The Unsustainable US Financial Sector

According to Bloomberg, the vast majority of the Big Five banks’ profits consisted of a taxpayer subsidy — the Too Big To Fail guarantee. If the Too Big To Fail banks had to lend at the rates offered to their non-Too Big to Fail competitors, their profits would be severely shrunk (in some cases, to a net loss):

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What does that mean?

That means that the American financial sector is a zombie, existing on the teat of the taxpayer.

It means the huge swathes of liquidity spent on saving the financial sector are ultimately good money chasing after bad.

As Bloomberg notes:

The U.S. financial industry — with almost $9 trillion in assets, more than half the size of the U.S. economy — would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.

Neither bank executives nor shareholders have much incentive to change the situation. On the contrary, the financial industry spends hundreds of millions of dollars every election cycle on campaign donations and lobbying, much of which is aimed at maintaining the subsidy. The result is a bloated financial sector and recurring credit gluts.

This is extremely prescient stuff. The Fed since 2008 has reinflated the old bubbles, while allowing the same loot-and-pillage disaster-corporatist financial model to continue.

It is insane to repeat the same methods and expect different results. This credit glut, this new boom that has seen stocks rise closer and closer to their pre-crisis high (which may soon be exceeded) will just lead to another big 2008-style slump, just as the Fed’s reinflation of the burst tech bubble led to 2008 itself. This time the spark won’t be housing, it will be something else like an energy shock, or a war. Something that the Federal Reserve cannot directly control or fix by throwing money at it.

America (and the Western world in general) post-2008 needed real organic domestic growth built on real economic activity, not a reinflated bubble that let the TBTF financial sector continue to gorge itself into oblivion. 

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The High Frequency Trading Debate

A Senate panel is looking into the phenomenon of High Frequency Trading.

Here’s the infamous and hypnotic graphic from Nanex showing just how the practice has grown, showing quote volume by the hour every day since 2007 on various exchanges:

It is a relief that the issue is finally being discussed in wider venues, because we are witnessing a stunning exodus from markets as markets mutate into what we see above, a rampaging tempestuous casino of robotic arbitrageurs operating in millisecond timescales.

The conundrum is simple: how can any retail investor trust markets where billions of dollars of securities are bought and sold faster than they can click my mouse and open my browser, or pick up the phone to call their broker?

And the first day of hearings brought some thoughtful testimony.

The Washington Post notes:

David Lauer, who left his job at a high-frequency trading firm in Chicago last year, told a Senate panel that the ultra-fast trades that now dominate the stock market have contributed to frequent market disruptions and alienated retail investors.

“U.S. equity markets are in dire straits,” Lauer said in his written testimony.

One man who I think should be testifying in front of Congress is Charles Hugh Smith, who has made some very interesting recommendations on this topic:

Here are some common-sense rules for such a “new market”:

1. Every offer and bid will be left up for 15 minutes and cannot be withdrawn until 15 minutes has passed.

2. Every security–stock or option–must be held for a minimum of one hour.

3. Every trade must be placed by a human being.

4. No equivalent of the ES/E-Mini contract–the futures contract for the S&P 500 — will be allowed. The E-Mini contract is the favorite tool of the Federal Reserve’s proxies, the Plunge Protection Team and other offically sanctioned manipulators, as a relatively modest sum of money can buy a boatload of contracts that ramp up the market.

5. All bids, offers and trades will be transparently displayed in a form and media freely available to all traders with a standard PC and Internet connection.

6. Any violation of #3 will cause the trader and the firm he/she works for to be banned from trading on the exchange for life–one strike, you’re out.

However, I doubt that any of Smith’s suggestions will even be considered by Congress (let alone by the marketplace which seems likely to continue to gamble rampantly so long as they have a bailout line). Why? Money. Jack Reed, the Democratic Senator chairing the hearings, is funded almost solely by big banks and investment firms:

It seems more than probable that once again Congress will come down on the side of big finance, and leave retail investors out in the cold. Jack Reed opened a recent exchange on Bloomberg with these words:

Well I believe high frequency trading has provided benefits to the marketplace, to retail investors, etcetera.

Yet retail investors do not seem to agree about these supposed benefits.

Retail investors just keep pulling funds:

Reed failed to really answer this question posed by the host:

Senator, US equity markets are supposed to be a level playing field for all kinds of investors; big companies, small companies and even individuals. That said, how is it possible for an individual investor ever to compete with high frequency traders who buy and sell in milliseconds. Aren’t individuals always going to be second in line essentially to robots who can enter these orders faster than any human possibly can?

