Sep

6

Hail Mary! from Gary Phillips

September 6, 2017 |

 Back in the day, (on the trading floor) where you stood and whom you stood next to in the pit, had more to do with how much much money you made, than how good of a trader or market maker you were. Groups of traders congregated around various brokers (order fillers) forming little cliques within the pit, which were largely hierarchical relative to capitalization, risk tolerance, and motive; yet the pit as a whole, still functioned as an efficient marketplace. Customer orders flowed from outside the exchange into the pits, where a market was made and fair value was determined through the process of price discovery, price information then flowed back out from the exchange, and back to the customers. But, not before the locals had a chance to "pick-off" off the customers' orders.In theory, all trading was to be executed by open outcry, and all customer orders were to be kept secret until they were executed. In practice this was seldom the case. While the ball belonged to the brokers, they needed the locals to take the other side of their orders. The locals needed the brokers to get the "edge " on their trades and information about the order flow. It was this interdependence that forced a bond of trust and a doctrine of integrity between the locals and brokers. While it both empowered and enriched the pit's inhabitants, it was also the dominant reason why the pits functioned so efficiently.

Today's central banks work together in much the same way as the cliques in the pit did. Although disparate in terms of policy, execution, and motivation, the end result is a convenient alignment of their interests.They continue to underpin the markets with massive asset purchases in order to create the illusion of a healthy global economy. They are counting on structural reforms and fiscal stimulus from the Trump administration i.e., corporate tax cut, repatriation of offshore capital, and a trillion dollar infrastructure spend, will be enough to create a healthy, growing, and self-sustaining global economy, as it moves from a central bank driven recovery to a fiscal stimulus driven recovery.

And it will probably take a perfect storm of all three stimuli to reverse the the structural changes the U.S. economy has undergone in recent years; because there is nothing the Central Banks can do with monetary policy to reverse the changes related to an aging population and job distribution that has resulted in sluggish wage and productivity growth. Kind of reminds me of the waning days of open outcry, when traders on the floor hoped for some kind of Hail Mary, that would save them from obsolescence.


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