3 short links

It seems to be an unavoidable truth that just before economic bubbles pop, trading confidence and bullish sentiment is likely to be at a significant high. Whereas some of this is undoubtedly definitional (a bubble can’t build without aggressive bullish sentiment) it always leaves me asking why people don’t see the inevitable coming. The short answer is that actually they do, or at least some people do. Provenance is important here. There are commentators that do nothing apart from forecast doom laden futures, and they spend a large amount of their time being wrong (even if they claim it is only the timing they are missing, it still feels to me, like the stopped watch which tells the time correctly twice a day). When the warning signs are being broadcast by the bankers themselves however, I feel we should take note. It won’t change any behaviours of course, bullish pre-burst behaviour is as much about herd tendencies as anything else, so these charts are for those of us without our fingers on the so called pulse.

From Schroders – The record amount being borrowed by investors is a worrying sign

 

 

Apparently 30 miles up from the surface of Venus is a sweet spot for human habitation, with Mediterranean temperatures and ideal barometric pressures. This article outlines the discussion about the real world feasibility of colonising Venus with floating cities. Its a somewhat Hemingway-esque life that’s described, where men really are men. Not for me, but I’d love to see the movie.

Venus is not for the timid, or people too afraid to shove a fat bird out the airlock and let the harsh laws of thermodynamics do the work. Venus is for men. Men who like to eat meat – cooked in fire and acid and seasoned with the Devil’s own mix of volatiles boiled up from the pits of hell.

The surprisingly strong case for colonising Venus

 

Finally back to more mundane earthly matters we have this interesting, recently discovered feature of Google maps. In parts of the world where there are visceral border disputes Google shows different boundaries depending on where the map request is made from. Does this fuzziness likely promote more comfort for those involved in the dispute? I must conclude that it is the only sensible option Google can take, delivering the map each territory expects to see. In this regard this is no different to the maps that would have prevailed 200 years ago. The really interesting thing though is derived from imaging what would happen if Google decided not to bother and simply presented one version, and by such a process taking a role as an arbiter of nation boundaries. They don’t do that today but it is the kind of thing that could one day fall under the remit of “Organising all the world’s information”.

How do you feel about that?

 


Links – High frequency trading, poison and Jimmy Carter

I’ve had my eye on high frequency trading (HFT) for a little while. I was initially fascinated by the overwhelming need for connectivity speeds driving up the cost of real estate near the exchanges. If you could locate your trading operation next to the exchange the tiny fractions of a second saved by geographical proximity were worth huge amounts in naked profit.

The whole thing struck me as another example of short term profiteering taking precedence over the more sensible longer term allocation of risk and investment capital (which is after all what stock markets are supposed to do).

The long term trend of shareholding periods has been in decline since the 1960’s when shares were held on average for 8 years. The following 2 links are in disagreement about what the average holding period was in 2012 but whichever data point you prefer, 5 days according to Businessinsider or 22 seconds according to London’s Daily Telegraph, it is clear that we are using the mechanic that is the stock market, in a radically different way than we have ever done before.

Part of the overarching societal philosophy of share ownership was that the long term incentives held by investors, via shareholding, would act as a brake on the incentives for larceny, held by the professional management class. But those long term incentives can only act as a brake if the shares are held in a long term pattern, and today that is not the case. To be fair this is not a triumph of the managerial class over the investor class, this is driven by the profiteering of Wall street and London’s City too. Simplistically more trading generates more trading income, but there are other factors acting here too.

Firstly we have a global capital investment paradigm that is focused on the needs of finance capital not production capital. This so called casino approach to capitalism, and its relationship to production capital, is best understood through the analysis of Carlota Perez in her stunning, and surprisingly accessible, Technological Revolutions and Financial CapitalThis is a very quick summary of her ideas.

Secondly, and something that has only surfaced into popular discourse recently, it appears that there is a fraudulent mechanic in widespread use as a result of HFT. Michael Lewis has penned the expose in his book Flash Boys.

