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by Al Martin

Secrets of Casino Capitalism (The Wealth Transfer Mechanism for Dummies)

(9-11-12) So who will get bailed out next? Now that so-called Quantitative Easing, or QE 3, has been largely discredited as the latest bailout mechanism for useless banks, “asset purchases” is the new buzzword for kicking the can down the road, i.e. avoiding economic collapse.

      To that end, Super Mario Draghi has announced that the ECB (European Central Bank) will buy Euro peripheral state bonds with durations up to three years because that’s all he can do without the full commitment of the EU commissioners, which requires a vote of all 17 EU members.

      As would be expected, this is just another band-aid measure, but it has less to do with markets and more with what he can do from a regulatory standpoint, since Draghi does not have the authority to buy sovereign paper (bonds) of anything greater than a three-year maturity.

      Meanwhile Italian Prime Minister & Lead Technocrat Mario Monti is also becoming involved, as he and Mario Draghi are now known as the two Super Mario Brothers.(Nobody has called him Two Card Monti yet.)

      In this case, Monti is playing the role of power broker, since he is in a caretaker role in a caretaker government as prime minister of Italy since he’s not facing an election. Therefore Monti can do what he wants and act as the broker between the haves and the have-nots in Europe.

      The so-called “austerity” programs in Greece and Spain are simply a scam because they’re meaningless since they’re never going to happen the way they are proposed other than “on paper.’ But they have to be at least “on paper.”

      So even though the citizens of the countries are demonstrating and rioting in the streets, it is simply the economic decline of these nation-states that is causing the current financial misery. This has been long building and is now coming out into the open.

      In a world of euphemisms, these so-called “austerity” programs are “required” for the ECB to act. Of course this isn’t credible, yet the markets continue to rally. This shows the dumbing-down factor that has occurred in markets.

      Thus markets are rallying on the perceived “risk trade” of another band-aid in the works – that the ECB, the Federal Reserve, the BoJ (Bank of Japan) and PBOC (People’s Bank of China) are going to be able to successfully engineer another Grand Kicking the Can Down the Road Scheme.

      The response in the markets is that they’ve gotten much more of a rally out of it this time than they had in the past – considering that they haven’t even undertaken any measures yet.

      So why are the markets rallying? Are the markets really that dumbed down?

      Yes. Now you have the lowest level of knowledge in the markets than have ever existed in history. It could be said that 80% of the market today are essentially small dumbed-down trader-wannabes who have only been trading during the last ten years.

      People talk about “institutional traders,” but all they do is follow the trend. As long as things move consistently in the same direction, everybody jumps on because they figure it’s a no-brainer. The problem is what happens when people try to get out – at a time when volumes are at record lows, as they are now.

      The reason why there is so much volatility in markets now is because trades become “crowded,” a market term when you get too much money on one side of the trade in a reduced liquidity environment. And that is what is consistently happening and why there is so much intra-day volatility every day.

      There has also been a mass exodus of capital out of hedge funds. Why? Because there is a realization that many hedge funds were “one-hit wonders” because they are largely managed by people who are not professional short term traders.

      There have been declining returns and performance and that’s why money is pouring out of hedge funds at this time. So where is it going?Literally it is going nowhere, and that’s why money market balances and bank retained capital balances continue to build to all time record highs.

      The whole idea of “hedge funds” is relatively new and people got drunk on this new idea in 2004-2005, when they were consistently making money on them as well as in 2007-2008 on the short side.

      Meanwhile the SEC has relaxed the rules for Joe Six Pack investors -- as opposed to so-called “accredited investors” -- to invest in hedge funds as well as IPOs (Initial Public Stock Offerings). The purpose of this is basically putting more meat into the grinder.

      If you have Big Republican Money coming out in a reduced liquidity environment, there has to be some money coming in from somewhere, and the only way you bring in new money is by reducing the regulatory requirements that investors bear.

      The SEC is also trying to change the so-called allotment system in IPOs. This will allow more small investors into the allotment pool. This also bespeaks of another problem -- the contraction of principal firms and the plethora of what I call Fly By Night Online Trading Internet-based Outfits that don’t get any allotments in IPOs because they don’t specialize in M&A; (Mergers and Acquisitions).

      Now there’s about 80% of the traders who are doing business with Electro Fly By Night Joints that are not principal members of the exchange. They’re not M&A; specialists, and they’re not syndicators, so they don’t actually take down pieces of IPOs that they can allot out to their clients. That old system is now largely broken down because there aren’t as many principal firms around as there once was.

