Massive Speculative Bubbles Everywhere And You Want to Invest

Speculative Bubble– Investor Nightmare

Right now the world of money is in a massive speculative bubble. Almost every financial institution from fund managers to sovereign wealth funds are playing the markets. Be it commodities, high frequency stock trading, or foreign exchange they are taking massive gambles using other people’s money – YOURS. This is partly due to their uncertainty in those markets and in our governments and may be a defensive play but it cannot be called investing by any stretch of the imagination. In fact the word “Invest” should be removed from the dictionary. It is not longer relevant in the financial markets and your government has high-jacked the word “invest” so it can replace the word “spend”. That way you don’t get suspicious. Or so they believe.

High Frequency Trading encourages a speculative bubble

We have NYSE with claims that up to 70% of the transactions are speculative high frequency trading – HFT mostly by the big, no huge too-big-to-fail financial institutes. What Percentage of US Equity Trades are High Frequency Trades?

  • “The former head of Nasdaq said that high frequency traders account for 73% of the volume on the stock market
  • Joseph Saluzzi – partner and co-head of equity trading for Themis Trading – puts the figure at 70%

But the exact figure is difficult to ascertain.”

Commodities with HFT – Time bomb waiting to go off

We have Commodities being driven up in price partly due to the falling US Dollar and partly being used by fund managers to enhance your returns (read your prospectus on fixed interest investments for the crazy details). But the most important point is that about 80% of the transactions are by speculators, not those people the markets were originally created for. It was to ensure an orderly market for commodities, not a market for speculators. Market Fundamentals and Commodity SpeculationLet’s review the basics. Some $9 trillion in trades take place in commodity derivatives, with 80-90% in over the counter (OTC) trading, outside of public scrutiny. Five banks control 96% of derivatives activity, giving a few players decisive market power. The ratio of non-commercial speculators to commercial hedgers (those with a commercial interest in the traded commodity) is by some estimates 4:1, roughly a reverse of the shares ten years ago when speculators accounted for 20% of the activity. Then, such speculators indeed provided liquidity to the markets without overwhelming them. That is no longer the case.”

Enter the Home Office Forex Trader into the speculative bubble

If you are not a Home Office Forex Trader then you are just not one of the in-crowd and don’t expect to be invited to any Christmas parties this year. A huge number of Forex Traders are over 50 and looking for a new challenge and a chance to replenish their nest egg. Boy are you going to get a challenge if you are trading with your nest egg. Beware as HFT is taking over. Read this article for some insight. High Frequency Forex Manipulation EvidenceIt was brought to my attention today that over the weekend of Sept. 27 and 28, 2009 something had changed in the Forex (Foreign Exchange) market. On Sept. 29 making a profit suddenly became very difficult. Normal trading techniques that worked well in past weeks no longer seemed to work for this particular trader. Many people who haven’t been able to make money in the stock market anymore have moved into the Forex market.”

Dark Pool – Nothing to do with Darth Vader

Add Dark Pools into the equation and you have a ready made recipe for market manipulation, distortion and fraud due to lack of transparency and the huge amounts of money that can move around electronically. What is so dark about dark pools? Dark pools are a private or alternative trading system that allows participants to transact without displaying quotes publicly. Orders are anonymously matched and not reported to any entity, even the regulators (Younglai and Spicer 2009). Thus, the mainstream exchange-traded market does not have any clue about the volume of transactions happening in this parallel market or the prices at which they are being executed.”

Why is this Happening? – Cheap Money & Printer Presses

With most country reserve banks forcing down interest rates in the hope of a recovery the cheap money is finding its way into massive speculation. Technology is also adding to the mix in a big way and billions of dollars can be moved around the world in fractions of a second. Large financial US institution can borrow from the FED at almost zero precent, then use that money to do high frequency trading to skim some profits from the stock market for very little risk and in fractions of a second –flash crash accepted. Millions of dollars hitting the stocks for a second or so and then sold again can skim off a few million if the timing is right. It’s all in a days work for these institutions which used to provide a service to businesses but now there is less risk for them to speculate with free money from the FED. Any money they are not using can be deposited at the FED and now they can even earn interest on that money. Again all this can be done electronically in a second, then it’s off to a good lunch. This is a no-brainer for a banker. Why would a bank loan money to a private business in this economy when you can deal yourself a virtual no risk hand just trading on your own behalf and depositing your profits with the FED, where the money is guaranteed? On the other hand many business have not wanted to take loans with all the economic uncertainty. So it plays right into the banks hands and helps them justify their actions.

Inflation can’t get a leg up – But it will

The reason inflation has not taken off with Helicopter Ben’s paper money printing machines spewing out trillions of paper dollars is because the money is being kept in the banking system and is not getting out to the public to buy “things”. When it does you will see an initial surge in productivity and everyone will feel good. Then just when you thought it was save to go in the water “stuff” will start costing a little more, then a lot more and finally a whole lot more. Wage rises will be demanded or worse price controls. Heaven forbid if that happens. However the “Bernank” might then be forced to raise interest rates and because of inflexible wage laws unemployment will ensue. And everyone will ask, “What the hell happened? I thought we were over the recessions.”

Fool me once, fool me twice

Okay fool me again why don’t you, it’s only my retirement nest egg taking a hit. People won’t understand because most members of the public don’t have the time to try to understand how economics really works, and how government meddling only makes us all the poorer. Financial Institutions thrive in this environment at our expense as well. We are all easily fooled again and again. If anyone says this is capitalism failing, please think seriously about that statement. Failure to realise what is happening will keep us in these economic dark ages. Read my Lips – If government controls the price of money how the hell can we be in a capitalist economy? Anyone still want to invest right now? No I hope not. But speculate with money you can afford to lose as there is money to be made if you are quick and nimble. Understand the playing field is stacked against you though, before risking your money in this speculative bubble.

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