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EconMatters - Global Economic and Market Analysis That Matters

Apple Stock is a 10 Year Short

November 25, 2015 by EconMatters   Comments (0)

By EconMatters

Holiday Melt Up in Stocks

Apple and most stocks do routinely well during the 4th quarter, and especially the last couple of months of trading after earnings are out, and the fund managers are pushing everything up with the goal of making their trading numbers by year end window dressing. It is amazing more people don`t realize this phenomenon and just buy December expiration calls on the SPY after the usual selloffs that happen in the third quarter, and wait for the holiday rally where stocks routinely melt up at year end.

$125 a Share

Apple almost touched $124 a share after earnings before some negative news came out regarding the supply chain which hinted at slower demand for I-Phones towards year end, and the stock reached its all-time high of almost $135 a share in late April of 2015. But if you are not already in at a good price for a long term short of Apple stock, then hope for one more run-up into year-end holiday trading to position yourself for the inevitable decline in this once Wall Street darling. Anything over $125 a share is an excellent price entry point to short this stock, and have a long term positive expected return on your investment from the short side. This stock should continue to put in lower highs and lower lows for the next five years, and ultimately continue lower for the next decade as this company eats through its massive cash reserves trying to come up with their next I-Phone blockbuster product in a declining margin world.

Large Institutional Ownership

Apple stock is a widely held stock by institutions, hedge funds and fund managers. This stock is basically a core holding in many fund managers portfolios, this is bad news once the bloom comes off of this rose, and investors start to see the long-term writing on the wall regarding increased costs and declining margins across the variety of Apple products it offers to consumers. In the end they are in a commoditized business, and this story never ends well judging by the history in this space over the last 50 years.

I-Phones Sales Hanging in There

I-Phones continue to hang on with newly created iterations with their slightly better bells and whistles but the improvements or differences between phone iterations are becoming less and less pronounced. Apple pulled the last big improvement in their phone out of the hat with finally giving in and producing a larger screen size for consumers. Sure there are still many I-Phone users who need to upgrade their phone, but I-Phones users are first adopters, that`s why they have I-Phones to begin with because branding and image are important to them so they don`t wait long to have the newest I-Phone. Stock prices are forward looking and the stock will move before the fundamentals fully become apparent to the overall market. By the time it becomes obvious that the trend in I-Phone sales is down for the foreseeable future, the stock will have long started its downward trek in price.

Smartphone Industry is a Mature Market

The cell phone and smart phone market is a mature industry, even basic and lower end smart phones essentially have the same comparable specs and features. And now that consumers have to pay full price for these small computers, consumers are going to think twice about shelling out $700 for a new I-Phone every year. Especially when the phones haven`t changed that much and they can get a pretty damn good equivalent smart phone for $50-$200 and in some cases even free with slightly older models. Once consumers get reoriented to the fact that they are basically buying the entire phone as no part is subsidized by their data provider, it is intuitive that I-Phone prices are going to come down to remain competitive in the market.

Margins Will Shrink for Entire Smartphone Segment

This is the next phase in the smart phone wars. First it was product innovation and differentiation. This phase as products become more and more alike is routinely followed by the price wars phase. And Apple has always tried to brand their way out of this problem by remaining the one premium branded product in the space. EconMatters view is that this may work for six more months but the writing on the wall will play out for Apple, and they will have to reduce prices just to stop the bleeding. As Apple is in for some brutal comps as I-Phones become too expensive relative to competitor offerings given the actual slight if any differences between smartphone specs. A consumer would find it difficult to justify paying $600 more for a phone when the only difference is a small icon on the back which will be covered up by a smartphone case nonetheless.

Beware of Spaceship Office Space

Beware in the history of building new office palaces or naming stadiums as this occurrence often through history signals the turning point in company fortunes. The list is long of company hubris at the top of the market spending out the wazoo for plush nice new office space only to have to move out of said office space or sell this luxury space at rock bottom prices in distressed times only a few years later. I expect this to be no different with Apple`s new spaceship offices in California. How many stadium naming rights deals have come undone over the years due to being taken over entirely or bankruptcy? The list is formidable to say the least! Candidly Bay Area real estate is probably in a bubble right now both on the commercial and residential side. And with the bubble in Unicorn and early stage financing of technology startups starting to show signs of cracking, it appears that technology stocks in general of many companies are going to experience difficult times based upon unrealistic expectations and cheap money evaporating that created unsustainable valuations. Thus let us label Apple stock as the signature leader in the decline of this bubble; the tech bubble bursting version 3.0.