In essence the advantage bestowed on certain traders as a result of their proximity to certain exchanges generates more than quicker sight of price movements. The original story of HFT was that this small advantage generated thousands of small arbitrage trades, but the window of opportunity to make these trades was so small that it could only be accomplished by computers acting autonomously via algorithms.

Among other things Lewis has showed that the various routings around the multiple exchanges are illegally skirting regulations that are designed to present the same price on all exchanges at the same time. This means that a trading outfit that operates on multiple exchanges can make trades based on the market intelligence of a received order. If a client instructs the trader to buy all 10,000 shares at the price they are listed they will need to buy them from multiple exchanges, but the trader’s ability to communicate to the furthest exchanges faster than the official price channels sees them instruct their machines at those locations to buy what is available. The end result is that the original client will only receive say 4000 of the shares they wanted. The differential 6000 shares are now owned by the trader, but only because of the inherent value generated by knowledge of the instruction for the original 10,000 transaction.

Interestingly a key component here is the difficulty of verification.

This lack of human insight about what is occurring through these technical networks, obscures knowledge of what is happening so much so that fraud can flourish. In this regard it is very similar to the fraud rife in the ad tech networks for digital display advertising.

This link from the Washington Post sets the scene very well, explaining the nature of the wider problem.

This piece, published by the NYT is actually an adaptation from Lewis’s book and details how the situation was eventually understood and the actions being taken to rectify the problem. Its long but really good.

 

 

In 2006 Alexander Litvinenko was poisoned in London with the lethally radioactive chemical Polonium. If you recall the incident at the time you will remember that it took a long time before anyone was able to understand what was happening to him, what the poisoning agent was and where he was poisoned. The original location was believed to be the Itsu sushi restaurant in Piccadilly although it eventually turned out to be the Pine Bar in the Millennium hotel in Grosvenor square.

The story is much more involved than any 5 minute news segment could possibly have hoped to portray, which I guess is not a surprise. Litvinenko himself was no innocent, with a history in the feared FSB and the KGB before that. He took a stand in favour of Boris Berezovsky over Vladimir Putin, something that no ordinary man would do, and maybe ultimately was contributory to the situation he found himself in.

This article is very long but if you enjoy a spy story, fictional or otherwise, then you will certainly enjoy this. Something I didn’t understand was how much concern was raised by the presence of Polonium in London. The decontamination program employed a staggering 3000 people and operated across 50 different sites, 2 simple numbers but they invoke images of a Men in Black style clean-up operation happening under our noses but with no obvious sign whatsoever that it was happening.

The article also describes the strange world of the Russian Oligarchs and as a result tells part of the recent history of the post cold war Russian experience.

It’s worth finding the time to read this. For fun.

How radioactive poison became the assassin’s weapon of choice

 

 

This next piece is also a pleasure to read if only because it is so refreshing to hear an American president (ex) talking so candidly about the role and position of America in the world today and issues within the scope of American domestic politics as well. Jimmy Carter never was like all the rest, whether you agreed with him, whether or not you are a natural republican or a natural democrat it is difficult to fault his sincerity and his integrity. There aren’t many world leaders that it’s easy to say that about.

On the topic of religious persecution of women’s rights.

Well, they actually find these verses in the Bible. You know, I can look through the New Testament, which I teach every Sunday, and I can find verses that are written by Paul that tell women that they shouldn’t speak in church, they shouldn’t adorn themselves and so forth. But I also find verses from the same author, Paul, that say all people are created equal in the eyes of God. That men and women are the same before God; that masters and slaves are the same and that Jews and Gentiles are the same. There’s no difference between people in the eyes of God. And I also know that Paul wrote the 16th chapter of Romans to that church and he pointed out about 25 people who had been heroes in the very early church — and about half of them are women. So, you know, you could find verses, but as far as Jesus Christ is concerned, he was unanimously and always the champion of women’s rights. He never deviated from that standard. And in fact he was the most prominent champion of human rights that lived in his time and I think there’s been no one more committed to that ideal than he is.

I’m not a religious man but I do wish there were more prominent leaders who hold a strong faith, willing to call out the contradictions within their religious texts and simply choose the side that is kind caring and decent instead of aggressive and divisive.

