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October 2015

Financial Markets are a Game

October 29, 2015 by EconMatters   Comments (0)

By EconMatters

 
Forget about Market Multiples: Totally Meaningless Sell-Side Crap

Anyone thinking about investing in financial markets should realize that most of the professionals who are on the inside, i.e., have power and access to information and capital to move markets, do not view financial markets as investment vehicles, decisions about P/E ratios, equity multiples, etc. but rather see financial markets as a giant game of making money.

Financial Markets are Giant Criminal Playgrounds

Consequently the first thing all ‘investors’ need to realize is that markets are crooked, always have been, and always will be despite year after year of new regulations trying to prevent ‘crooked behavior’! Once you understand that the market is a giant game, and you stop thinking about the market from a valuation sense or a fundamentals standpoint; your next task is to identify the rules of the game, or the way the game is being played during your ‘investment horizon’ as in, when you as an investor are risking your capital in the markets.

Market Makers Never Risk Anything: They Make Markets Move Directionally

Most of the games in the market are about fooling other investors and taking their money, but there are all types of games, some actually can benefit average investors who actually believe in the fundamentals and a fair market. The problem is that you as an average investor will be thinking that the fundamentals are why an asset is going up, which can be the case, but the party will end while you are still looking at the same fundamentals that are in place, and the game players have already sold the stock or asset and bought derivatives in the opposite direction because they are Making the party to be over, there is no guess work involved on their end as they are Market Makers!

Sell Dungarees to the Gold Rush Crowds

In short, fundamentals do not matter in financial markets! This is the hardest thing that investors have to learn about financial markets because they have been so conditioned to believe that the financial markets are based upon the fundamentals because of all the folks who sell shovels and axes to the market participants. The amount of money made off of the financial markets over its history probably surpasses the amounts of money made from financial assets. Again the game within the game.

An Example of Game Playing

I will give you an example of a recent game just to get your mind to start thinking in terms of the games behind the financial markets. So remember when the Federal Reserve was dovish at the September Meeting and the markets had sold off in a tizzy fit, don`t be fooled there was a game already in place, and it played out according to the predetermined script.

What you have to realize is that this game, and the entire game of selling the markets off because of “China Turmoil” had very little to do with China and a whole lot to do with pushing the financial markets down into quarter end. So when the new money came into financial markets for the Christmas Rally of the 4th quarter the game players have a low base from which to work from and have a monster fourth quarter. Most of the real money is made in derivatives off of the movement in the core assets due to the massive amount of leverage that can be attained. Therefore if you know where the market is going ahead of time because you are the market maker and are the one pushing prices up or down; (conveniently you also know where and when markets are going to stop going down because you are the one pushing them down) you can bet that as these same game players were selling the market down towards the end of the third quarter in September, these same game players were building massive derivative positions in the opposite direction before they covered their shorts and went long with the rest of the Long Only Money that came into financial markets on October 1st.

What is so special about October 1st?

Just think what kind of money comes into financial markets October 1st: Monthly 401k allocations, 4th Quarter Capital, and financial markets were at a discount relative to most of the year, plus the natural short covering in the markets, this is the type of game these market makers love to play. They get a much bigger return for their buck, than just buying at the top of the market and pushing financial markets up another 3% to all time new highs with the same amount of initial capital. This is why these same market makers pushed the financial markets down in the third quarter to begin with, these moves were already pre-determined well in advance and had very little to do with china or growth concerns or the Federal Reserve. Those were just excuses, it’s not like any of those factors suddenly changed and were fixed magically on October 1st. It’s all a game folks, try and figure out how the game is being played and get on the same side as the power of the market makers who are moving asset prices all around the game board!

Beware of Clearing Out Stops in Opposite Direction of the “Real Move”

If you remember in September the markets didn`t go straight down right after the dovish announcement, in fact the market makers pushed the S&P up 20 points real fast in a final clear out all the overhead stops before taking it down big time about 145 S&P points. And you can bet they were taking the other side of the derivatives market on that overhead stops clear out move, so they were positioned at the best possible price to make a fortune on the slam down into the end of 3rd quarter selling where the average investor probably thought the world was coming to an end! And voila October 1st comes around and all the world`s problems are solved, bad employment number, bad economic data, all viewed in a positive light because the real thing that matters is who is positioned for the 4thquarter rally, the Market Makers that`s who!

