We've got some really good Q&A today, thanks to some really good comments and questions from you folks.
But before we dive in, I want to say something about the storm that hit the U.S. this week.
Personally, I was lucky: Hurricane Sandy only brushed by my home in the Northeast.
But there are so many individuals, families, and businesses that weren't so lucky. They are dealing with everything from serious inconveniences to horrific tragedies.
My heart and prayers go out to all of you who are trying to recover from this truly devastating storm. I especially feel for those of you who lost family members, friends, partners in life, and your beloved pets.
I've had a glimpse of the devastation you're feeling. My girlfriend's amazing mother, sister, family members, and many, many dear friends live in Breezy Point and in the Rockaways. I was just there for her brother Johnny's wedding.
The home on the beach I stayed in is flattened. Her mother's house is a wreck. And many, if not most, of their other family members' and friends' homes burned to the ground, were flattened, or drifted out to sea.
Between the loss of lives and the horrific devastation, there's nothing much left of this once beautiful community where everyone knows everyone else and no-one locks their doors.
Breezy and the Rockaways will rebuild. That's what New Yorkers do.
They fight for their neighbors, their communities, their city, their state, and America. Their citizens will come together as neighbors and friends to help each other.
Because that's what Americans do. This is who we are.
In the meantime, I send my sincerest regards and deepest sympathies to those of you suffering tragic losses.
Okay. Now let's get started with your comments on "Big Bank Protectionism."
Q: What happened to our antitrust laws? ~ Ron
A: Good question, Ron. They are there to be used when competition is deemed to be in the public's best interest. In the case of big banks, "too big to fail" is what's in the public's interest - at least, if you go by what politicians are doing, as opposed to what they are saying. Get it? They're all for big banks because those monsters pay them monster amounts of hush money to leave them alone.
Q: You may not have heard Romney [in the presidential debates], but he specifically stated the small banks are getting squeezed out and need help to stay afloat. He is very much aware and wants to amend some of Dodd-Frank to help them out. ~ Mike (and Jim, who pointed this out too)
A: I'm not impressed with what any politician says; I have to see them act before I believe they'll make effective changes. If Romney gets elected, we'll see then if his crusade to help small banks really helps small banks, or if it is more rhetoric to thin out or eliminate anything that might be good in Dodd-Frank to benefit the big banks who pay for their puppets' campaigns. It's easy to champion small banks, but not easy challenging large banks, whose objective is to cut their competition to the quick. Be careful of that kind of political prestidigitation.
Q: I was once on the bandwagon to eliminate the Fed, but then I realized our CONgress would take over the responsibility. This is like choosing between Stalin and Hitler to be your best man at your wedding. So, I now believe the Fed should remain, but its powers diminished and very detailed. ~ Ray
A: Well said, Ray, I totally agree. Sometimes the devil you know is better than the devil you don't know. In this case, both are creatures from Hell. But you're right, it would be a lot easier to have the Fed taken over by academics (preferably accounting professors), the dual mandate eliminated, and their powers greatly diminished.
Q: Shah, I always learn from you and you have a high level quality of reader comments, too. Don't always agree, but again, always learn. This is democracy, right here. ~ Mary Jane
A: Thanks, Mary Jane. I'm not always right, so not agreeing with me is sometimes a good thing. After all, I remember the one time I was wrong. And as far as reader comments, I agree totally. There are a lot of really smart and engaged people making our conversation a lot better for everyone, especially for me.
Q: FOOD, WATER, AMMO!! ~ Jeffrey H.
A: Yeah, but you might have to reverse that order.
Let's keep going...
Q [re: "The Junk Credit Bubble"]: The question is, what is left to screw up? It should have all died back with bank liquidity problems. Tech bubble, oil/gas bubble, real estate, you name it. Phony gold, blocks of collateralized companies, is there a straw that will break the camel's back? Cause I'd like to go short... ~ Ed
A: There are always straws that will break the collective public's back. That's because the public, being the proverbial camel, is always ripe to be humped. Why? Because schemes will keep coming and get through the threadbare protective net of insufficiently motivated regulators employing an overly complex regulatory wet blanket with no real heat applied to crooked pinstriped creeps.
If you want to go short, there are plenty of bubbles forming. Pick one, or two. Just keep in mind, timing when they're going to pop is anything but easy.
Next up: "Why Nothing has Changed Since Black Monday."
Q: I was under impression (perhaps wrong) that it is better to lend bailout money to European countries, instead of directly supporting troubled banks there. What is the difference, and does it matter? ~ Dimi C.