The Electric Car Savior

This isn`t a surprise to Apple executives, why do you think they are working so hard on coming up with the next revolutionary product? This is why Apple is contemplating how far they can get into the automotive space, how profitable are heads up displays, or entire futuristic technology dashboards, can they profitably build an electric car without going bankrupt in the process due to cash flow drain? Investors are not going to stick around and wait to see if Apple can invent the next blockbuster product. Once the earning`s pain comes, this stock is going to get punished with 15% plus shellacking’s on future earnings releases over the next five years. I do think electric cars are inevitable replacements for the combustion engine, but is Apple really going to outcompete German engineering in this area? Is Apple going to produce more electric vehicles ten years from now than BMW? Does this seem like a positive expectancy investment?

Grow Old Gracefully

I think the most optimistic case for Apple stock is that they can just grow old gracefully so to speak and produce high quality products for their core competency in existing product offerings. I admire their research and innovative spirit looking for the next big technological breakthrough, but this requires cash, and it is a good thing they have stored a lot of nuts for this rainy day, because they are going to bleed through cash reserves over the next ten years like nobody`s business seeking the next I-Phone holy grail product. I hope for their sake they find it because their existing business is a commoditized product model, and margins are going to come down during the same time as the company`s overall cost structure is going to go up significantly.

Bear Market Environment

Apple stock has had some massive declines on several occasions over the last 10 years of this bullish market environment. Look for the stock to move around a lot as it continues to put in lower highs and lower lows in a continual downtrend over the next decade. Apple stock is a long-term short for the patient investor. There will be several short shark attacks as institutional investors bail after miserable earnings releases over the next 10 years. But just wait until interest rates rise and we are in a full out bear market environment for the real declines in this stock. The sheer size of this stock in portfolio holdings is impressive, so not a lot of buyers left in this name, but this represents a whole heck of a lot of potential future sellers in this name on substantive negative news.

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The Republican Party

November 24, 2015 by EconMatters   Comments (0)

By EconMatters

Extremism & Democracy

The Republican Party has been hijacked by the right wing Christian conservatives, the gun toting NRA extremists, the Tea Party extremists and the racially and culturally narrow-minded factions across the country. The party is a complete mess, it really has lost its way, and is destined to lose the Presidential Election to Hillary Clinton. The emergence of front runners in the Republican campaigning season of Donald Trump and Ben Carson speaks volumes regarding how far this party has lost its way.

Donald Trump

Pictures of Christian evangelicals putting their hands on Trump`s forehead during prayer make baby kissing look respectable on the campaign trail. Trump obviously got into the race as the attention whore that he is just because there are cameras involved, and this is what he does. The fact that he started polling well probably shocked this branding clown more than anybody, and then he started getting serious in pandering to every worst-case extremist tendency that so aptly defines the Republican party today. He basically has done the Democrat`s job in converting any remaining Republican moderates to the other side. Hillary Clinton and the Democratic Party should send Donald Trump a large thank you note after the election, he has made their job a lot easier. Donald Trump`s incessant pandering to every extremist group and their requisite views has basically confirmed what the Democrats have been saying and portraying about the Republican party for years. That they are a bunch of racist, homophobic, right-wing, gun-toting, tea-party simple minded extremists.

Ben Carson

Ben Carson could have been a breath of fresh air for the party, but no he had to start opening his mouth on the campaign trail. And he has said some pretty stupid things on the campaign trail. Things I thought a competent neurosurgeon was incapable of thinking or enunciating, let alone speak in public. The guy is basically an incompetent, senile idiot who if the Republican Party had any real platform with legitimate candidates would have been marginalized months ago on the campaign trail. I never realized how specialized competencies can be until this guy opened his mouth, and the incongruence between the thoughts rattling around this man`s brain, and what he did for a profession is astounding.  I am not sure how one can make it through basic medical school with such thoughts. He may have early stage Alzheimer’s or dementia of some sort. At any rate just another of the long list of un-electable Republican Party candidates.