The reality is that unless regulators and markets can create an environment where individual investors can participate on a level playing field, they will look for alternative venues to put their money. It is in the market’s interest to create an environment where investors can invest on a level playing field. But I think the big banks are largely blinded by the quick and leverage-driven levitation provided by high frequency trading.

Can Banking Regulation Prevent Stupidity?

In the wake of J.P. Morgan’s epic speculatory fail a whole lot of commentators are talking about regulation. And yes — this was speculation — if Dimon gets to call these activities “hedging portfolio risk“, then I have the right to go to Vegas, play the Martingale roulette system, and happily call it “hedging portfolio risk” too, because hey — the Martingale system always wins in theory.

From Bloomberg:

The Volcker rule, part of the Dodd-Frank financial reform law, was inspired by former Federal Reserve Chairman Paul Volcker. It’s supposed to stop federally insured banks from making speculative bets for their own profit — leaving taxpayers to bail them out when things go wrong.

As we have said, banks have both explicit and implicit federal guarantees, so the market doesn’t impose the same discipline on them as, say, hedge funds. For this reason, the Volcker rule should be as airtight as possible.

Proponents of regulation point to the period of relative financial stability between the enactment of Glass-Steagall and its repeal. But let’s not confuse Glass-Steagall with what’s on the table today. It’s a totally different ball game.

To be honest, I think the Volcker rule is extremely unlikely to be effective, mostly because megabanks can bullshit their way around the definitional divide between proprietary trading and hedging. If anything, I think the last few days have proven the ineffectiveness, as opposed to the necessity of the Volcker rule. Definitions are fuzzy enough for this to continue. And whatever is put in place will be loopholed through by teams of Ivy League lawyers. What is the difference between hedging and speculation, for example? In my mind it’s very clear — hedging is betting to counterbalance specific and explicit risks, for example buying puts on a held equity. In the mind of Jamie Dimon, hedging is a fuzzy form of speculative betting to guard against more general externalities. I know that I am technically right, and Dimon is technically wrong, but I am also fairly certain that Dimon and his ilk can bend regulators into accepting his definition.

What we really need is a system that enforced the Volcker principle:

As Matt Yglesias notes:

Once bank lawyers finish finding loopholes in the detailed provisions, whatever they prove to be, the rule will probably have little meaningful impact.

The problem with principles-based regulation in this context is that you might fear that banks will use their political influence to get regulators to engage in a lot of forebearance. The problem with rules-based regulation in this context is that it’s really hard to turn a principle into a rule.

And I fear that nothing short of a return to Glass-Steagall — the explicit and categorical separation of investment and retail banking — will even come close to enforcing the Volcker principle.

Going even further, I am not even sure that Glass-Steagall will assure an end to this kind of hyper-risky activities that lead to crashes and bailouts.

The benefits of the Glass-Steagall era (particularly the high-growth 1950s and 1960s) were not solely derived from banking regulation. America was a very different place. There was a gold exchange standard that limited credit creation beyond the economy’s productive capacity (which as a Bank of England study recently found is correlated with financial and banking stability). But beyond that, America was creditor to the world, and an industrial powerhouse. And I’m sure Paul Krugman would hastily point out that tax revenues on the richest were as high as 90% (although it must be noted that this made no difference whatever for tax revenues). And we should not forget that it was that world that give birth to this one.

Anyone who worked in finance in the decade before Glass-Steagall was repealed knows that prior to Gramm-Leach-Bliley the megabanks just took their hyper-leveraged activities offshore (primarily to London where no such regulations existed). The big problem (at least in my mind) with Glass-Steagall is that it didn’t prevent the financial-industrial complex from gaining the power to loophole and lobby Glass-Steagall out of existence, and incorporate a new regime of hyper-leverage, convoluted shadow banking intermediation, and a multi-quadrillion-dollar derivatives web (and more importantly a taxpayer-funded safety net for when it all goes wrong: heads I win, tails you lose).