A: You are right, it is better to lend (if you have to) to countries as opposed to private banks. Banks can go belly-up, and if you're a creditor you get in line to pick up what's left. When a country gets in trouble, it can always (maybe not always) borrow more, because people believe that their taxing power will be enough to pay them back. The long theory is that even if they (sovereigns) do default, they will continue to exist, so they will have to prove that they are, or will be, credit-worthy again, and so will eventually pay off old debts, or most of them. The difference does matter.
Q: What would happen if all the CDS players got in a room and cancelled all their contracts by calculating the value and settling up? Would the combined net value be positive negative or zero? ~ D.A.P.
A: That is actually done, to a small degree, at times. Usually it's when counterparties are in trouble and in the arms of regulators or trustees, who force a netting-out of positions to make their jobs easier. On their own, players won't net out with each other, because as long as their positions are open, they stand to make money if their speculative bets go their way. So why eliminate all that leverage when leverage is the name of the game... if you're on the right side.
Q: I have thought this for some time, why not just WIPE OFF debts and everyone start over again? ~ Felix
A: Felix, I hope you were kidding, or fanaticizing. If we did that, the sanctity of all contracts would forever be null and void, and moral hazard would be the new order of all things, wouldn't it?
Q: WHY do you have some [portfolio insurance] to sell? I thought you were smarter than that! ~ S.
A: It was a joke. I don't have anything to sell, except this little bridge I own in Brooklyn. Want it?
The laundry is for dirty clothes
It cleans them good as new
Some water and a little suds
Will make your dreams come through
But debts are quite a different mess
They just won't go away
You dump them, and go bankrupt
Or hide them where you may
But someone always finds them
and wants to be repaid
So now the game is over
And you're as good as dead!
~ Kevin D.
A: Kevin, please keep posting your poems, they are funny, right on the mark, and really good! I love them.
Q [re: "Poor Old Vikram"]: I'm still perplexed that the Obama administration, after all their yammering about the crimes of Wall Street, has not succeeded in any prosecutions of those they claim are at fault (even though they never name names). Could it be that they all share the same political party affiliation? ~ Kevin B.
A: If by "affiliation" you mean "greed," then you're right.
A lot of you misunderstand me when I've said I supported Obama when he got elected. I didn't vote for him. I believe in supporting every new president who is supposed to change what isn't working in our country. I stopped supporting him when he almost immediately turned his back on what caused the financial crisis he inherited, and, instead of standing up to and crushing the moron bankers that rule Congress, lined his pockets with their money. Obama screwed the country by pointing to healthcare as the problem that needed immediate fixing, and not fixing the cause of repeated financial crimes and attacks on the American public by the bankers he "yammers" about.
Where are the prosecutions? Why is Jon Corzine still walking around? And the rest of them?
Q: Once again I am reminded this subscription is the best money ever spent. Someone needs to snap you up and put you where you can do some damage (politically, that is). ~ M.A.D.
A: M.A.D., this is free... but if you want to pay up for another subscription, I'll send you my bank account number. Kidding!
Q [re: "Conspiracy Theories"]: I have one for ALL of you - WHO HAS EVER BEEN CALLED BY THE BLS TO SEE WHO IS WORKING IN YOUR HOUSEHOLD? I've been in the workforce since 1968, and NO ONE from the BLS has ever called me or anyone I know or have known. How's that for some "statistics"?? ~ John P.
A: Does anybody out there know anybody who has ever been called? I'm curious. I asked and I don't know of a single soul.
Q: Every one of the last 60 plus employment reports have later been changed to worse that first reported - not one in the other direction that would not be in Obama's favor. And you do not think that there is mischief afoot in this organization. ???? I am losing faith in your opinion. ~ P.L.D.
A: Don't lose faith. I have my opinions too, which I believe you've been exposed to. But I try and take the objective, non-conspiratorial approach to how things might be serendipitously the way they are.
Now for your thoughts on "How Wall Street Hijacked America."
Q: So essentially what you are saying is that the stockbrokers in the past were "somewhat" working for us, and we could make a few bucks, but now they are working for themselves with our money and now they are skinning us alive. Sweet. ~ J.S.
A: Stockbrokers are mostly low-level pawns gathering "assets" so the sheep can be shorn by the managers and leveragers of those assets. It's always about playing with OPM, other people's money. The managers and leveragers are the ones doing the trading and expanding that universe so they can wish upon the stars they control for the yachts and islands they buy with the fruits of their trading labors.