Fiscal Conservatism

The Republican Party needs an overhaul, they need to get back to the core values of pro-business and job creation, entrepreneurial beliefs that once made this party a formidable political entity. They need to concentrate on fiscal conservatism as this will be sorely needed in about three years when all the entitlement spending really starts hitting the accounting books of the government. They need to focus on promoting lower taxes, simplifying the tax code, and cutting waste from bloated governmental programs like the military. In short, the government needs to be much more efficient in where and what they spend the taxpayer receipts on. The US has spent so much money supporting the military industrial complex over the last 20 years that the overkill factor is off the charts. I know the importance of having a strong military but the current spending is just comically ridiculous given the juxtaposition of the United States Military capabilities and the next nearest competitor.

Inefficient Capital Allocation

It is obvious that a large portion of this spending needs to be reassigned to more productive and efficient uses in the economy. This is where the Republican Party needs to steal a Democratic idea and really overhaul the healthcare industry. It doesn`t take rocket science to realize the quality of healthcare for the average citizen in the Scandinavian countries versus the United States and what these countries spend on the Military to realize poor capital allocation policies.

There is no reason that every American shouldn`t be able to walk into any healthcare facility at a moment`s notice and have all their medical needs met free of charge given the immense resources of this country. It is obvious that the entire healthcare system needs to be overhauled, costs are out of control and have been for decades; most of this is due to structural inefficiencies and the interplay between drug companies, insurance companies and the government – this relationship structure is broken.

It will require a lot of money and focus but this is going to happen by necessity if for no other reason as the current system will eventually implode. Since this is going to happen eventually, the Republicans might as well adopt this issue from the Democrats now that they have really screwed up the healthcare system with their failed attempt to fix it. Ideas go back and forth between the Party Platforms all the time, the Republicans need to steal this issue back from the Democrats.

The party needs to be much more inclusive from a sexual orientation, cultural values, and ethnicity standpoint. This is a no-brainer, it is an election after all, and sheer numbers count. But the real reason is that wake up Republicans America isn`t like your grandfather`s age, and that era ain`t coming back. Cities are multicultural landscapes with large populations of culturally and ethnically diverse people often with common goals of seeking a higher quality of life. In short, to be simplistic here good capable hard working, smart people come from many diverse ethnic and cultural backgrounds – yes even illegal immigrants. Get over it Republicans by giving this issue solely to the Democrats, you are essentially committing political suicide – you have become a stereotype, a caricature of a political party that is destined to lose elections.

Never Going to Attain Unanimity of Thought

Americans have diverse views on many issues, it is hard getting two people to agree on anything these days. All Republicans are not going to agree with each other on all the issues, some may be sympathetic to some issues and vehemently opposed to others. The key is to move to the center and have enough of the issues that are really important to voters to broaden the appeal of the party. Focus on policies promoting economic growth, lower taxes, and spending tax receipts more efficiently and not on one`s sexual orientation in the bedroom. The Republican Party has too many extremist views on far too many issues to be electable right now on the presidential stage. Right now it appears that Hillary Clinton is going to be our next President, and that means another four years of underachieving from a pro-growth business standpoint. And frankly, she is the only candidate I have seen who is even remotely qualified to run for President in this circus show of a campaign.

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Federal Reserve

November 23, 2015 by EconMatters   Comments (0)

By EconMatters

Rate Hike

The Federal Reserve has been telegraphing to markets that they are going to raise the fed funds rate by 25 basis points next month at its December Fed Meeting. The financial markets think they are serious this time and have been pricing in this 25 basis point rate hike for the past 6 weeks. The real question is that since the Fed has told us that they are Data Dependent for the past 7 years regarding changes to monetary policy, what has really changed in the economic data for the positive? Why now of all times do they decide to raise rates? Are they raising rates for the right reasons? These are just some of our concerns as the Federal Reserve embarks upon their final FOMC Meeting on December 16th2015.