I fear that the only answer to the dastardly combination of hyper-risk and huge bailouts is to let the junkies eat dirt the next time the system comes crashing down. You can’t keep bailing out hyper-fragile systems and expect them to just fix themselves. The answer to stupidity is not the moral hazard of bailouts, it is the educational lesson of failure. You screw up, you take more care next time. If you’re bailed out, you just don’t care. Corzine affirms it; Iksil affrims it; Adoboli affirms it. And there will be more names. Which chump is next? If you’re trading for a TBTF bank right now — especially if your trading pattern involves making large bets for small profits (picking up nickels in front of steamrollers) — it could be you. 

I fear that the only effective regulation was that advocated way back before Gramm-Leach-Blilely by Warren G and Nate Dogg:

We regulate any stealing off this property. And we’re damn good too. But you can’t be any geek off [Wall] street, gotta be handy with the steel, if you know what I mean, earn your keep.

In other words, the next time the fragilista algos and arbitrageurs come clawing to the taxpayer looking for a bailout, the taxpayer must kick them off the teat.

UPDATE:

Some commenters on Zero Hedge have made the point that this is not a matter of stupidity so much as it is one of systemic and purposeful looting. Although I see lots of evidence of real stupidity (as I described yesterday), even if I am wrong, I know that to get access to the bailout stream banks have to blow up and put themselves into a liquidity crisis, and even if they think that is an easy way to free cash it’s still pretty stupid because eventually — if not this time then next time — they will end up in bankruptcy court. It would be like someone with diabetes stopping their medication to get attention…

Double or Nothing: How Wall Street is Destroying Itself

There’s nothing controversial about the claim— reported on by Slate, Bloomberg and Harvard Magazine — that in the last 20 years Wall Street has moved away from an investment-led model, to a gambling-led model.

This was exemplified by the failure of LTCM which blew up unsuccessfully making huge interest rate bets for tiny profits, or “picking up nickels in front of a streamroller”, and by Jon Corzine’s MF Global doing practically the same thing with European debt (while at the same time stealing from clients).

As Nassim Taleb described in The Black Swan this strategy — betting large amounts for small frequent profits — is extremely fragile because eventually (and probably sooner in the real world than in a model) losses will happen (and, of course, if you are betting big, losses will be big). If you are running your business on the basis of leverage, this is especially dangerous, because facing a margin call or a downgrade you may be left in a fire sale to raise collateral.

This fragile business model is in fact descended from the Martingale roulette betting system. Martingale is the perfect example of the failure of theory, because in theory, Martingale is a system of guaranteed profit, which I think is probably what makes these kinds of practices so attractive to the arbitrageurs of Wall Street (and of course Wall Street often selects for this by recruiting and promoting the most wild-eyed and risk-hungry). Martingale works by betting, and then doubling your bet until you win. This — in theory, and given enough capital — delivers a profit of your initial stake every time. Historically, the problem has been that bettors run out of capital eventually, simply because they don’t have an infinite stock (of course, thanks to Ben Bernanke, that is no longer a problem). The key feature of this system— and the attribute which many institutions have copied — is that it delivers frequent small-to-moderate profits, and occasional huge losses (when the bettor runs out of money).

The key difference between modern business models, and the traditional roulette betting system is that today the focus is on betting multiple times on a single outcome. By this method (and given enough capital) it is in theory possible to win whichever way an event goes. If things are going your way, it is possible to insure your position by betting against your initial bet, and so produce a position that profits no matter what the eventual outcome. If things are not going your way, it is possible to throw larger and larger chunks of capital into a position or counter-position again and again and again —mirroring the Martingale strategy — to try to compensate for earlier bets that have gone awry (this, of course, is so often the downfall of rogue traders like Nick Leeson and Kweku Adoboli).

This brings up a key issue: there is a second problem with the Martingale strategy in the real world beyond the obvious problem of running out of capital. You can have all the capital in the world (and thanks to the Fed, the TBTF banks now have a printing-press backstop) but if you do not have a counter-party to take your bets  (and as your bets and counter-bets get bigger and bigger it by definition becomes harder and harder to find suitable counter-parties) then you are Corzined, and you will be left sitting on top of a very large load of pain (sound familiar, Bruno Iksil?)

The obvious real world example takes us back to the casino table — if you are trying to execute a Martingale strategy starting at $100, and have lost 10 times in a row, your 11th bet would have to be for $204,800 to win back your initial stake of $100. That might well exceed the casino table limits — in other words you have lost your counter-party, and are left facing a loss far huger than any expected gains.