Jimmy Carter

 


6 speculations on the next financial crash

There has been a small spate of articles in the last 3 months or so suggesting that we might be in for another horrible global financial shock this year. I’m in no position to judge these opinions with any certainty, but do note that they are coming from both the right and left flanks of modern political discourse. Recently I have increasingly taken the position that economists, when considered as a singular group, are in general no better at such predictions than almost any other group of people, economics being, chiefly, an ideology masquerading as a science in its common usage (to be clear economic thought could/should be scientifically applied, but in most expositions isn’t). So, when I see the right and the left making similar claims I take notice.

Causing some jitters

Causing some jitters

First up we have the Wall Street Journal’s Marketwatch relaying the eery similarities between the movement of the Dow Jones Industrial Average (DIJA) in 1928/29 and the movements of the DIJA today. To my untrained eye it certainly does look very similar, however, of more concern is the evolution of how Wall street traders are commenting. No-one is panicking but, as is noted, the level of concern is rising the longer the similarities continue. The chart was first circulated in November 2013, and wasn’t taken too seriously  by seemingly anyone. Now, the rhetoric is more cautious.

One of the market gurus responsible for widely publicizing this chart is hedge-fund manager Doug Kass, of Seabreeze Partners and CNBC fame. In an email earlier this week, Kass wrote of the parallels with 1928-29: “While investment history doesn’t necessarily repeat itself, it does rhyme.”

http://www.marketwatch.com/story/scary-1929-market-chart-gains-traction-2014-02-11

 

From the Guardian we have Ha-Joon Chang, currently Reader in the Political Economy of Development at the University of Cambridge and author of “23 Things They Don’t Tell You About Capitalism”.

His point is quite succinct. In the UK and the US we are currently seeing stock markets at record marks, despite the underlying economies performing at levels that have not recovered to 2007 levels. Chang’s key point of reference is the growth in per capita growth in income, a data point that speaks to the underlying real economy (I find it strange that economists of all stripes talk of the real economy as an aside, surely it should be the main focus). More scarily he makes the observation that at this point no-one is offering any kind of narrative to explain these huge performance numbers. This differs starkly from the dot com bubble, explained away by tech innovation, and the 2008 crash, financial innovation leading to better risk management. The commenters were wrong in 2000 and in 2008, as the bubbles burst causing great losses, but at least someone believed in the market movements. This time is seems that no-one does.

http://www.theguardian.com/commentisfree/2014/feb/24/recovery-bubble-crash-uk-us-investors

 

David Cay Johnston, writing for Aljazeera, takes a stab at some of the crazy changes in valuation metrics that have become prevalent over the last 15 years or so. In short this is an intelligent and in depth (although very accessible – not too long) look at the tendency to massively value tech stocks that seemingly turn over no profits. Superficially this seems similar to what happened in 2000, however he also shows that there is some deep complicity between the journalistic sector and the speculative elements of today’s trading universe allied to a degradation of traditional measures of value, such as price/earnings ratios being superceded by price to revenue. For example, Facebook’s traditional PE is currently around 113, against a century long S&P500 average of 15, but its PR is 26 ($5bn revenue to market cap of $132bn), which is seemingly more palatable to speculators.

PE ten year average profits

The article makes the point that investors that push money into stocks like Twitter, that has yet to book a red cent in profit are speculators.

Would that we could bring back Benjamin Graham, whose 1949 book, “The Intelligent Investor,” explains how to value stocks. Warren Buffett calls it “by far the best book on investing ever written.”

Graham looked at the profits companies earned, not the promises of what they might someday make. That is, he was an investor.

Markets can benefit from speculators, who take risks that prudent people and institutions should avoid, but speculators should represent the edges, not the core of the market.

http://america.aljazeera.com/opinions/2013/12/stock-market-techbubble.html

 

Back to the WSJ’s Marketwatch. This post is a little strange, almost an homage to the deep fallibility of the human animal in totality, not just in regard to the prediction of financial crashes. The premise is very straightforward, there are always warnings, there have always been warnings, before the 1929 crash, 2000, 2008 the same. And they were all ignored. All of them. And it will be the same this time. It’s a heartfelt characterisation of a human process that will play out against pre-ordained personal prejudice and bias (naturally a bull, naturally a bear), regardless of what the rational analysis tells us.