Try and Discover as many Games and Rules of the Game as possible and What Different Games Structures Look Like so you can understand Price Action of Assets

There literally are so many games that are played within financial markets that it would take a 500 page book to outline them all, from the micro, micro option games to the spoofing tricks, to the coordinated functioning of Algos across entire unrelated asset classes, to afterhours games, to market close games.

In the end, Remember it is A Game

It may be serious business to you as an investor, this may be your retirement savings here. However, the players who move the market are already set for life, they could retire today and never have to work another day in their life and still have 5 homes. These people play the game more out of habit, the joy of making more money, and the prestige and power that comes from being a player in the markets and moving even higher up the food chain. But rest assured what happens on a daily, weekly, quarterly, yearly basis doesn’t really affect their quality of life one bit.

It is just the icing on the cake, they have already won the game of life by being market makers in the first place. They rarely lose, it takes an outlier even to catch them off guard like a natural disaster that came out of nowhere, and they have even been known to buy up markets or hold markets up, until they can get positioned on the right side of the natural disaster trade.

The large Financial Institutions who are major players have a different motive as public entities with shareholders to keep happy. They make most of their trading money by front running order flow, traditional market making activities, front running clients and their proprietary research with the goals of having good profitable quarters, meeting bonus targets and not getting caught rigging markets when colluding. Also, limiting and isolating the damage from the inevitable collusion when they do get caught! They are playing the Corporate Game as well as the Game of the Financial Markets.

Pragmatic Approach to Financial Markets

It is very hard for you the average investor because you are trying to figure out what markets Should do, you are a Market Taker. Market Makers on the other hand dictate what the market Does, they define the rules of the Game! Thus your goal as an investor isn`t to study charts, the fundamentals or economic tea leaves, but rather to figure out what the large Game Players are doing, and can you piggyback on their coattails or Market Moves, as they Move Price like pawns on a Chess board!

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Corporations Moving More of Healthcare Costs to Employees

October 26, 2015 by EconMatters   Comments (0)

By EconMatters

Rising Healthcare Costs for Employees

It used to be one of the major advantages of having a good job with a fortune 500 company as they basically payed for the healthcare costs of employees. However, the trend each year is to shift more and more of these rising healthcare costs to employees as subtly as possible. Employees really need to read the fine print of their company`s healthcare plans, and have money set aside for the real costs of these company supported plans.

The Good Old Days

When my mom worked for a fortune 500 company, there were no yearly deductibles or out of pocket expense deductibles; there was just a $5 copay for each doctor`s visit. Oh the glory days of great company healthcare plans. The next incremental step in this process of making employees subsidize more of these rising costs for companies was to raise the copay from $5 to $10 to $15 and so on depending upon your company and Insurance provider.

Incrementalism at its finest

The next brilliant idea borrowed from the Auto Insurance Industry was to create an annual deductible like $500 so as to offset some of these rising costs and shift more of the burden to employees. It is pretty easy to hit that $500 mark on an annual basis, and multiply this number by a large employee base and this is quite a profitable savings for companies.

But in what I call the ‘Consultantism’ of corporate America where it seems consultants have a larger influence on many strategic decisions and dream up creative ways to add ‘value’ to the bottom line of companies for a large fee of course the incrementalism of shifting healthcare costs didn`t stop there with the annual $500 deductible.

The next brilliant idea was to create another type of deductible in the ‘Out of Pocket Expenses’ Deductible. And the shiftiness of this move alone just screams “How can we market this increase to employees so they don`t bring out the pitchforks?” I realize there are some slight differences, but seriously, companies for all intents and purposes could just have raised the annual deductible.

Healthcare is affordable as long as you don`t “Get Sick”

If an employee starts racking up any type of healthcare costs, and with out of control healthcare costs, almost any healthcare event or significant illness is going to end up in the employee hitting this out of pocket expense deductible rather quickly. So much so that every employee should just set aside this amount each year for this healthcare expense. Accordingly if you have a car accident, the Flu where an employee has to visit the emergency room, breaking of a leg playing softball, major food poisoning, appendicitis, etc. on up the risk scale to Heart trouble and Cancer you are going to become rather familiar with this Out of Pocket Expenses Deductible classification.

The Slippery Slope turned into an Avalanche

The shifting didn`t stop there though as what initially started out as $1,000 out of pocket expense caps or deductibles, have been rising each and every year as corporations and health care providers (by Health Care providers I am referring to Insurance companies here) and hospitals/medical facilities all look to shift costs to employees. It really is a concerted effort with much cooperation by these three parties, they basically have become incentivized to collaborate behind the scenes, as their interests are incentivized and aligned all in opposition to the employees of said companies. All with the common goal of “How can we shift more of these costs to employees” instead of looking at creative ways of addressing why these costs have risen so much above almost every other market category from an inflation standpoint in any consumer index.