Similarly (as Jamie Dimon and Bruno Iksil have now learned to their discredit) if you have built up a whale-sized market-dominating gross position of bets and counter-bets on the CDX IG9 index (or any such market) which turns heavily negative, it is exceedingly difficult to find a counter-party to continue increasing your bets against, and your Martingale game will probably be over, and you will be forced to face up to the (now exceedingly huge) loss. (And this recklessness is what Dimon refers to as “hedging portfolio risk“?)

The really sickening thing is that I know that these kinds of activities are going on far more than is widely recognised; every time a Wall Street bank announces a perfect trading quarter it sets off an alarm bell ringing in my head, because it means that the arbitrageurs are chasing losses and picking up nickels in front of streamrollers again, and emboldened by confidence will eventually will get crushed under the wheel, and our hyper-connected hyper-leveraged system will be thrown into shock once again by downgrades, margin calls and fire sales.

The obvious conclusion is that if the loss-chasing Martingale traders cannot resist blowing up even with the zero-interest rate policy and an unfettered fiat liquidity backstop, then perhaps this system is fundamentally weak. Alas, no. I think that the conclusion that the clueless schmucks at the Fed have reached is that poor Wall Street needs not only a lender-of-last-resort, but a counter-party-of-last-resort. If you broke your trading book doubling or quadrupling down on horseshit and are sitting on top of a colossal mark-to-market loss, why not have the Fed step in and take it off your hands at a price floor in exchange for newly “printed” digital currency? That’s what the 2008 bailouts did.

Only one problem: eventually, this approach will destroy the currency. Would you want your wealth stored in dollars that Bernanke can just duplicate and pony up to the latest TBTF Martingale catastrophe artist? I thought not: that’s one reason why Eurasian creditor nations are all quickly and purposefully going about ditching the dollar for bilateral trade.

The bottom line for Wall Street is that either the bailouts will stop and anyone practising this crazy behaviour will end up bust — ending the moral hazard of adrenaline junkie coke-and-hookers traders and 21-year-old PhD-wielding quants playing the Martingale game risk free thanks to the Fed — or the Fed will destroy the currency. I don’t know how long that will take, but the fact that the dollar is effectively no longer the global reserve currency says everything I need to know about where we are going.

The bigger point here is whatever happened to banking as banking, instead of banking as a game of roulette? You know, where investment banks make the majority of their profits and spend the majority of their efforts lending to people who need the money to create products and make ideas reality?

Does Jamie Dimon Even Know What Hedging Risk Is?

From Bloomberg:

J.P Morgan Chief Executive Officer Jamie Dimon said the firm suffered a $2 billion trading loss after an “egregious” failure in a unit managing risks, jeopardizing Wall Street banks’ efforts to loosen a federal ban on bets with their own money.

The firm’s chief investment office, run by Ina Drew, 55, took flawed positions on synthetic credit securities that remain volatile and may cost an additional $1 billion this quarter or next, Dimon told analysts yesterday. Losses mounted as JPMorgan tried to mitigate transactions designed to hedge credit exposure.

Having listened to the conference call (I was roaring with laughter), Jamie Dimon sounded very defensive especially about one detail: that the CIO’s activities were solely in risk management, and that its bets were designed to hedge risk. Now, we all know very well that banks have been capable of turning “risk management” into a hugely risky business — that was the whole problem with the mid-00s securitisation bubble, which made a sport out of packaging up bad debt and spreading it around balance sheets via shadow banking intermediation, thus turning a small localised risk (of mortgage default) into a huge systemic risk (of a default cascade).

But wait a minute? If you’re hedging risk then the bets you make will be cancelled against your existing balance sheetIn other words, if your hedges turn out to be worthless then your initial portfolio should have gained, and if your initial portfolio falls, then your hedges will activate, limiting your losses. A hedge is only a hedge if it covers your position. That is how hedging risk works. If the loss on your hedge is not being cancelled-out by gains in your initial portfolio then by definition you are not hedging riskYou are speculating.

Dimon then stuck his foot in his mouth even more by claiming that the CIO was “managing fat tails.” But you don’t manage fat tails by making bets with tails so fat that a change in momentum produces a $2 billion loss. You manage tail risk by making lots and lots of small cheap high-payoff bets, which appears to be precisely the opposite of what the CIO and Bruno Iksil was doing:

The larger point, though, is I think we all know damn well what Jamie Dimon and Bruno Iksil were doing — as Zero Hedge explained last month, they were using the CIO’s risk management business as a cover to reopen the firm’s proprietary trading activities in contravention of the current ban.

