Wall Street’s Response to Obama’s Whimonomics

If you have been watching the news with an objective mind of late you will have noted that governments around the world are more and more driven by whim. A government’s response to the “crisis of the moment” becomes their policy for a brief moment in time.

There is no overall strategy as such, only responses to pressure groups, lobbyists, or companies “too big to fail”. Or tactical manoeuvres to push a political agenda.

You wake up one morning and find there is a “cash for clunker” program. Not too much later the clunkers program is ended as abruptly as it started. Confusion reigns.

“Carmakers and dealers have booked expensive advertising to capitalize on buyers’ interest in CARS, and now will be left promoting a tie-in with an uncertain government program — one that wasn’t supposed to end until Nov. 1. “Disappointed,” said Chrysler spokesman Scott Brown.”

Another morning you wake up to find Henry Waxman has summoned your leading insurance companies to a “show trial” where they will be asked to open their businesses to the world.

“We need to better understand how widespread this harmful and destructive practice has become, and how it is impacting small businesses and their employees across the country,” said Waxman, who chairs the House Energy and Commerce Committee. The letters also were signed by Rep. Bart Stupak, D-Mich., who chairs the subcommittee on oversight and investigations.

Aetna Inc., UnitedHealth Group Inc., WellPoint Inc., Humana Inc., Medica and Wellmark Blue Cross Blue Shield received the letters.

America’s Health Insurance Plans, which represents the companies, said Waxman’s investigation was designed to smear private insurers and bolster support for a public insurance option.”

There may be a case to answer but this is not the way to do it. Congress and State governments are all complicit in the problems of the insurance industry with the deals they do with insurance companies at state and federal level to gain some short term advantage over their opponents.

We hear a deal was done with the Drug companies. In exchange for their support of the Obama health care reforms they will not be targeted by the White House. Their penance for bad behaviour is to fund an advertising campaign promoting the “health care for all” bill.

“Though the drug companies had offered to cooperate with the White House — and even spend upwards of $150 million on ad campaigns — to support President Obama’s calls for an overhaul of health care, they are fighting calls to reduce their “data exclusivity” to high-end “follow-on biologicals.””

Whatever way you try to look at this it is government interference in the economic processes at the micro level. Wall Street, Fund Managers and the wealth management industry has to try and second-guess what is likely to happen next.

Which industries will be next for massive government handouts? I heard there is a cash for washing machines program coming…. 🙂

Where does this leave the financial industry whose business is to invest billions of dollars into the economy to get a return for their investors? Nowhere!

No one can invest long term when you have no idea what the rules will be tomorrow. It make it impossible to confidently invest several million or billion dollars in stocks that you believe have growth potential if the next day those same companies are listed in a letter from a congressman or senator. (It can work in your favour too, but it is a lottery – gambling, guesswork, not investing)

So you have to wait and see. That kills the investment process. You have to try and pick the industries that are favoured by government either through government endorsements or financial handouts, rather than the companies that have good businesses with upside potential. You still have to decide whether those industries favoured by government will be able to make a profit over the long term or will be propped up by government financial support, or even dropped from it!

Remember it is the professional money that moves the stock market. If they can invest for the long term with confidence then you are likely able to trust your fund manager to invest long term for you and you can expect a return.

Right now all the major financial companies are setting up algorithmic trading platforms. These trading platforms look for millisecond trades using millions of dollars in thousands of trades. The algorithms are designed to detect millisecond changes in buying and selling patterns and either buy, sell or cancel millions of stock orders in less than a second.

As I have said before this is not investing, it is trading.

Among others Goldman Sachs appears to have made this form of trading an art-form and have been making huge profits off it with the help of the market volatility.

I think they saw it both as an opportunity to make short term gains but more importantly as the only way to protect themselves from the “whimonomic” of the government. Just imagine having to invest billions into the stock market not knowing what the trading rules are for the next day.

Remember as I stated above each day brings with it a new statement from the government that can directly affect the economy and that is very quickly reflected in the stock market.

The Financial Industry is trading the markets like a “school of fish” or a “flight of birds”. I’m sure you recall watching thousands of fish or birds suddenly change direction whilst swimming or flying in one direction. They can change direct in a fraction of a second and all at the same time. It’s an amazing sight…..

“Schooling fish respond quickly to changes in the direction and speed of their neighbours.  Anyone who has swum in a school of fish can attest to their ability to change direction swiftly while still retaining their closely knit swimming pattern.  They can move from one configuration to another and then regroup almost as one unit.”

That’s my view of algorithmic trading. This form of trading is in part a response to uncertainty about governments (the predator) interfering in the economy. IT may be the only way large financial institutions can hope to protect their capital.

Until the rules and regulations for investing are clearly stated and government learns to avoid emotive statements directing at whole industries we can expect investing to become a distant memory.

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