Thursday, June 7, 2012
It's all smoke and mirrors
An economic rundown or is that meltdown?
As I predicted the markets are back up today (this was written yesterday haven't checked today) after a usual and predictable dump they took at the end of the week. Hum just long enough for those in the know to cash out their insurance policies before the climb back up. That's how derivatives work you know. And nobody on the planet without the knowledge of how this system works could eek out the most meager of gains. For you see non of this is based on any realistic value but perceived worth. And as was mentioned before in prior posts only those with the fastest of super computers have the hope of a gain. In this case it's like playing both sides of the fence. A stock is purchased or not and a hedge (insurance) against its' downfall is bought about the same time. This generally goes in six month cycles because that is the minimum amount of time to hold a stock to avoid long term capital gains taxes. All of this information is neatly programed into the aforementioned computer and trades are made without so much as a keystroke. True, adjustments are made from time to time depending global circumstances and opportunities unforeseen by the program. But none of this is sustainable in the long run. Like a casino the bank almost always wins but in this case the players are running out of money and the bank isn't floating any more marks.
Another note on hedges, that is in case you didn't know or forgot how they work. Hedges are like an insurance policy in the event a stock bond or contract takes a nose dive. They were originally started as an insurance against market price drops for farmers. This dates back as far as the 1590s so this is nothing new. What is new is how they (derivatives a type of hedge) are used at the present time in our financial markets. What is disheartening is that an investor need not own the asset to buy a hedge or even a percentage of that asset. This is akin to the "Bucket shops" of the 1920s that were outlawed and for good reason. When a broker or investment house has a hard time explaining them to an average investor and it takes a complex computer program to figure them out then it's time to avoid.
National economic picture
On a national level there are those that scream about the deficit. But realistically we could be at twice the GDP and still be in fine shape. The problem is with revenues. By cutting taxes for so long we have little way to payback the mortgage on this country. Small tax cuts are fine when the economy is humming along, it puts a bit of a punch and helps to keep things moving. And with obscenely low interest rates which was meant to spur business activity didn't help because of low demand. Why would a business want to expand without increased demand? As you can see we're stuck in a Catch 22. No demand equals no need to hire and more incentive for layoffs to increase shrinking profit margins. Must look good to the shareholders at all costs even if you have to fudge the books as we've seen. But again that leads to lack of demand and more importantly lack of trust.
And as all of this is playing out those in the financial markets continue to play at the casino with puts and calls, derivatives and hedges, A shares and B shares while the rest of us suffer. This is almost a lost generation. What student graduating from college with a mountain of debt could ever imagine or even hope to marry buy a house and start a family in these economic times?
The parking lot index
Presented as an anecdotal indicator of our local economy. The scale is quite easy to understand. Approximately 20 cars are visible from this place. When there are 13 or more cars present during the day in the average work week then the economy is doing poorly. Anything 10 or below indicates the economy is improving. Factor -1 for someone on vacation.
Today's index stands at 12.