Personally, I have no idea why the authorities insist on this rule — if J.P. Morgan want to persist with a hyper-fragile prop trading strategy that rather than hedging against tail risk actually magnifies risk, then there should be nothing to stop them from losing their money. After all, these goons would quickly learn to stop acting so incompetent without a government safety net there to coddle them.

The fact that Dimon is trying to cover the tracks and mislead regulators is egregious, but that’s what we have come to expect from this den of vipers and thieves.

Shadow Banking 101

This article originally appeared in the May 1st edition of The Occupied Times.

Meet James. James bought a house. It cost him $150,000, of which $30,000 had come from his own savings, leaving him with a $120,000 30-year fixed-rate mortgage from the WTF Bank, with a final cost (after 30 years of interest) of $200,000. Now, up until the ’80s, a mortgage was just a mortgage. Banks would lend the funds and profit from interest as the mortgage is paid back.

Not so today. James’s $200,000 mortgage was packaged up with 1,000 other mortgages into a £180 million MBS, (mortgage backed security), and sold for an immediate gain by WTF Bank to Privet Asset Management, a hedge fund. Privet then placed this MBS with Sacks of Gold, an investment bank, in return for a $18 billion short-term collateralised (“hypothecated”) loan. Two days later Sacks of Gold faced a margin call, and so re-hypothecated this collateral for another short-term collateralised $18 billion loan with J.P. Morecocaine, another investment bank. Three weeks later, a huge stock market crash resulted in a liquidity panic, resulting in more margin calls, more forced selling, which left Privet Asset Management — who had already lost a lot of money betting stocks would go up — completely insolvent.

Confused?

You should be. This is of course a fictitious story. But the really freaky thing is that this kind of scenario — the packaging up of fairly ordinary debt into exotic financial products, which are then traded by hundreds or even thousands of different parties, has occurred millions and millions of times. And it is extremely dangerous. When everybody is in debt to everybody else through a complex web of debt one small shock could break the entire system. The $18 billion debt that Privet owed to Sacks of Gold could be the difference between Sacks of Gold having enough money to survive, or not survive. And if they didn’t survive, then all the money that they owed to other parties, like J.P. Morecocaine, would go unpaid, thus threatening those parties with insolvency, and so on. This is called systemic risk, and shadow banking has done for systemic risk what did the Beatles did for rock & roll: blow it up, and spread it everywhere.

Deregulation

The banking system has blown up multiple times in history, when depositors have panicked and withdrawn funds en masse in what is known as a bank run. So traditional banks have become party to a lot of regulations. For example, banks must keep on hand 10% of deposits as a reserve. This reserve is a buffer, so that if depositors choose to withdraw their money they can do so without the bank having to call in loans. Of course, banks can still suffer from a liquidity panic if a large proportion of their depositors choose to withdraw their money. Under those circumstances, traditional banks have access to central bank liquidity — short term loans from the central bank to guarantee that they can pay depositors.

Shadow banking arose out of bankers’ desire to not be bound by these restrictions, and so to create more and more and more financial products, and debt, without the interference or oversight of regulators. Of course, this meant that they did not have access to central bank liquidity, either.

Essentially, shadow banking is still banking. It is a funnel through which money travels, from those who have an excess of it and wish to deposit it and receive interest payments, to those who want to borrow money. Shadow banking institutions are intermediaries between investors and borrowers. They can have many names: hedge funds, special investment vehicles, money market funds, pension funds. Sometimes investment banks, retail banks and even central banks. The difference is that in the new galaxy of shadow banking, these chains of intermediation are often extremely complex, the shadow bank does not have to keep reserves on hand, and shadow banking institutions raise money through securitisation, rather than through accepting deposits.