      And how does this relate to the Facebook IPO fiasco? This cockamamie kid that runs it tried to get too much involved in his own IPO in order to ensure as wide a participation as possible. Then they all found out with this Facebook deal that the computer technology necessary to execute that many trades in a short period of time just hasn’t been invented yet. The technology just hasn’t caught up with this idea of “democratizing” the IPO process.

      The IPO business used to be a pretty cut and dried affair. When an IPO was sold, it would be syndicated out to what’s called the lead manager, a firm that would hold the primary responsibility of marketing the offering. This would typically be an investment house like Goldman Sachs, Morgan Stanley, etc. Then there would be so-called co-syndicators underneath, who would support the IPO. That used to be the EF Huttons, the Merrill Lynches, and the Smith Barneys.

      These retail brokerages, or wire houses as I call them, are all gone now and that was one of the principal roles they played -- to come in as co-syndicators. They would get an allotment and they would pass that down to their customers – to their “book” as it was called. The customers that had been with them the longest and had done the biggest business with them got the biggest piece of the pie. They would then maintain what’s called a “syndication bid” for three days to ensure the stock did not drop below its IPO value. That was a requirement so that after three days you were on your own.

      The problem is that all of this has now been turned on its head with the advent of Electro Fly-By-Night Outfits that aren’t principal members and that cannot directly manage or syndicate or distribute stock because they’re not principals. Consequently the stocks become very erratic from the first day.

      So who got burned the most during the Facebook Fiasco? It was the 100 share twenty-something Electro-Wannabe Traders with their charts and graphs dealing with Fly-By-Night Electro Bucket Shops in Cyberspace.

      And what about the so-called “computer glitch” which further exacerbated the situation? The computer glitch was simple to understand. That’s why you haven’t seen a lot of litigation because it was the people’s own fault.

      That’s what happens when you keep hitting the 100-share buy button so many times because you’re not getting filled, and that’s what these people do because they assume their order hasn’t been entered and there has been some sort of glitch. They don’t understand because they get sold on these trading platforms which brag about “near instantaneous” fills.

      So when the Electro-Wannabes hit the “Buy Market” button and they don’t get a fill within about three seconds, they hit the button again. And again. And again.

      Then suddenly the Electro-Wannabe Traders who wanted 100 shares wound up with 4200 shares – two hours later. That’s why there hasn’t been a lot of litigation. After all -- Whose fault is that?

      These are people who have never had a relationship with a retail wire house and they don’t know anything about how it really works. The concept of calling your broker to enter an order and get a fill and he calls you back with a fill – the electro-youngsters don’t know anything about that. To them it’s all Electro – it’s Cyberspace someplace that doesn’t exist in the Real World. And they don’t have real relationships with real people that actually know what they’re doing. The people that know what they’re doing are actually not being minted anymore.

      This then could be called the Casino Economy because Electro-Wannabe Traders are making bets and then guessing - and hoping - that they might get a “winner”. When you’re stupid and/or ignorant, it’s just like buying a lottery ticket.

      It’s true. This has become the New Normal Reality because the number of derivative contracts that are available now is something like 70- 80,000, so you can make bets on price directions intra-day. Now they have come up with these cockamamie derivative contracts to try to get away from the “stop loss orders” they were touting in the past… It’s all “technical” -- charts and graphs that the twenty-somethings think they can understand.

      This then is the story of how the Casino Economy works. And what it comes down to is this – it’s just the latest twist to the Wealth Transfer Mechanism.

      So what has changed? Now the wealth transfer mechanism is beginning to fray. WBRs (pronounced “webbers,” meaning Wealthy Bushonian Republicans) are going to want their 20-30% annual return – which they’ve always been used to. The problem is that this can’t be sustained. Unless you’re doing business with old-timers who actually know what they’re doing, who know the business and know how to trade.

      The problem we are finally seeing is the wealth accrual of the WBRs is beginning to slow because the environment where they could consistently receive that 20-30% return every year and spend the rest of the time in Costa Rica… that’s gone. Because the WBRs themselves were largely people that didn’t know much about markets. They depended on the old-line houses to keep making them that 20-30% return – and that’s all gone. The problem is that the people that knew how to do that have died out. And -- they’re not getting replaced with a younger generation that knows how to do that. That’s also why the hedge-fund industry and to a lesser extent the mutual fund industry is dying.

      Stay tuned -- and subscribe -- to see what’s coming next…

    * AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.


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