Yes, you will read new warnings, like “ Soros doubles a bearish bet on the S&P 500, to the tune of $1.3 billion.” You may double down too. Or do nothing. You may listen to Hulbert, Gross, Gundlach, Ellis, Shilling, Roubini and Schiff. And still do nothing. Or something. You will listen, take it all in, and do what you always do. Your way, based not so much on all the warnings, the facts, evidence, predictions. Rather you’ll make your own decisions based on some inner consensus of voices that always guides you from deep inside your brain.

http://www.marketwatch.com/story/crash-of-2014-like-1929-youll-never-hear-it-coming-2014-02-19?dist=tbeforebell

 

Talking of George Soros and his $1.3billion Put, here are 2 opinions, first from the WSJ again and secondly from the strange folk at zerohedge (a site that is popular with aggressive opinion. Nearly all columns are written by “Tyler Durden” a nom de plume designed, with a somewhat wicked sense of humour, to enable industry insiders to pontificate anonymously without fear of jeopardising their employment). Both articles are strangely inconclusive actually, it may be a hedge, or it may be a sign that Soros is concerned about China and is anticipating a big fall. Still, an interesting marker to keep an eye on, Soros, after all, has a history of getting big bets right.

The Soros Put

The Soros Put

http://blogs.marketwatch.com/thetell/2014/02/17/soros-doubles-a-bearish-bet-on-the-sp-500-to-the-tune-of-1-3-billion/

http://www.zerohedge.com/news/2014-02-17/soros-put-hits-record-billionaires-downside-hedge-rises-154-q4-13-billion

 

Finally a somewhat left field and unscientific historical observation from David Brin.

His suggestion is that 1914 and 1814 were the real starting points of their respective centuries, with the Concert of Vienna 1814 leading to an extended era of peace on the European continent, shattered rudely by the horror of WW1 in 1914. As a thought experiment, and Brin is clear that this whole exercise is almost an amusing aside, we can speculate what might be brought forward from 2014. It could go both ways. Let’s hope common sense prevails.

http://www.bloombergview.com/articles/2013-12-31/what-if-the-21st-century-begins-in-2014-


5 even handed links about banking

Ok, firstly, in the interests of clarity, these individual links aren’t necessarily even handed when considered on their own singular merits. However, if you were to read through all the different viewpoints collected here you would find that this post, as a whole, is presenting opinions from both sides of the divide.

It is instructive, in my opinion, that considering the range of opinions here that not one writer is arguing for a retention of the status quo.

Banking

1. Rolling Stone – Everything is rigged: The biggest price fixing scandal ever

You are probably familiar with the Libor fixing scandal that has so far seen fines in the region of $1.5bn being levied against the world banking community. You may not be aware, however, that the class action suit filed against the banks by the funds, cities and institutional investors was dismissed recently using the argument that as the banks themselves were not competing over their Libor submissions (they were colluding), anti competition legislation could not be used to censure their activities.

So, colluding to fix the underlying rate which subsequently set the price of a large range of financial products was deemed to be non competitive behaviour, and hence out of scope for anti competitive regulations, because the daily act of submission of the Libor rates was supposed to be factual, and not competitive. As in, “yes we lied about our rates, in order to fix the prices of loads of products that we all competed for, but when we submitted our rates every day, well that act, that was never defined as competitive”  My words not theirs, but yes this was their defence, and it was a success.

Anyway the Libor affair is only the opening act of the piece. The main course is a scandal yet to really hit our screens. The latest arena of unbelievable larceny is another rate setting submission process relating to a benchmark called ISDAfix which sets the rates for interest rate swaps, a market currently worth in the region of 380 trillion dollars annually.

The Rolling Stone piece was written in April this year, the story is now starting to leach into the mainstream press being reported by the Daily Telegraph on the 2nd of August.