What do you think HR`s Savings Initiative Ideas were lately?

Therefore, the $1,000 out of pocket expenses deductible was raised to $1,500, then $2,000. And I could just see the meetings between the healthcare providers and the companies in regard to making these cost increases palatable for large companies. “Ya know if you just raise that out of pocket expenses deductible another $500 per employee, look how much additional revenue you will have this year, or save on this expense….so it doesn`t even become that big of an increase for your company!” Or you can just see some ‘brilliant employee’ with a savings initiative for the Fortune 500 firm proposing this company-wide tax for employees of which he will also be affected to raise the out of pocket expenses cap again this year! Consequently this out of pocket expenses cap has gone up from $1,000 to $1,500 to $2,000 to $2,500 to $3,000 to $3,500 to $4,000 depending upon your company. Right now the two deductibles are inclusive of each other, so if you hit the initial $500 deductible this is inclusive of the Out of Pocket Expenses Deductible of let`s say $3,500. However, expect this to change over time as the incremental move which appears to be heading towards outright privatization of employee health care continues along this trending path!

The Devil is in the Details regarding Healthcare Costs

Therefore, drill down into your healthcare plan and read the fine print as I guarantee you the headline numbers don`t “emphasize” or market this Out of Pocket Expense Deductible as this is what every employee needs to focus in on regarding your true healthcare cost exposure each year. The company and HR are not going to Advertise or sell the plan of a $3,500 Out of Pocket Expense Deductible to employees as such a great benefit that they are providing for them. Especially when this same deductible was $1,500 three years ago depending upon your company. Too bad Fortune 500 firms cannot raise salaries along the same lines on a percentage annual basis the way they do Out of Pocket Expense Deductibles in healthcare benefits plans!

Healthcare Industry requires complete Overhaul

The companies are not really the real issue, it is obvious that the Healthcare Industry in the US is in need of some major overhaul, and I am not talking about a politically expedient solution as was the latest undertaking by the Obama administration. The entire healthcare system needs to be completely overhauled similarly to other Industries like the Defense Industry and Education Industries.

Political Industry Broken

These three Industries have metastasized for the last 30 years into giant economic cancers where costs, inefficiencies and bureaucracy have ballooned far outside of any normal market forces not artificially supported through poor governmental policies. The fourth Industry is probably the Political Industry that requires an overhaul because the incompetent Political Industry is part and parcel what has enabled these three Industries to become so inefficient, artificial, costly and unproductive economic black holes from a resources standpoint.


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The Inflation Lie

October 24, 2015 by EconMatters   Comments (0)

By EconMatters

Inflation Over Estimated?

I was watching a little of the ECB press conference after their policy meeting and a reporter asked why inflation is such a bad thing for Europe and European consumers. Mario Draghi gave a canned response, but the real interesting moment came when an individual sitting to his left on the ECB panel opened his mike up and wanted to speak about inflation. I thought this was a little odd, and it became stranger by the moment. He really went out of his way to point out some obscure economic study that showed that US inflation was overestimated, and that actually US inflation was actually negative according to this recent study.

Central Bankers & Research Objectivity

The first question is what does US Inflation have to do with the ECB`s decision to add more stimulus to the European economy, and what does it have to do with European inflation?

I guess the inference is that even in the US where the economy is the relative strongest house on the block so to speak, that there is even underlying deflation in the world`s strongest performing economy.

But is sure seemed to point out that Central Bankers are not objective data driven, independent academics seeking the truth regarding economics, but rather have a goal ahead of time, and look for any type of data to support said agenda.

Most of the studies actually show that inflation is underreported and this is the first time I have come across someone citing the opposite conclusion regarding inflation reporting.

Gas Savings Eaten Up Fast by Increasing Healthcare, Food & Housing Expenses

This is rather intuitive as well, energy and commodities have collapsed due to the oversupply of these markets, but really that is the one area which makes the overall inflation numbers appear lower than most feel in their everyday living experiences.