John Williams

It is hilarious watching Federal Reserve Bank of San Francisco President John Williams flip flop on rate hikes faster than a politician on an issue after a new poll comes out. It has become obvious that this Fed member has no views of his own regarding monetary policy, he is basically Janet Yellen`s mouth piece, and is not an independent Fed member. If one just reads his statements over the course of 2015 regarding possible rate hikes, with an economy that hasn`t dramatically changed much in 2015, one would demand immediate and supervised drug tests on a monthly basis. Maybe I am being too hard on this guy, and that he has a difficult job of navigating Fed Policy politics, but he sure is coming across as an incompetent and unqualified board member that adds no real value to the committee.

Neel Kashkari

Any maybe that is why Neel Kashkari, has been chosen as head of the Federal Reserve's regional bank in Minneapolis to make everyone else appear more qualified in comparison. I am not sure why this Fed move hasn`t garnered more attention by the mainstream financial media, but what has Neel Kashkari ever done that makes him qualified to be a Federal Reserve Board member? And yes it is too easy a cynical softball setup for the peanut gallery to shout out “He worked at Goldman Sachs!” here. But he has accomplished very little in the Hedge Fund community, Investment Banking, his small time as a Portfolio manager at PIMCO, he made an unsuccessful run for governor of California in 2014, and was an unsuccessful aerospace engineer at TRW Corp. So unsuccessful in fact at TRW Corporation that he went to Wharton to get his MBA to reinvent himself at Goldman Sachs.

It seems the only thing this guy has succeeded at is kissing up to Hank Paulson while at Goldman Sachs, which landed him a high profile position at the Treasury Department during the TARP bailout program, by the way another colossal failure both in terms of policy creation and implementation. The guy has literally failed at every job he has ever done, and keeps getting promoted to better jobs with higher required responsibilities and required competencies. It is not like this guy has written extensively on monetary policy in his career or has a PhD in economics from a respected academic institution. This guy was literally pushing defense stocks on CNBC a couple of years ago while learning Portfolio Management at PIMCO. I realize that often employment success in life is knowing the right people and connections, but this is the Federal Reserve we are talking about, and not the Vice President of some obscure department in a sleepy corporation. Consequently the Peter Principle is alive and well at the Federal Reserve, has the Federal Reserve become one giant example of the Peter Principle?

Inconsistent Message

This brings us back to the fact that the Fed now is so motivated to raise rates just to show that they can actually raise rates, even when it is obvious to everyone in financial markets that there is no need to raise rates here. In fact, the Fed should have raised rates 3 or 4 years ago, and at the very least last year when GDP was more robust during the second half of 2014. In short, for the near term the Fed missed their opportunity window to raise rates, according to the economic data and overall global economic environment – them being ‘Data-Dependent’ and all.

Therefore, this rate rise is purely for show, the Federal Reserve has had 7 plus years to raise rates and they pick the time when China is struggling, and the ECB, Japan, and almost every other EM country is trying to weaken their currency. And they are going to do it, as they have extended so much credibility the last 6 weeks talking up this rate cut, that they would become a complete laughing stock by their most diehard supporters if they bailed out on this one. The Federal Reserve isn`t even consistent with their messaging within the same calendar year. As the reason they couldn`t raise rates back in June, another heavily telegraphed Fed Rate Rise Meeting, was because the US Dollar was too strong. They were worried about the effects of a strong dollar on the US Economy from a trade and corporate profits standpoint; not to mention its effects on emerging markets. Hello Federal Reserve, just six months later we have the same conditions with a strong US Dollar, it is not like anything has changed from a data standpoint to now suddenly merit a 25 basis point rate hike. I realize it is easy for me to sit back and criticize their actions, but it seems that from a logical reasoning standpoint if they can raise rates now, then they should have raised rates back in June.