2. The Economist – Wall Street is back

This is a shorter article examining the difference between the European and American response to the 2008 banking crisis and what those changes mean in the longer term. With the crisis breaking in the US (remember the shock of Lehman’s) the European banks initially saw this as their chance to grab a foothold in the US investment banking markets.

It has not turned out that way. The US forced their banks to take the pain quickly and hence have returned to a serious footing more effectively than anticipated. For example Citigroup has already dealt with $143bn of loan losses, whereas no bank in Europe has set aside more than $30bn.

Nonetheless, the writer still asks whether this is a good thing or not, suggesting that an additional dose of competition in the US investment banking market might actually be a good thing.

3. New Economic Perspectives – “Let it be Done” An Alternative Narrative for Building what America Needs

I’m a 70’s child, so I missed all the brouhaha that must have accompanied the ditching of the gold standard. As a result I have never really asked myself any questions about the implications of a currency pegged to gold, or the alternative, the system we have today of pure fiat money. I’ve been familiar with the terms for sure, but now after reading this essay I realise that I had no true understanding at all.

The post posits a long but fascinating perspective that casts doubt on the likelihood that many people at all, including our policy makers, actually have a true understanding of the difference between the 2 systems. We initially get a solid, but succinct history of the journey to today’s money structures, followed by, for me at least, some truly brain bending implications of a fiat currency. I need to spend more time with these concepts before I’m comfortable telling you what I think but this is still a highly recommended read.

“…..if the government of the United States, for example, issues the fiat U.S. Dollars (prints them, or keystrokes them onto an electronic ledger), how do the citizens get hold of the Dollars so they have them to pay their taxes with? The answer is both obvious and startling: The sovereign government has to spend the Dollars after it issues them. And what does it spend the Dollars on? It buys things from the citizens—goods and services which the citizens willingly provide in exchange for the Dollars because they need the Dollars to pay their taxes with.”

4. The Rhodium Group – The EU Commission’s Latest Proposals for Troubled Banks

I keep my eye on the perspectives written here as I find they provide a great deal of the information missing from the public dialogue that is presented in the British press with regard to the banking regulations and landscape of the forthcoming European banking union.

Jacob Funk Kirkegaard, the author, tends to report from a position of an assumed and effective banking union being somewhat inevitable. This report lays out a couple of upcoming changes to the approach the EU will take to the issues of dealing with future banking failures. One is an inevitability as the EU constitution already has the power to mandate the rules for state aid to failing banks. These rules now create the reality that bank failures should be resolved by bail ins (Cyprus), as opposed to bail outs (Greece and Ireland).

5. Vice – Did Fabrice Tourre Really Create the Global Finance Crisis?

This story, written by Greg Palast, is particularly timely (probably not an accident) as the subject of the story has recently been found guilty as charged. Fabulous Fab, as he was known, was a junior player in the debacle that brought the financial world crashing down. At 29 he was a junior grunt, on loan to the Goldman client John Paulson, the man who originally put in place, along with Goldman itself, the deals that eventually caused the whole system to implode. No kidding, by the way, it was losses of nearly a billion dollars on this deal that pushed RBS over the edge.

This is the basic account of how Goldman and an investor named John Paulson secretly arranged to take both sides in a deal, netting themselves a vast profit ($3.5bn for Paulson, fees for Goldman).

Whilst promoting investment in a fund tied to the US mortgage market Paulson also secretly bet against the performance of said fund, cashing in as the market collapsed.

The kicker, and the reason why Palast wrote his article is that the only person held accountable to law for this, is the junior banker. The youngster on loan,  the one person involved, who clearly wasn’t an instigating force. You expect this kind of behaviour in a novel, not real life.

 

 


Time to revisit Enron: ask why, asshole.

I’ve just finished watching ‘the smartest guys in the room’ a documentary which goes through the detail of exactly what happened at Enron before it went bust. I’m surprised on so many levels, but perhaps mostly by how little I had understood of the scandal’s DNA, from the coverage at the time and since.