For example, the cost of renting or home ownership has been rising steadily the past 16 months, and will continue to do so over the projected near term future. Healthcare costs continue to rise each year despite a nationalized healthcare plan. Even those lucky enough to have great company backed healthcare plans are paying higher deductibles and more out of pocket health expenses each year. Education and tuition costs continue to rise above the average rate of inflation. Entertainment expenses from movies, eating out, cable and internet fees, mobile phone plans, gym memberships, and travel accommodations are all experiencing inflationary pressures. Automobile prices sure aren`t deflationary as anyone who has purchased a new car recently realizes. Shoot even HOA fees are rising year after year! And those pesky real estate taxes sure seem to go up well above the stated rate of 2% inflation that is the Fed`s desired target rate. Ironic isn`t it that if inflation could only hit that 2% mark they would be raising interest rates in a heartbeat. Like when it was well over 2% 16 months ago, and the Federal Reserve not only wasn`t raising rates, but was still buying bonds each month via QE 3?

Deflation is not a problem anywhere in the world

It is pretty obvious to anyone with a little common sense and operates a household budget that deflation is not a problem here in the United States or anywhere in the world. This is all Central Bank nonsense used to justify an agenda regarding monetary policy. It is also abundantantly clear that the real inflation rate is much higher than that reported by the official governmental data sets. That in fact these reporting tools substantially underrepresent the real level of inflation in the economy. This is what I refer to as part and parcel of the Inflation lie.

Government Spending & Debt Monetization

Inflation and all the Central Bank rhetoric is used as a tool to manipulate policy towards an agenda, and all the official government tracking reports have a role in promoting the company line, which at its core is spend beyond your means, and kick the can down the road by monetizing the debt, robbing consumers of purchasing power along the way in a never ending currency devaluation scheme. This is also why the debt ceiling needs to be raised every year, and the US has doubled the national debt over the last 8 years. If you keep a healthy dose of inflation, let us call it the real inflation rate in the economy, the overall debt is less as a percentage of GDP, Tax Revenue, and overall Production Output – thus the debt has been monetized. At least this is the Central Bank and government strategy to dealing with out of control government spending far in excess of tax receipts taken in. Borrow, rack up huge deficits, print more money, devalue the currency, create inflation in the money supply, and make the borrowed money less onerous than it otherwise would appear with a lower rate of inflation. This is why Central Banks are so obsessed with inflation, the entire scheme falls apart and fast if the debt cannot be monetized or lessened as a percent of its original value through currency devaluation via the printing presses.

Debt Monetization Scheme a Delicate Juggling Act

This is the big Inflation Lie, Inflation doesn`t hurt consumers; it is a needed tool to monetize the debt and keep the whole deficit spending scheme going for as long as possible. The theory is sort of like the expansion of the Universe. If Central Bankers can inflate the money supply without inflation going nuclear on them, and keep diluting the currency without Zimbabwe like repercussions, then the size of the national debt is as manageable as 20 Trillion can be in a relative sense.

But it is a dicey game in juggling of account variables and the slightest unbalanced move of any of these account balance variables and the entire deficit financing scheme implodes or blows up on itself. It is terribly unsound financial engineering, and a looming disaster that at best is kicked down the road a little further. My calculations are that the government liabilities hitting around 2018 are just the variable that makes this whole financial engineering scheme face some serious here and now addressing. But it can be any variable in this complex financial engineering equation that can go out of control. Inflation as reported over 4%, interest rates rising significantly, Real Deflation, Economic Recession, Credit Rating Downgrade, Spending at a rate exponentially more than currency devaluation of Monetary Policy, Central Bank Credibility and Confidence, and a full-blown Currency Crisis to name just some of the possible variables that could blow up in the face of this financial engineering experiment.

Deflation, Demonizing, Central Bankers & the Power of Language to Manipulate

Now you know why Central Bankers try so hard to demonize deflation, well we have never had real deflation in my lifetime, it is the reason that cars that used to cost $5,000 now cost $50,000. But more specifically Central Bankers know that the official Inflation reporting tools are built to underrepresent inflation in the economy, and anything trending below their fake targets is a problem for them because government spending continues exponently and unabated, and without elevated inflation the debt cannot be monetized and kicked down the road a few more years – which is the agenda. And really the whole purpose for their existence in government service. This is why Central Bankers will look for any semblance of deflationary pressures, albeit some obscure economic study in the United States, any excuse possible to ramp up the old printing presses at full speed ahead come what may! This is the big Inflation Lie purposefully put forward by Central Bankers to continue the charade that is modern financial engineering.