Reasons Not to Raise Rates

The main reason the Federal Reserve shouldn`t raise rates now is that the ECB, which the Euro makes up the largest part of the US Dollar Index, is going full scale nuclear on devaluing their currency for trade competitive advantages over the United States. The second reason is that Emerging Markets haven`t shown a real pickup yet from their latest stimulus attempts, and are still hampered by being in the early stages of financial reform and structural rebalancing. The third reason is that commodities are being hammered with a strong dollar, further reinforcing deflationary pressures from a “Data-Dependent” standpoint given that the Fed wants to stimulate ‘inflation’ in the economy. The fourth reason is that there really is no need to now, that ship has sailed about 5 years ago, for all we know we have reached the other side of the business cycle, and are headed back into recession.


In fact, there can even be a case for QE4 as the inflation in the economy is coming mainly from Housing, (not enough affordable housing), and healthcare. Thus buying new bonds and lowering interest rates further might stimulate the housing industry in helping additional buyers move from apartment living into buying their first home; thereby lowering the steep rise in apartment rents of the last several years. This might also stimulate loan growth for both commercial builders and banks now that some have started to up their commitment to consumer home loans. Moreover, with regard to healthcare, raising rates isn`t going to promote or reduce inflation as this inflation is purely institutional to the absolute structural nightmare that is the healthcare industry today. A major overhaul will be required in the healthcare business over the next five years. The recent college try at reform has been a total and unmitigated disaster; we have only begun to see the fallout from this failed policy initiative.

The Gang that couldn`t Shoot Straight

The Federal Reserve is increasingly looking like the scared kid who is egged on to show his bravery by jumping from a high cliff to regain his ‘manhood’ in the eyes of the cool kids only to make a reckless decision with negative consequences. Yes the Federal Reserve needed to raise rates, but they probably should have started 7 years ago. After 7 plus years of being ‘Data Dependent’ why now?

In case the Fed hasn`t been paying attention, the world has devolved into a full out currency war, what the ECB has done to devalue the Euro in 2015 is not in the United States best interests. It makes for bad Fed Policy to raise rates now, it puts the US at a competitive disadvantage. All one has to do is look at the hit to the retail sector from the drop in tourism spending of this year due to the stronger dollar and compare this with the latest economic upturn in the European economic data with a weaker Euro to realize that currency devaluation as a strategy works and confers a strategic advantage for countries.

Really Federal Reserve, you pick now of all times to raise rates? I think I know why Neel Kashkari was recently selected to head the Federal Reserve's regional bank in Minneapolis, he makes the rest of the brain dead zombie Fed Members feel ‘comfortable’ and not threatened by actually making competent and sound monetary decisions for the US economy.

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Current Copper Price Below Cost of Production

November 21, 2015 by EconMatters   Comments (0)

By EconMatters

Long Dollar Trade

One of the common trades in financial markets these days is going long the US Dollar and shorting Commodities, especially the precious and industrial metals. This has been a bad year for commodities, and this trade has picked up steam with large fund flows the last 6 weeks.

Schizophrenic Fed & Employment Reports

This all turned around after the poor employment report of October 2nd, followed by some trade unwinding thinking the Federal Reserve may be on hold for the remainder of the year after the dismal October Employment Report. This resulted in about eight days of currency unwinds and around October 14th, Investors started putting the Long Dollar Trade back on as they realized the Fed still wanted to raise rates, and since China seemed to stabilize from a crashing standpoint, Fed Speak became hawkish to telegraph to financial markets that the December meeting was a potential live meeting for a rate rise. This trade really picked up speed when the November 6th Employment Report came in much stronger than anticipated with a robust 271,000 new jobs created for the previous month.

Trading Algos & Paper Markets

Oil has also been hit along with the metals but it has inventory issues to contend with and is in the midst of a price war for market share. But there is no such price war in the metals industry, and although China`s weakness has no doubt tempered demand, the precious and industrial metals are basically being hammered down in the paper markets by fund flows in this Long Dollar Trade. This trade has become such a reflexive trade, that if the US Dollar is strong, the trading algos just start attacking Gold, Silver, Copper, Aluminum, Platinum and Palladium. These metals by and large trade as a group with slight differences in the charts based upon any unique demand characteristics of the given metal.

