Juggling Dynamite

For years I have been pointing out that on-line trading platforms are all about the providers making profits off of the gambling impulses of their users. The business model is about capitalizing on addictive behavior and profiting as users bet their brains out, especially on margin.

For the investment banks that have underwriting and proprietary trading desks, their discount brokerage arms are just another captive distribution channel for product as well as “dumb money” on whom they can front-run, gouge spreads, re-hypothecate and trim other hidden timing profits. As discounters competed for fresh blood over the past 15 years, transaction rates dropped from dollars to pennies, and finally a focus on who was giving away the most trades “for free”. The marketing around “valuable research and tools for pennies a trade” was always a deft maneuver to distract their victims customers from the true nature of the business. This morning new start-up Robinhood’s Co-Founders Vladimir Tenev and Baiju Bhatt let the cat out of the bag when discussing the future of trading stocks for free. They admit the truth about on-line trading: the business is a loan shark model, enticing people to place their bets “for free” on margin. The model is a no-brainer business for them because as everyone should know by now: the house always wins.  Here is a direct video link.

This morning, the world’s largest retailer Wal-Mart confirmed that sales fell for the fourth straight quarter, and net sales growth for 2014 was trailing to the lower end of its previous forecast range. At the same time, Caterpillar–heavy equipment seller to the world and traditional barometer of US GDP–continues to defy the “demand is picking up” crowd. CAT’s sales decline led the global economy into recession in 2008 and issued a similar warning in 2013 as shown in this chart.

Data source: Not Jim Cramer.com
The Canadian dollar–canary in the global growth mine–seems to agree. After a reflex rally in the early part of February, the downturn towards fair value has resumed.

A friend calls it going “native”. When wealthy people live in a world of such extreme privilege, special treatment and favor that they lose all sense of reason and perspective on the reality of life outside their world. They convince themselves that they deserve all of their benefits because they are smarter or harder working than others…without recognizing all of the privileged access, influence and often unfair advantage (government contracts, taxpayer bailouts, insider information, regulatory forbearance and rare opportunity) that flows their way.

Recently financial chieftains have publicly lamented in op-eds and interviews that they are being unfairly persecuted for their success. When journalist Kevin Roose donned a rented Tux and strolled into a ballroom of banking elites at dinner, he was able to witness the .0001% as they relaxed in a room of their peers. The display was predictable: Wall Street insiders in all of their true, entitled, colors.

“Recently, our nation’s financial chieftains have been feeling a little unloved. Venture capitalists are comparing the persecution of the rich to the plight of Jews at Kristallnacht, Wall Street titans are saying that they’re sick of being beaten up, and this week, a billionaire investor, Wilbur Ross, proclaimed that “the 1 percent is being picked on for political reasons.

Ross’s statement seemed particularly odd, because two years ago, I met Ross at an event that might single-handedly explain why the rest of the country still hates financial tycoons – the annual black-tie induction ceremony of a secret Wall Street fraternity called Kappa Beta Phi.

“I’d heard whisperings about the existence of Kappa Beta Phi, whose members included both incredibly successful financiers (New York City’s Mayor Michael Bloomberg, former Goldman Sachs chairman John Whitehead, hedge-fund billionaire Paul Tudor Jones) and incredibly unsuccessful ones (Lehman Brothers CEO Dick Fuld, Bear Stearns CEO Jimmy Cayne, former New Jersey governor and MF Global flameout Jon Corzine). It was a secret fraternity, founded at the beginning of the Great Depression, that functioned as a sort of one-percenter’s Friars Club. Each year, the group’s dinner features comedy skits, musical acts in drag, and off-color jokes, and its group’s privacy mantra is “What happens at the St. Regis stays at the St. Regis.” For eight decades, it worked. No outsider in living memory had witnessed the entire proceedings firsthand.”

See the whole recount of the evening here: I crashed a Wall Street secret society.