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ECB Putting Federal Reserve in a Bad Spot

October 22, 2015 by EconMatters   Comments (0)

By EconMatters

ECB Policy Press Conference

I was watching a little of the ECB policy press conference this morning and there were a lot of thoughts that came out of that event which I may write about at a later date. However after the ultra-dovish ECB decision to signal to financial markets that they are going to add more stimulus in December with more bond buying in order to weaken the Euro currency, the US Dollar is back up to the 96.30 area on the DX, and financial markets haven`t really thought about the implications of this move by the US Dollar.

Believe it or not: The Fed actually wants to raise rates now just to save face!

Reading between the lines the Fed wants to raise rates in December to get back the ounce of credibility they once had as they have reiterated their intention of raising rates this year, and with the financial market once again ‘healed’ they are going to sneak in a 25 basis point rate hike, (maybe a lame 10 basis point rate hike if they completely wimp out on the rate hike) just to keep their original word of raising rates in 2015.

Thanks A lot ECB, You just made the Fed`s job twice as hard

The problem is with the ECB slamming the Euro trying to purposefully weaken the currency the US Dollar is already back to levels that were causing emerging markets to freak out, and the Fed to lose their nerve to raise rates in September which they had done a good job building in market expectations for a rate hike.

The market sold off for the first time on a dovish Federal Reserve Meeting, and Fed members took notice of that and immediately tried to reassure markets that they were still committed to raising rates in 2015. I actually think the Federal Reserve is going to try and sneak in a rate hike, and this is a mistake right now given what the ECB is going to do in December at its policy meeting with regard to adding even more stimulus.

Two Wrongs Cancel each other out right?

The Fed is going to ‘rectify their wrong’ of the last meeting and raise rates and lose twice with regard to disappointing market expectations, and the US Dollar Index will jump back above 98, and I expect a sizable market selloff as the Dollar continues to strengthen as the Forex markets get hit with a double whammy of a Dovish ECB Meeting and a Hawkish Federal Reserve Meeting this December. And given year end positioning the Federal Reserve couldn`t pick a worse time to raise rates. Hopefully they will just make another stupid excuse, and avoid raising rates - the lesser of the two evils. But given they have become a complete joke with their forecasts regarding hiking rates, saving face is probably more important for them right now. Therefore, Wall Street and financial markets are probably going to get screwed on this one, and end up taking one for the team!

Buy Some VIX Futures for December for Portfolio Protection

Expect a totally surprised market when the Federal Reserve raises rates at its December policy meeting. The financial markets are as about as far from ‘pricing in’ of any rate hike for the December Meeting as they could be and frankly, the marker reaction will be fun to watch this December. And I really can`t blame this one on them as the Federal Reserve has gotten just plain loopy at this point. And listening to the ECB panel trying to justify more stimulus of bond buying in their herculean fight to save ‘low’ inflation from damaging European citizens was just pure comedy beyond a Monty Python skit. And at this point it is almost becoming a requirement for Central Bankers to just be plain Dodgy, Comical, Squirming in their Seats, Stupid, In Denial, Blatant Liars who look like Meth Abusers being questioned at the Press Conferences like a criminal in an interrogation room at the police station – even they don`t believe their own ‘shit’ these days that comes out of their mouths.

Poor Mario Draghi: He didn`t look well

A piece of advice for Mario Draghi just speak the truth, the ECB wants to weaken the Euro to boost exports by making them more competitive in trade, and they want to monetize the debt by trying to raise inflation because all of Europe`s Debt to GDP Ratios are a severe threat to European Solvency – the relativity game in both cases!

At least with this answer I would  trust your competence as someone capable of holding such a position – although I don`t agree that QE and Debt Monetization actually is sound policy as it becomes self-defeating in promoting inefficient allocation of capital, and is in the end deflationary over the long haul.

But when the reporter asked Draghi about why is low inflation such a bad thing for European consumers, and the panel trots out the argument of consumers delaying purchases crap, Draghi and company just come across as loopy, antiquated Meth induced pathologically untrustworthy and incompetent liars. Not the quality of individuals that should be in charge of monetary policy for the ECB!

Low Standards for Central Bankers: Isn`t there Performance Review for this crowd?

I think we should have the same standard that we have for Physicists, one can postulate all kinds of theoretical ideas, but when they fail in the experimental phase, they become set aside and replaced by better ideas that actually work in practical application in the field. Voodoo Economics of the last 25 years has failed, time to start promoting some economic ideas that actually work in the field. You know economic ideas that do a better job of more efficiently allocating capital to more productive purposes, as opposed to having large amounts of financial resources stuck as reserves in central banks and yield chasing electronic markets accumulating miniscule yields instead of promoting actual long term project growth for the world.

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