Soft Demand

Demand hasn`t really fluctuated much for any of these metals the last six weeks, China and the global economy are just sort of trudging along with China`s rebalancing and the global economy growing somewhere in the area of 3.5%. But what has changed the last 6 weeks is the large fund flows into the US Dollar all trying to front run the Federal Reserve, and shorting the Euro, (which makes up the largest component in the US Dollar Index), with traders also front running Mario Draghi who has been telegraphing more future stimulus for the European Union.

No Shale Technology for Copper Mining

But at some point every asset has a price, it really comes down to price, markets often over shoot in one direction or the other, but ultimately, what is a ‘fair price’ given the dynamics in the market. Copper is an interesting market because it is being slammed down with Gold and Oil, and the supply side of the Copper market has had its issues in 2015, with supply constraints limiting new supply on the market. Most of the pressures have come from the demand side of the equation with China`s rebalancing. But Copper doesn`t grow on trees, and is actually rather difficult to get out of the ground and process from a cost perspective. The steps involved in actually processing Copper to get it in a marketable form are rather extensive and involve considerable resources. And with six straight weeks of slamming down by traders we have reached the low level of $2 on the Nymex December Futures contract.

Marginal versus Production Processing Costs

There are various estimates for what the Marginal Cost of getting Copper out of the ground is before supply is taken offline completely. But it is reasonable to assume that Copper is currently being priced well below the long term Production Cost of Processing the Industrial Metal, and a large component for this trend is strictly fund flows in the Long Dollar Trade.

Path Forward for Copper

I am not sure how much this trade has left in it for the near term, who literally knows with asset prices and financial markets these days. But my intuition is that this Long Dollar Trade will probably be pushed into the European Central Bank Decision regarding more stimulus measures and the Fed December Meetings regarding a 25 basis point hike. Also, two other contributing factors are the December 4th Employment Report and traders wanting to take profits before the actual event in early December.

Buy the Rumor, Sell the News

And given the fact that the Federal Reserve is probably going to go out of its way to talk dovish with a 25 basis point rate hike, almost a “One and Done” intended messaging given what the rest of the world is doing in this robust currency devaluation game; it probably means that traders buy the rumor, and sell the US Dollar hard after the actual news of a rate hike, at least in the near term.

Short Covering Rally

This is when traders will probably really unwind these Fund Flows with buying Gold hand over fist, covering the substantial shorts in the market, and simultaneously putting new money to work in Gold and the rest of the Industrial and Precious Metals. And if it starts getting cold Oil might even get a bid along with these commodities. We shall see how this all plays out in the market, but $2 Copper could be setting up for an ample short covering rally before 2015 ends!

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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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A New World Order of Corporate America Recruiting?

July 15, 2015 by EconMatters   Comments (0)

By EconMatters

In June, I did three posts discussing some of the things in Corporate America, either from personal observation or first hand accounts through friends, readers, or colleagues. (Read: Getting Hired Now Takes LongerHow Some Companies Are Scamming Job ApplicantsHow Companies Are Using PIP To Humiliate and Get Rid of Workers.  Today, I'm going to talk about something I learned just this week.

One of my friends recently went through a job application and interview process with a U.S.-based leading oil and gas midstream pipeline company (~ 22,000+ miles of pipeline and 1.4 million retail customers, on 2015 Fortune 450 list).  At the end my friend did not get an offer, so my friend asked me for a postmortem and shared with me all relevant information including job posting description, back-and-forth emails and voice mails between the Human Resource (HR) "Talent Acquisition" person and the "Hiring Manager".  Below is a recap of what had transpired in the two months after the initial job application.

From Routine To Bizarre

My friend has a very strong background in market analysis and in May, applied for a non-managerial Senior Analyst position with this pipeline company.  Initially, everything was pretty routine from the phone screening interview to in-person on-site interview with 3 managers.  Then things took a bizarre turn.

"Bring You On Board" - What Else Could It Mean ?