Securitisation

With securitisation, the financial industry creates the products which populate the shadow banking ecosystem, and act as collateral. Rather than accepting deposits (and thus accepting regulation as traditional banks) shadow banking gets access to money through borrowing against assets. These assets could be anything — mortgages, credit card debt, commodities, car loans. These kinds of products are packaged up into shares, sold and traded. There are various forms: collateralised debt obligations, collateralised fund obligations, asset-backed securities, mortgage-backed securities, asset back commercial paper, tender option bonds, variable rate demand obligations, re-hypothecation, and hundreds more exotic variants. (Hypothecation is where the borrower pledges collateral to secure a debt – i.e. a mortgage, and re-hypothecation is where that collateral is passed on and someone else borrows against it, even though it remains in the original debtors hands). The function of these assets are essentially the same; securitisation is a way of creating products with an exchange value, and bringing money into the shadow banking system; so much money that the shadow banking system in 2008 was much larger than the traditional banking system:

shadow_fig1

Plummeting Junk

So securitisation — as well as its siblings hypothecation and re-hypothecation, allowed for pre-existing securities to be re-posted again and again as collateral, sucking more and more money into the system — became a pretty significant way of funding lending. The problem in the financial crisis beginning in 2007 was that a lot of the assets securitised to bring money into the shadow banking system turned out to be junk.

Think back to the MBS bundle containing James’s mortgage: if 90% of the mortgages in the MBS were defaulted upon, that MBS would yield a huge loss for whoever was currently holding it. If that MBS had been posted as collateral against further lending, those debts would be called in. For shadow banking institutions that were highly leveraged this turned out to be a huge problem. To raise capital, they started selling just about anything that wasn’t bolted down. This meant that prices — even of securities that weren’t fundamentally weak — plummeted. And because of the problems with a lot of existing securities, the funding source for a huge part of global lending completely dried up, worsening the economic contraction.

The risk — that debtors would default upon their loans — rather than being confined to a single bank, came to be spread about the entire economy, with bad debts that had been securitised, hypothecated and re-hypothecated coming to sit on the balance sheets of tens or even hundreds of financial institutions.

Pseudo-Money

This entire system creates another problem. Securities came to be a kind of pseudo-money. In other words, they became a unit of exchange and a means for payment between banking institutions. With the 2008 shadow banking implosion, this meant that many prices, including prices of products like equities that were superficially disconnected from the shadow banking system, fell precipitously simply because there was less money floating around in the system.

Friedrich Hayek wrote about this problem long before anyone coined the term shadow banking:

There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money.

Thus, as the shadow banking system expanded, it caused inflation, and as it imploded it caused deflation. It was a big toxic bubble waiting to burst.

The Future

Ultimately, markets are a little crazy. People will do all manner of wacky things trying to turn a profit. All kinds of weird and wonderful systems will emerge. Some systems work better than others. And — as might be sensibly expected — the shadow banking system’s wacky idea of financing banking operations through the securitisation of debt failed. But because of the wider implications for the financial system, central banks began throwing money around in order to save these broken institutions and systems.

The Federal Reserve’s first quantitative easing program bought up tranches of defunct MBS. This stabilised markets to the extent that while securitisation virtually ground to a halt in 2009, by 2011 the shadow banking system was growing again. But this is surely just a temporary measure. Simply, there is no reason whatever to doubt that the same problem — of bad debt coming to be spread around the entire financial system through securitisation and re-hypothecation — will take root once again, causing similar turmoil in the future.

The status quo is that we have a broken and dangerous system that doesn’t really work, surviving on government subsidies. Sure, a full collapse of shadow banking in 2008 would have been painful. But we may have created a bigger and more painful collapse further down the road.

 

Wall Street vs Chimps

A friend sent me an interesting article debunking the widely-promulgated myth that traders are especially gifted creatures. Simply, other businesses make much more efficient returns on shareholder equity. Of the top ten DJIA stocks ranked by return-on-equity, only one — American Express — is in the sector of financial services:


But actually, the rabbit hole goes a little deeper.

From the Daily Mail:

They are paid a fortune for their ability to make complex decisions about where to invest millions of pounds every single day.

But perhaps the job of an investment banker is not quite as difficult as it might seem.

A chimpanzee in Russia has out-performed 94 per cent of the country’s investment funds with her portfolio growing by three times in the last year.

Moscow TV reported how circus chimp Lusha chose eight companies from a possible 30 to invest her one million roubles – around £21,000.

I think this brings us to a (rather obvious) hidden truth.

Human beings are generally very good — vastly better than any chimpanzee — at creating value, producing things, bringing ideas to life. That’s why the most efficient companies on the DJIA — even over long periods — are all industrials.

Human beings are generally very bad — no better than any random stochastic process, like a chimpanzee throwing darts — at predicting the future in non-linear domains like currency rates and stock prices.

The fact that our predictive industries keep requiring taxpayer bailouts seems to confirm this.