund.

There exists kickstarter and other crowd funding resources to microcap startup funding.

Traditional financial markets are geared towards mid to large companies.

Anonymous said...

I actually assist our comptrollers and accountants build 10-k and 10-q reports that very, very accurately represent the economic events within our firm.
Those reports are filed regularly with the SEC and are there, plain as the nose on your face, for all the world's investors to see. They can easily be downloaded from government websites and can be analyzed by an competent financial professional or by savvy individual investors.
We have maybe, at any given time, about 5-10% of our shareholders that are traders, speculators, or hedge funds.
The rest of our investors, as you alluded to, are insurance companies, banks, or pension funds who need either dividend income or a reasonable rate of return.

Anonymous said...

The Washington Post has a heartwarming three-part series explaining how African-Americans are victims when they live in palatial houses without paying.

Jeremiah Ross said...

Speaking of machines... There is an interesting article regarding how some of the arguments against HFT are really just other large speculators poisoning the well.. I haven't taken the time to vet this just yet; but it is on my list of personal research topics

Kristophr said...

Jeremiah Ross:

I suspect that article is just whining by the HFT boys. A bunch of nit-picking, while avoiding wtalking about what they are really torqued off over.

What IEX does is simply route all trades through a huge coil of T3 cable in a big box.

Everyone has one full second of lag, and no one can pay to put their trade server in the exchange's farm in order to electronically rape traders who have not.

Anonymous said...

Chad Young,


You should invest in yourself. First, develop marketable skills.

Anonymous said...


The market will not crash, because Saudi Arabia is printing oil to backup the FED's printing press.

Who's going to pay for all the FED's quantitative easing ? Oil will.

Saudi Arabia is so leveraged in the US financial markets that it cannot afford to lose those investments.

So they are dumping their oil to save their dollars and dollar denominated assets.

Pete Brewster said...

A vasectomy and a second passport from a country with better weather and thinner, better looking and saner women.

All those stocks and bonds are backed by nothing but the stupidity of beta males dumb enough to keep working for someone else. Men going their own way will destroy banksterism along with its psycho daughter feminism.

I read in an MSM paper the other day how we were supposed to feel bad that women doctors in Greece had to moonlight as escorts to make ends meet because Greek men refused to work and pay taxes. They made Greece sound like a great place to go and enjoy the decline.

TroperA said...

Wow. This is so succinct, I would have thought that you wrote it:

"Economics in 2015"

Anonymous said...

Nice post. I'd love to hear your thoughts on the JOBS Act and its legalization of crowdfunding.

The statute doesn't really make crowdfunding easier and it imposes a lot of additional filing requirements on firms that attempt to raise funds through crowdfunding. There's even a lot of bad information out there because some firms confuse the newly legal "public solicitation" with "crowdfunding" (they're governed under two different parts of the JOBS Act).

There have been calls since 2008 to drastically amend the definition of an accredited investor. The definition was slightly amended in Dodd-Frank. This will make it even more difficult for entrepreneurs to raise funds.

Mr. M said...

This is why we should just privatize the New York City Stock Exchange. That way we can have multiple stock exchanges hence lots of competition. Also privatized stock exchanges can decide for themselves whether or not they will allow speculation in their establishment. So long as the stock exchange is owned by the government, speculators and the government will screw up the economy. Don't you agree Captain?

srhcb said...


Don't tell everyone.

(not like they'll listen anyway, I guess?)