After 4 weeks of non-communication post-in-person interview, my friend suddenly received a voice mail at 7pm on a Friday evening from the HR person apologizing that he had been on vacation, but the Company is ready to move to the "next steps" to bring my friend "on board" the following week.  My friend of course immediately returned the call to the HR person confirming what he said on the voice mail.  (Well, this is weird to begin with, if anybody needs to work at 7pm on a Friday, it'd NOT be HR.)

Then, the following week came, gone and silence, my friend followed up with an email to the HR person. The HR person left yet another voice mail reiterating the Company is still looking to bring my friend "on board" but due to some delay in the internal approval process, my friend should hear back the following week.  (I listened to both voice mails, there's zero possibility of a "mis-understanding" or a "mis-communication").

Then the following week (this is two weeks after the bizarre 7pm Friday voice mail), my friend received a call from the same HR person inquiring about the current compensation info which was already reviewed during the initial phone screening process, except that the "salary range" of the position had gone down by 15% from the initial conversation with the very same HR person.

Nonetheless, my friend was professional enough not to say anything.  The HR person still ended the phone conversation with "I will talk to the Hiring Manager and reach out to you".

What's Up With "Next Steps"? 

After the phone conversation, my friend got a notification that the same position was re-posted at the Company's Careers site.  Realizing salary seems an issue, my friend immediately sent a short email directly to the Hiring Manager and cc the HR person reiterating the interest in the position and pay flexibility.  The Hiring Manager replied

"Thank you for your email. [HR person name] will be reaching out to you soon to discuss next steps." 

Well, at this stage, by any logic, there is NO "next steps" to "discuss" except reviewing and negotiating offer.

Two hours after this reply email from the Hiring Manager, the newly posted position was taken off the very same day it was put up, while my friend got a generic rejection email --

".... After careful consideration, we have decided to extend an offer to another applicant whose qualifications more closely align with this position. ..."                

Again, I read the emails, above are the direct quotes from original email communications.  


First of all, judging from the job description, there is very little possibility that the hiring company could have found another better qualified candidate for such a niche expertise area, and zero possibility the company could have found the right candidate in one day.  

Secondly, from what I can tell, the hiring company most likely was stalling and stringing my friend along for two months, perhaps trying to find a cheaper alternative (It does not take two months to figure out a candidate is not a good fit, not to mention the excuses and weird communications in between).  I see this as bizarre, utterly unprofessional and unethical.  I'm quite surprised to see this kind of recruiting practice from a Fortune 450 company, and can only imagine what goes on in smaller outfits all over.      
Work Sample - No Copy Should Be Left Behind

Of course, my friend made a typical mistake of any eager job seeker -- leaving a hard copy of two "work samples" believing they'd showcase skills and capabilities.  My understanding is that one of the work samples gives the complete layout and format of a deliverable the Hiring Manager had no clue and prior experience.  There was some 'phishing' questions started in the initial phone interview already which was why my friend provided a work sample at the in-person interview.  I can only imagine the Hiring Manager probably showed that sample to all other applicants to finally find a taker.

A New World Order of Corporate Recruiting? 

Again, as I discussed before, this is how some companies are scamming job applicants.  To my previous points, in this case, both the Hiring Manager and the HR person are Gen Y, the new royalty in Corporate America, whose recruiting priority is getting a "team member" with similar age and 'years of inexperience', instead of best talent for the job and responsibilities to deliver quality and value for the greater good of the corporation.

Fortunately in this case, my friend is still gainfully employed, but this little experience does not bode well for the self-confidence.  Again, this is one more example to add to the NWO of Corporate America Recruiting.

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What is a Market?

July 12, 2015 by EconMatters   Comments (0)

By EconMatters

Market Definition
The Merriam-Webster definition for Market is the following: (1) :  a meeting together of people for the purpose of trade by private purchase and sale and usually not by auction (2) :  the people assembled at such a meeting. This just gives a starting point for this important discussion given the philosophical crossroads that financial markets are facing in today`s evolution of economic theory with regard to social and governmental policy decisions juxtaposed against the backdrop of the underlying nature of basic financial principles.

Global Volatility
The past week saw the Chinese government take drastic measures to keep their financial market from falling further, the market has become as artificial as can be envisioned with sellers facing outright arrest for their actions.

