The Masters Of The Universe Are Financial Predators And We Are Prey

The inflation versus deflation debate is about to become animated. Unfortunately most of it is lip-sync, creating the illusion of real debate, scripted to play the emotions of the public. Be wary of the conflicts of interest of the players. There are a lot of puppeteers in the background. In other words, it’s all just more of the ‘market on a string’ phenomenon, something along the lines of the present Bull versus Bear Market discussion, much ado about nothing.

An article (”A fate worse than debt”) published eight months ago in The Economist explained the reality.

Consumers and companies may be forced to cut back.

IT IS ugly, but deleveraging is the word of the moment. Financial institutions, desperate to repair the damage inflicted on their balance-sheets by mortgage-related securities, sell assets. In doing so, they exacerbate the problem. Forced sales push down the prices of assets, worsening the balance-sheets of other investors, forcing more asset sales, and so on. In the end, the government is the only entity left in the game with a balance-sheet strong enough to keep buying.

… What hurts finance affects the rest of the economy in spades. Tim Bond, of Barclays Capital, reckons that, thanks to the gearing effect, a shortfall of bank capital of around $170 billion may reduce the potential supply of credit by $1.7 trillion.

… If consumers start to save more or borrow less, spending suffers. In the last three months, America has seen the weakest car sales since 1993, according to Bloomberg. A general decline in demand will cause businesses to shed jobs, creating further falls in demand and more bad debts… Once started, the process is hard to stop. “What the financial and household sectors are doing is unwinding more than ten years of a credit boom,” says George Magnus, an economist at UBS. “The idea that they can rid themselves of this problem in a matter of months is pie in the sky.”

… Even firms that are not heavily in debt may think twice about expanding. According to Morgan Stanley, changes in bankers’ attitudes to lending tend to lead business investment by three quarters. If the past pattern holds good, by the summer of next year investment may be falling at an annual rate of more than 10%. That will further depress economic growth… The danger is of a “second-round effect”, as the crisis in finance affects the economy, leading to further problems in finance. Mortgages may be the problem asset of the moment but next year the worry may be about credit cards, car loans and corporate debt… The Bush administration’s rescue plan aims to arrest this deleveraging cycle. But it will not be easy.

As we move into the summer of 2009 that was forecasted so well in The Economist article, the Obama Administration is now caught up with financial - leading to economic - problems related to credit cards, car loans and corporate debt.

Meanwhile, those with an axe to grind with respect to commodities, penny stocks and the like are quite animated. Listen, perhaps, but don’t take your focus off what is all-important, which is the short-term trend and momentum of capital market prices.

Unstable markets require trading agility, which is the new paradigm in portfolio management because all money is now “hot”.

But even when the fire is eventually put out, i.e, when debts are brought back in line with our ability to service them, I anticipate that money will remain warm. You see, no longer do people blindly trust their governments, where public sector finance ministers are joined at the hip to private sector central bankers. Where are the checks and balances? Until the basic conflict of interest issue is settled, no longer will the taxpayer accept these so-called public-private partnerships.

If, as and when the people are able to see that they are working for their own personal interests, and not those of bankers, money will chill, i.e., stable markets and buy-and-hold investing will return. But not before.

In the 1970’s, I was a trader of equity market prices with a time horizon of one to three years, and bankers would say I was too active. Then from 1981-82 until October 19, 1987, my average holding period dropped to about one year, which again was frowned upon by bankers. From Black Monday 1987 until 2H1999, as globalization heated up, my decision-making time frame had plummeted to three months to one year. With the Y2K experience and the Bear Market of 2000-2002, my average trade was down to three weeks to three months. From the summer of 2007, however, I dropped down to averaging trades between one day and three weeks.

By now the bankers and their friends who run the mutual, hedge and pension funds hate people like me. You see, if we can take a profit of five or six percent in a period of a week and a half every thirteen weeks (i.e., a quarter year), and they can’t, it’s a new ball game. What is particularly offensive to them is the fact that in my company I win with only a small percentage of my capital exposed to the risks of dealing with them. By controlling risk, I control my positions; hence I win and they lose.

