I believe in nature. I believe in earth, sun, fire and water. I believe in the circle of life. When a tree loses its leaves, you think it's dead. But the tree is only resting. It's born again, in the spring. I believe in energy. Positive energy.

Paolo Di Canio

How could we monitor energy in markets? What are the leading indicators, what is in control positive or negative energy? (This may not mean it is connected with a bullish or bearish overtone). What happens when a market loses its soul? Does this affect the length of time until the leaves return, if they return at all?

Anatoly Veltman writes: 

Yes, there are plenty of reasons to believe that the free market has been totaled. It will take some sort of cathartic process to ever regain it.

1. It began with the machines taking over. Big picture has gradually been rendered irrelevant, as black boxes battle to take advantage of regulatory shortcomings– and manage to skim the zero-sum markets of billions inside of every reporting quarter!

2. Then came the cyclical peak in asset prices. By the end of 2007, helped by ridiculously easy credit, the bubble formed and popped.

3. The short-term pain proved so unbearable, that both sides of the isle caved in to the kneeling emissary - giving birth to centralized market and killing off free market spirit.

4. The centralized machinery gained speed, as flexionic power houses began to perfect leveraged self-dealing, smashing through all past records in the process. Billions became chump change. The machinery is hungry for trillions, and the far-from-independent Fed is happy to print them.

5. All those newly minted trillions get channeled to a few, resulting in unprecedented wealth disparity. Trillions get laundered on the periphery of the real economy, avoiding regular capitalist process and diminishing the multiplier effect. The entire demand curve shifts, further distancing the financial assets from real economy and the Main Street.

6. Every so often, the financial infrastructure figures blow up and expose total void of the system's integrity. Former exchange chairman is exposed as a Ponzi, and former governor is about to be exposed as expropriator of customer segregated accounts. That's all we needed at this point of the cycle…

George Parkanyi writes:

Even if these things are true, what benchmark are you comparing current markets to? At what point in time did they ever have true "integrity"? Over the ages markets have been manipulated by different parties who benefited disproportionately in different ways and to different degree. If no-one is willing to step up and define what wonderful era represented the true/ideal baseline market environment that worked for everyone, then I'm not interested in listening to the complaining. We are speculators - I posit that we need to deal with reality, not some kind of utopian fantasy. If markets are being manipulated, then understand the manipulation/environment without the hand-wringing and moralizing, and make the necessary trading/investing adjustments. No-one said speculation was supposed to be easy.

Anatoly Veltman responds: 

I'm curious, George. Can you cite modern market history precedent for any of these?

Rocky Humbert joins the conversation: 

There are countless examples of similar govt interventions. Everything from exchange controls to wage and price freezes to rationing to anti-trust exemptions to banning private ownership of gold to tariffs that undermine whole industries to regulatory edicts that accomplish the same to union regulations etc. Etc. Etc. Even Operation Twist is a rehashing of old policies; the practice of monetary policy , if anything, has become only more transparent in the past 20 years — but not necessarily wiser.

And of course, there's the occasional war with its wholesale expropriation of wealth, death and destruction.

History rhymes. Always has. Always will.

I look forward to the day when Anatoly writes constructively of something that actually works…instead of commenting endlessly about what doesn't, lamenting the good ole days…

Anatoly Veltman responds: 

I'm looking forward to that, too, Rocky, and thanks for straightening me out. However, has there been a precedent for robbing customer segregated accounts to such an extent that recovery is seen as unlikely, and yet prosecution is seen as unlikely as well?





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1 Comment so far

  1. R. Kumar on December 11, 2011 3:04 pm

    Interesting to see this post right on the heels of this writeup by Michael Bigger on his blog:

    The Market is Energy
    Friday, December 9, 2011 at 11:38AM

    The market is energy. On any particular day, think about the energy needed in order to move one unit of capital (a security) by a distance y (unit of stock price). Think about all the energy required to move all the capital market securities in the U.S market at any given point in time. The amount of energy required to accomplish this transition must be substantial, almost infinite. Think about the traders’ actions and reactions, the news, the liquid networks transporting market information, the value created or destroyed at each of the companies listed on the exchange over that unit of time, and so on. Astounding, isn’t it? Stock prices ebb and flow.

    The trader or investor’s purpose is to harness market energy to his own advantage similar to Hydro Quebec’s purpose of harnessing the flowing energy of massive rivers in Quebec to the benefit of its population.

    Hydro Quebec does not build its dams along marshes. Hydro Quebec has acquired engineering insights about the location of potential hydro energetic sources. They make money harnessing this energy and transporting it to where it is needed.

    In my experience, most market participants have it upside down. They fall in love with a technique (technical analysis, value investing, day trading, pairs trading, and so on), and they try to apply their techniques to the most promising market situations. Market energy, which is fleeting, possesses this devilish ability to frustrate the application of most techniques developed for the pursuit of profit. However, by viewing the market as energy, you become less dismissive of other approaches. You use the most appropriate technique for the task at hand.


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