This really has brought to culmination the ever-trending debate of what role central banks, governments and centralized control have for financial markets. And what is the very nature of markets in general, what is their purpose, their structure, and ultimate sustainability going forward as entities.

Slippery Slope of Market Evolution
The US Central Bank has influenced market prices by lowering interest rates to zero, flooding the financial markets with massive liquidity, and outright asset purchases like treasury bonds. Japan has gone one step further in addition to buying bonds has expanded their Central Bank purchases to other financial assets like equity indexes. Many Central Banks like for example the Swiss National Bank holds shares in US equities like Apple Inc., Exxon Mobil Corp. and Johnson & Johnson to name a few of their holdings.

The Role of Central Planning
China which has long been a centrally planned government structure for economic initiatives who was trying to implement more free market reforms recently has reverted back to its fundamental nature and strategies and tried to completely control its stock market. Basically taking over every aspect of the market, forcing firms to buy stocks, closing stocks from trading, and arresting parties who wish to sell assets in the financial market.

The best face to put on this behavior is that panic and irrational selling has taken over the market, and that the Chinese government is just putting in a giant trading curb in the market to give participants a chance to recover, take a deep breath, and reflect more rationally on the market. The other take on these measures in that they only make things worse, and in a sense have completely broken the market, it no longer exists.

Social Engineering Outcomes & Financial Markets
But the Chinese example is just the latest and final culmination in my mind of the slippery slope of governmental and central bank intervention in financial markets. The rub is this if central banks and governments view financial markets as Wealth Creation and Social Policy Initiatives, as Bernanke himself seemed to imply with his comments on the Russell 2000 during his tenure at the helm of the Federal Reserve, then the culmination of this rabbit hole journey is that central banks and governments have to intervene forever. A consistent forever, i.e., markets have to go up at a right angle forever, every year has to be higher than the previous year. If this is modern market theory than you have to commit forever, there is no stop and start commitment! It is like debt monetization theory and utilizing inflation to monetize an ever increasing debt over time by expanding the money supply.

If markets are no longer vehicles for price discovery, valuation metrics for business prospects and growth projections, or capital allocation vehicles reflecting sound business decisions by management; but rather proxy vehicles and conduits for Social Wealth Creation Policies then is doesn`t really matter if Enron is solvent or not, or a Chinese construction company is bankrupt as long as the government can make these shares appreciate each year in perpetuity. In other words to be a forever appreciating asset, and not a valuation or price discovery mechanism.

Sustainable Commitment
Therefore, two questions emerge can central banks and governments stomach or sustain this kind of commitment forever for financial markets, and will it work even if they do? And probably more importantly is this the best outcome for financial markets, i.e., would markets and financial markets in general and the overall economy be better off as a result of a different approach by central banks and government authorities over the long run?

These are some of the questions that all central banks and governmental policy leaders need to think hard about right now given the trend that has been emerging lately with policy decisions in regards to financial markets.

Call it whatever you want, but it isn`t a market!
My belief is that markets are markets for a reason, whether they are financial markets, the oil market, the housing market, the local farmer`s market or the illegal drug market, that fundamental economic and financial principles of price discovery and valuation metrics determining ultimate value lie beneath what it means to actually constitute a market.

What we have today are not markets, you can call a financial market a market, but they are no longer actually markets in the traditional sense of what it means to be a market. It is also my belief that ultimately the underlying financial and economic principles of market behavior and forces will prevail over central bank and governmental interventions. In the end it is just a matter of time! Markets can be influenced for a while, they can even be changed, but ultimately the core essence of what it means to be a market reasserts itself at often the least opportune moment in time.

Ultimately the assets in a marketplace represent valuation instruments, price discovery vehicles over time, and any approach that tries to circumvent this process is doomed to fail over the long haul as witnessed by how many companies no longer exist on a global basis over the last 50 years. Financial Markets are not socially engineering mechanisms for wealth creation strategies by central banks or governments, they are price discovery and valuation vehicles that are ultimately beholden to the underlying laws of economics and finance. So again I ask what does it mean to be a Market?

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