But, these masters of the universe are not in the habit of losing. So, now they want to change the rules: eliminate short-selling; burden us with transaction taxes; have their Fed take over the SEC; force small independent banks out of business; demand transparency among the record-keeping systems of all nations; and possibly confiscate gold.

If this was a two-way street, all would be fine. But it is not; it is Wall Street, where bankers expect us to go to them, and where the marketplace is rigged in their favor. They know everything about us; we know almost nothing about them. We must borrow from them; place our assets under their control; be insured by them; buy financial products and advisory services from them; and on and on.

They are advisors to us and are also principal and agent in our personal transactions. For their profit, they trade against us in the capital market, which is not something an advisor or agent ought to be permitted to do in a modern society.

In no other aspect of our lives is such blatant conflict of interest permitted - not in government, nor business, nor the professions. But then, as I say, these are the masters of the universe. They are financial predators and we are prey.

But, “we” is not “me”. Not at all. I fight back, and now I teach others how to fight back. And now others are teaching others who are teaching others.

As the Community grows - from molehills, perhaps, to mountains - at some point we will take the high ground, and we the people will become masters of our own universe. We will then set new rules. We will elect our own choice of representatives to government and once again there will be government by the people, for the people - not by bankers, for the bankers and their friends and families.

Even the employees of banks today are now seeing the light. Yes, many have been terminated, but many others have quit, and are now speaking up. Whistle-blowing is in vogue. Just as the Iron Curtain of the Soviet Union collapsed suddenly, the walls of Humungous Bank & Broker (HB&B) are breaking down, and will soon be breached.

Their leaders can see the trading volumes disappear and even the percentage of that rise in the public’s use of electronic brokerages. The HB&B CEO’s can hear the calls of politicians - “Off with their heads” - “Eliminate the Fed” - “Taxpayer rip-off” - and so forth - so they know the end is near. In response, they are trying to ram through quick legislation that would buttress their position. But they are on the run. Little by little, the people are advancing.

When our trading time frames get down to hours and even minutes, the leaders of HB&B will feel the tips of our bayonets as it were. In hand to hand combat, our sheer numbers will overwhelm them. Unable to win and to eat what they kill, their elite traders will quit, and their leaders will wave the surrender flag.

For two months they have been waving a red flag at us, trying to invite us, as Bulls, to fight on their terms, telling us about ‘green shoots’ and all, record gains in the market and all, hoping we return to the buy-and-hold style of trading. But, the trend and momentum indicators are telling us their advance is tired, and the likelihood of their retreat is near. They are now throwing us gold pieces as a distraction while they try to re-capitalize their depleted balance sheets. It’s laughable, really.

The perfect storm is about to hit. I wonder which of their ships is next to sink or their armies to surrender.

This Interactive Performance Comparison Chart for the past 60 days indicates that the best chance of survival, at least in terms of changing perception, is Bank of America (BAC) and Citigroup (C), while Keycorp (KEY) is the riskiest and SunTrust Banks (STI) and US Bancorp (USB) are next riskiest.

http://tinyurl.com/odyjqh

I think the results of this phase of the battle will be known in the next sixty days. Meanwhile we are almost finished with our put writes strategy, and have moved into one of selling call spreads, while awaiting a put purchases strategy for employment when the market confirms a pull-back.

Remember; our average trade is now just one day to three weeks, and we are anticipating going into hand to hand trench battles that will last some hours and possibly minutes.

Be ready. Be strong.

It is so fitting on this Memorial Day to be thinking of our fallen comrades as we prepare to engage the enemy.

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Comment by DJ Curcio

2009-05-25 02:45:02

How can we get broker/dealers - now banks with unlimited access to free capital via the Fed out of the business of traiding against us, and proprietary trading without an armed revolution? Seems impossible to me. They own the politicians and we are nothing but peasants to be pleased with festivals, bread and chocolate, and some occassional fireworks. Americans are ignorant and choose to stay that way - much like in the Matrix - the majority is asleep in a controlled pleasure-filled dream state and they do not want to wake up.

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