At some $5 trillion of daily transactions, foreign exchange is the world’s largest, most liquid market. Collusion and fraud in FX price fixing by bank traders has been terrifically profitable for them as they worked to rebuild from the debt bomb of 2008. It also made FX a perfect playpen for HFT algos to rip worldwide. Over the past 16 months in particular, we came to observe that the “carry trade” in FX has been the driving force behind daily price moves across equities, commodities and high yield debt. As Abenomics drove the Japanese Yen lower since December 2012, the Yen became the favorite place to borrow and speculate in global asset markets: lower Yen meant higher, higher and higher stocks. Yen strength on a given day, meant stocks lower, nearly without fail.
Case in point this week, as more deflationary data out of Japan confirms Abenomics is failing to stimulate exports and targeted inflation; the Yen has weakened once more in anticipation of yet more [ineffective] stimulus to come as stock markets surged to yet another maniacal high on relentlessly vapid volume. See: High-Frequency Traders chase currencies as stock volume recedes
All of this makes a complete mockery of free markets, price discovery, economic progress and investment prospects of course. Particularly embarrassing are all the clueless financial types trying to rationalize and justify an investment case for today’s historic stock valuations now second only to the peak of 1929 and 2000. ‘Dumb money’ is an understatement.
At least we can credit Micheal Lewis’s new book campaign and media blitz with finally bringing attention to the sinister forces that have been happily stealing the public’s breakfast, lunch and dinner the past 5 years. Hopefully it may also shame prosecutors and policy makers into taking long overdue action. For the moment at least, we are also seeing a scurry among some of the big banks to retreat from this space and distance themselves from coming lawsuits and deserved public anger.
Time will tell if any of the necessary reforms finally stick. Given years now of shocking abuses, it’s hard to be hopeful, and yet, exposed to enough sunlight, eventually corrupt regimes always do fail.
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