In my mind it had been an accounting scandal, the lunacy of mark to market combined with Arthur Anderson’s complicity and some market rigging of the Californian electricity markets. It was more than that though. Enron’s position as the poster boy of free market ideology (something I had missed) was a causal factor, not an accidental correlation as many seem to believe.

The scandal is also a testament to that ultimate human frailty, the happy decision to proceed with stupidity, largely because someone told us to, and everyone else was.

There is also a wider lesson here, something that resonates with the challenges that we currently face.

Those challenges can be stated as a question; how should we structure capitalism today?

To help answer that question it is instructive to ask exactly what Jeff Skilling did to get to the top? Jeff was an ideas man. The idea he introduced was this.

When faced with the difficulty of making sufficient returns on the production, sale and distribution of power (originally the market Enron played in was gas, electricity came later) Skilling took the company in a different direction. They became traders in the energy markets. This is easy to misunderstand because, of course, they always were trading in the energy markets.

The indication here is that we are talking of 2 different meanings of the words trader / trading.

Enron originally was a trader in the sense that they sourced, extracted and distributed the raw materials (gas) of energy production. They pulled it out of the ground and sold it.

Skilling added a 2nd, but wildly different, sense of the word trader. He turned them into a company that traded power in markets. Enron traders became traders in the sense that the stock exchange floor is populated by traders.

To be clear. They reduced the focus on creating a product and selling it to their, and their customers advantage, and became a drain instead, making money as a by-product of trades of energy commodities.

They became a financial company, instead of a company that makes products.

It is past time that this approach to wealth creation is removed from the ascendant position it currently occupies as the primary and most significant driver of western economies. Effecting this change is one of the most significant challenges facing modern capitalism.

We don’t need to lose the bankers. We don’t need the bankers to be put in the poor house. We just need to get them into a support role for production capital, rather than expending their energy in endless schemes to create new money without any real underpinning wealth and value. The zero sum game needs to stop, and it needs to stop NOW.

Analyst: You are the only financial institution that can’t produce a balance sheet or cash flow statement with their earnings…
Jeffrey Skilling: You, you, you… Well, uh… thank you very much. We appreciate it… asshole.

That quote was from a public earnings call with analysts. Skilling, the CEO, could not explain how Enron made money and publicly called the analyst an asshole for asking a very reasonable question. That is probably worth repeating.

The CEO could not explain how they made money and publicly called the analyst an asshole for asking a very reasonable question.

Enron was a black box. In one end went desires, out the other end came a set of what we now know were fraudulent earnings statements. And that’s before we even start to examine the horrendous rigging of the Californian electricity market and the actions of the CFO in hiding losses.

The documentary uncovered tapes of the Enron traders talking about the market manipulations in California.

The concept of arbitrages, as used here, is quite vital to the situation. Essentially California had been experimenting with deregulation of the energy markets. Arbitrage was the process whereby loopholes were found, within the remaining regulations, and exploited. Even though this seemed legal to the traders, on paper, it is clear how they actually viewed these practices.

“He just f—s California,” says one Enron employee. “He steals money from California to the tune of about a million.”

“Will you rephrase that?” asks a second employee.

“OK, he, um, he arbitrages the California market to the tune of a million bucks or two a day,” replies the first.

There is evidence that they asked producers to turn off production to create artificial supply shortages resulting in artificial increases in price.

“If you took down the steamer, how long would it take to get it back up?” an Enron worker is heard saying.

“Oh, it’s not something you want to just be turning on and off every hour. Let’s put it that way,” another says.

“Well, why don’t you just go ahead and shut her down.”

And then there are the comments that show just how little concern these people had for the impact of what they were doing, which, for what it is worth, and in my opinion, was behaving like a pack of feral little shits.

“They’re f——g taking all the money back from you guys?” complains an Enron employee on the tapes. “All the money you guys stole from those poor grandmothers in California?”

“Yeah, grandma Millie, man”

“Yeah, now she wants her f——g money back for all the power you’ve charged right up, jammed right up her a—— for f——g $250 a megawatt hour.”