Q: Wall Street did not hijack America, it only did what it was allowed to do. America hijacked America. ~ Peter
A: I don't think America is to blame for what makes America great, which is letting people figure out ways to make money. What did get hijacked is our government's ability to protect the public from the harm they cause by being part of the greed-is-good creed crowd.
Q: Since all trades have to be reported, why not institute a tax of 95% on any trade with a holding period of less than 5 days? Doing this would not generate another layer of bureaucracy. ~ R.W.N.
A: In theory, I get where you're coming from. But the nature of effective risk-transference and realizing effective liquidity demands that markets be free. Five days is like being in jail when a trade is going against you. A one-second hold time is fine, really, whatever it is, we should all just have equal access, and "fake" bids and offers shouldn't be allowed.
Let me make something clear here. I used to put down "fake" bids and offers to make a stock look stronger or weaker, there's nothing wrong with that. That's because, as a market-maker, I had an obligation to honor those bids and offers. Many times they did get hit or taken, and I might end up with a 10,000 or 50,000 share position that I really didn't want. That's market-making; that's trading in a fair market. But putting in fake bids and offers that have no chance of ever being hit or exposing to you to taking a position, and being able to manipulate the field that way because you pay for faster access to do that, that is sickening.
I don't blame the traders. I blame the exchanges and the SEC for fostering it. They screwed the markets up; traders are just playing within the rules they've helped widen.
Q: Shah, is the system used for HFT code named PROMIS? Recently I read an article in the Malaysian Press with regard to this "mythical" PROMIS system in which it was pointed out that the system had the capability of monitoring the global Internet for ALL Monetary transaction & movements of Securities & Currency's in real time. Supposedly, as described in the article, the PROMIS system was not limited to just Financial Transactions online in real time, but could be used for tracking all forms of communications whether email, Zipped Packet Data, and Dedicated Point to Point Networks. To my thinking this PROMIS system, if it exists is a far more lethal weapon than the use of nuclear weapons in wartime. The ability to be aware of all traffic on the internet and disseminate that information in real time, breaches any and all Net-Privacy Regulations and if the system was in the wrong hands and has the capability as described it alone could have the power of life and death for much, much more than Financial Markets control over the Globe. Can you shed any light on this?? ~ Michael
A: I've never heard of PROMIS, but I believe it. I will look into it. As far as net privacy, I don't buy it, never did. Google not doing evil? Don't buy it. How can the type of information flow across the Internet not be a top priority of governments? Oh, it is. Especially financial information. Follow the money and you can tax and take it. As much "freedom" as the Internet is giving us, it is also gives governments the power to control us and to jail us.
Finally, "Why High-Frequency Trading is a Scam."
Q: I have a question... Is this what is commonly known as "day trading" with several computers set up? ~ Z.
A: No, HFT is not the same as day trading. Not even close. Day trading is to HFT as a minnow is to a shark.
Q: The Tobin tax would fix this abuse immediately. ~ Chris S.
A: There's merit in the Tobin tax approach.
Q: Is it out of the realm of reality to suggest a class-action lawsuit on behalf of the class of investors who have no access to HFT? Besides ending the practice, any monetary recovery can go to a designated charity for medical research of lethal diseases or to children's hospitals. ~ Franco F.
A: I like it. I'll call some lawyer friends of mine.
Q: [High-frequency trading] probably is illegal if you bring an action under the RICO Statute. Which broadly defines fraudulent actionable conduct as any scheme or device intended to deceive some person or persons out of his her money. It is a catch all net and very inclusive. Someone with money and legal talent could really upset the industry maybe even bring a class action unless the courts have been bought which is not unheard of. You could even sue the regulatory agencies and make them co-conspirators. That would upset a lot of bureaucrats. Have fun. ~ Ashley G.
A: Where's that class action lawyer's phone number? Someone pass me my black book.
Q: Maybe we should hire some good hackers, like Anonymous, to attack HFT computers, or have someone launch a DNS attack on their machines. Oh, that would be illegal wouldn't it? ~ Joe W.
A: Joe, Joe, Joe... two wrongs are better than one, no, I mean, two wrongs don't make a right.
Related Articles and News:
- Money Morning:
Thanks to the Fed, It's All Proceeding According to "The Plan" - Money Morning:
Why There's No Jail Time for Wall Streeters - Money Morning:
Conspiracy Theories About the Jobs Report Don't Ring True - Money Morning:
High-Frequency Trading Could Cause Another Flash Crash
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.