This is getting quite ridiculous, really. No more than a week ago, I had a post about the idiotic comments coming from Europe on “wolfpacks” and “wolfpack behaviors” that were “rampant in the marketplace.” Those comments about wolfpacks elicited a reaction from me:
It’s amazing what folks in his position do in reaction to market events. To me, it’s very clear that the market isn’t looking to take the Euro down, or as he put it “tear the weaker countries apart.” What the market wants is for Brussels to show they have some guts and draw a line in the sand with respect to their mantras of fiscal responsibility. Not just pay it lip service.
Now we have comments in the Financial Times from Wolfgang Schauble, Germany’s finance minister, who thinks markets are “really out of control.” He also thinks “the ratio of financial transactions to the real exchange of goods and services” needs to be regulated.
I guess my first question is define “out of control.” Are prices only supposed to go one way, depending on the prevailing political winds (up for stocks, down for commodities)? Puhleeze. That will get you just as far as a kid gets complaining about a dog eating their homework. Markets are a product of the people/institutions that participate in them, the products/services that are bought/sold/traded there and the rules that they can operate under. Rules that are made by people. So is he really saying people screwed up in setting up markets? Or that people screwed up in the enforcement of those rules? If that’s what he means, I’d buy it. Sadly, I don’t think that’s what he meant.
Which leads me to this asinine idea of regulating “the ratio of financial transactions to the real exchange of goods and services.” Who sets that ratio? And who says they know better than me? Or that they know better than you for that matter?
To me, this is clearly an outgrowth of some things I highlighted in another post. Let’s take what I said about CDS for example. There’s a huge disparity between inter-dealer trading volumes and client-based flow trading:
First, I have to say the volume differences between inter-dealer trading and non-dealer trading is staggering. But it leads me to some questions. Questions that need answers…
- What are the dealers doing? Is this how they are trying to make the market appear “liquid?”
- Is there another explanation? I’ve been toying around with this idea that there may be another reason completely unrelated to trading and market-making. The volumes are such to support the headcount in those departments – so this could be bureaucracy and bloat. It may be totally wrong, and a sign my medication needs to be upped dramatically, but I’m just saying there may be an alternative explanation.
I’m just trying to come up with ideas as to explain what’s going on, I don’t assume for a minute I’ve hit on anything. But sticking with CDS for a second, I picked this instrument strictly because it is, to borrow the words of Baudrillard (courtesy of Kevin Depew), a manifestation of the simulacra. CDS are a synthetic of an organic/cash instrument. But yet, we talk more about CDS than cash bonds. It’s like we talk more about Super Bowl bets than the actual game.
But there’s a point there. Sports betting is a derivative of the event: an event occurs, people are betting on its outcome. The same can be said of the markets. The issue is not in the market action, it’s that the market has become so concentrated – so cartel-like and oligopolistic – that when we need true liquidity to facilitate things like “Flash Crashes” or massive carry unwinds, it’s not there to be had. People have failed in their regulation of markets and in how regulations should be enforced.
So if Herr Schauble wants to talk about how to fix markets through better policy, fine. If it’s to punish market participants for participating in the market, like what he said here, the only words that come to mind come courtesy of Gordon Ramsay:
“You! Over there. Shut it! Now!”