Free market ideology and deregulation have been the corner stone of western economic policies since the days of Thatcher and Reagan. The economic theories of Carlota Perez show that these policies, that favour finance capital over production capital do indeed have a time and a place. I am not discounting their use in appropriate circumstances, but for now, in this part of the cycles their day is done and we need to urgently move on. If nothing else surely the Enron debacle proves such a point.

The last time we saw this changeover of ascendancy between finance and production capital was after the depression of the 1930’s. It took 13 years and a world war to complete. Let’s not be so stupid this time too.


Zero sum trading, markets and the clever people resource

In highly efficient markets, however, educated guesses are no more accurate than blind guesses   –  Daniel Kahneman

I am currently thoroughly enjoying Daniel Kahneman’s new book “Thinking, Fast and Slow”. I’m currently half way through, and have just finished his summary destruction of the common belief that the most successful stock pickers on Wall Street are the most skilled. Instead Kahneman shows quite cleanly, with real trade data and interpretation difficult to refute, that success is mostly due to chance and that those traders that trade the most, lose the most. The best strategy, it seems, is to barely trade at all!

The classic stock market model is that the share price reflects all the information that is known about a certain stock. When a share is traded, certainly amongst professionals, it is very likely that both sides of the trade have the same information available, they are just interpreting this information differently. Essentially one side must believe the price will rise, the other that it will fall.

So far, all so good, nothing odd going on? This seems to indicate that there must be a skill involved, the accurate analysis of the data. Well, to some extent this is true. Much like with skill in poker, which is realised as profit by seeking out and beating fundamentally weaker opponents, so there are investors with poor fundamental knowledge. There is  a class of trader that does indeed make a consistent profit from these ‘amateur’ investors.

And that’s fine, caveat emptor and all that.

Success in trading, however, needs to beat the market. You can buy the market in a number of different ways, tracker funds and the like, so  hedge funds et al, they have to beat the market otherwise they have no purpose. The scary question, therefore, is this…

Why does either side of the trade think that their analysis and interpretation of the data will be more accurate than the market itself? Pricing a stock is what a market does.

If a market produces stock that is priced correctly and reflects the true value of a company’s assets, then a market is said to be efficient. It has done its job. This of course is the underlying belief that underpins free market ideology, that markets know best.

Is that quote at the top making sense now?

In an efficient market, all the data correctly analysed will suggest that the stock is priced correctly, the analyst’s estimation of a stock’s value will match the market’s. Any assumption of movement will be a guess. Obviously, even in efficient markets stock prices change. Why is there no skill in accurately predicting which way it will go? Because you have no data to analyse, its all already reflected in the market price. There is no immediate profit in the trade of an accurately priced stock, and accurate predictions of future movements in price are by definition, lucky guesses.

So, do we have highly efficient market’s? No not really, but over the years since Thatcher and Reagan they have been getting closer and closer with every passing relaxation of market regulation. Each time we increase the freedom in a market,, the whole business of trading stock moves closer and closer to a game of roulette.

Nothing here tells us that these traders are fools or idiots, although of course I’m sure some of them are. No. Rather, stock picking and investment banking, has of recent years been the destination of many of our finest. The best brains. These are sharp intellects and they make good money.

This, then, is the, so what? Here is the true crime of the situation; that our very finest are dedicating their lives to a zero sum game.

For every successful trade, there is an unsuccessful trade. Zero sum. To society, no value.

This is a view mirrored in this fascinating profile of Ray Dalio, an investor in the mould of George Soros, the chief force behind Bridgewater Associates, a hedge fund with a great record, a fund seemingly beating the market over the long term. His company has been accused of cult practices and has been the butt of jokes, but nonetheless in many ways is very impressive! A fascinating article actually.

Today, C.E.O.s and star traders routinely demand vastly higher sums to keep up with their counterparts at hedge funds. In addition to distorting salary structures elsewhere, the rewards that hedge-fund managers reap draw some of the very brightest science and mathematics graduates to the industry. Can it really be in America’s interest to have so much of its young talent playing a zero-sum game?