Juggling Dynamite

As we listen to this very lucid discussion of what Chinese policy makers need to do in order to allow a necessary re-balancing in the world’s second largest economy, we should realize that precisely the same revelation and new approach is needed in the world’s largest economy today as well.

Patrick Chovanec, Chief Strategist at Silvercrest Asset Management, says the buildup of bad debts in China is leading to less available credit to grow the economy. Here is a direct video link.

The fact that many people are saying these practices don’t worry them, is a testament to how clueless the consensus view is today. Let’s face facts. We know the HFT firms are making a fortune skimming money off the market. We know they have increased the risk of crashes and dislocations significantly. We know they have undermined confidence in public markets, and we know that the exchanges have so far been happy enough (foolishly) to degrade their integrity in order to pick up the change HFT’s toss at them as they scream wildly round the track. We know that HFT is violating the spirit of insider-trading bans by buying access to information about orders that other investors do not have. See: FBI investigating high speed trading outfits.

But we should make no excuses here: investors get zero from HFT–except greater capital risk. If HFT is to be condoned it should be restricted to separate exchanges where computers can play high risk games, battling and duping each other far away from traditional traders and investors. The algos have come to use the public as unwitting camouflage at their disposal. The fact that many of them are working at tax-payer backed “too big to fail or jail” banks is further insult to injury. Time to separate banks from trading, restrict algos to their own exchange, increase the bid ask spread and cut the parasites loose.

“The risk isn’t so much about the small investor,” he said. “The risk is all these different high-frequency traders playing a game with their algorithms, trying to trick each other, to get in front of each other to make that trade.” Here is a direct video link.

For any of us that hoped people might have learned a little wisdom or self-preservation bias from the pain of the last two equity market implosions…we would be wrong. Emboldened by taxpayer bailouts, market participants heading into March were more highly levered than at any other time since this secular bear began in in 2000 (red line below).

Amazing, but not surprising to see, that after trillions of dollars tossed into the banks (money that was desperately needed in infrastructure, energy, education, food and water management, etc) market participants today have less net equity at the end of February than ever before, graphed here by dshort.com.

We can all thank central banks and Wall Street-subservient politicians for all they have done in helping to prolong and magnify the most unfavorable, dangerous investment climate in history.