Trust as a Business

There was a great piece on 60 minutes last night with Michael Lewis about the financial markets. It is well worth the 14 minutes to watch it and you can see it here: http://www.theblaze.com/stories/2014/03/31/authors-jarring-claim-the-stock-market-is-rigged/.

Michael LewisThe topic was about how high frequency equity trading was destroying the financial markets. The solution to solve the problem, as outlined in the interview, is fascinating…creating a platform were people can trust to trade.

Although as we sit here in 2014 the markets are at an all time high, confidence in the financial institutions is at an all time low. Stock ownership has declined dramatically and given that we live in a capitalistic society this should shock many people. The underpinnings of what makes our society tick… free enterprise, risk taking, entrepreneurship… are being taken advantage of and corrupted by the financial marketplace; these risk takers are shunning the market where capital is being allocated.

Over the last 20 years or so stock exchanges have traded humans for machines. I would venture to say that over 90% of all stock exchanges are now electronic. So, now, when you place an order to purchase a stock that order is being handled by a computer not a person.

As this transformation has taken place, pure computer power and the speed of the fiber network has taken precedent over the ability to allocate capital efficiently. High frequency traders over the last 5 years have built these highly complex algorithms to trade and can now execute trades in milliseconds for fractions of a penny. So by the time “Joe Investor” can execute a trade, the high frequency trader can buy and sell that same stock to “Joe Investor” at a slightly higher price and make money off of his order.

Here is an example in practical terms: Say that you wanted to go to the Dolphins game in Florida and saw 4 tickets on stub hub for $20 each each. You decided to buy the 4 tickets but were only successful at buying 2 tickets at $20.00 each. The remaining two tickets, those same additional 2 tickets that you tried to buy minutes before, are now trading at $25.00 each. Why? Because the system recognized your order and filled only 1/2. Then, it raised the price on the other 2 tickets. Since you really need the 2 extra tickets, you buy the last 2 tickets for $10.00 more per ticket.

This example is the same thing that’s happening on Wall Street. High frequency traders can see your order before it gets executed.  Then they buy that same stock and sell it back to you for a slightly higher price. The practice is called “front running.” Normally front running is illegal. However, on Wall Street, the way that high frequency traders are doing it…its legal.

A trader from Royal Bank of Canada spent the last 5 years uncovering the problem, detailing it and alerting investors to the pitfall. He subsequently started a new exchange, which brilliantly circumvents the high frequency trader’s edge by way of new software and complicated data routing. With his new exchange, people can trade stocks without the impact of high frequency traders there to rip them off. So far business has been good.

When asked why his business is doing so well he said “trust.”  Really that is all that he’s selling. People trade on his system because they know that aren’t going to be ripped off. What a beautiful way to run a business. Do what you say you are going to do and people will come.

 

Steven Clark

 

Creating New Patterns

On Friday’s podcast we spoke about how common it is for people to move from a particular state because of undesirable economic conditions and relocate..taking with them the same political affiliations and ideas that relate to the conditions they sought to flee.

Letting GoThis difficulty that we humans have in letting go of what isn’t working for us goes way beyond politics. In a very real sense it why “history repeats itself.” That adage is true because we repeat patterns of behavior whether they serve us or not or whether they lead us to the outcomes we seek.

This sad truth exists because letting go, allowing in new experiences, seeking out new people or establishing new patterns means embracing the unknown. They each require courage and trust. They each also necessitate the admission to oneself that all of life is transient and temporary.

Precisely because we have so much emotionally invested in the material, physical world…hoping those investments provide us with something to hold on to in the face of life’s inherent uncertainties, we close ourselves off from the wonders of change and the infinite possibilities that chaos brings.

In a world that daily seems to become more chaotic, don’t allow the purveyors of fear to shut down your creativity and your natural wonder of the unknown. Remember, chaos is the natural byproduct of change… and change, mysterious and at times both challenging and inexplicable, is the precursor to growth.

So, if you’re relocating, pause and re-evaluate if your location isn’t the only thing that needs to be left behind.

Carole

Capital Destruction and its Consequences

During the financial crisis of 2009 General Motors was one of the many companies that filed for bankruptcy. But unlike other bankruptcies, GM was allowed to carve up the company as they saw fit, or better said…. the way the unions saw fit.

The financial markets treat bankruptcy in a very specific way. Creditors of the company always come first, that is people who lent the company money are 1st in line to be paid. Creditors supersede everybody else in the food chain in that loans are contractual obligations to pay. Equity holders, union workers, salaried employees are usually last in line because the nature of the agreements- these agreements  are within the company itself and the company can no longer honor those contracts due to the bankruptcy.

General Motors

The way a normal bankruptcy works is that the creditors have an economic stake to recoup as much money as possible and are incentivezed to make the company work again. This might take the form in making less cars, paying people less money, firing people, etc… So in many cases companies that come out of bankruptcy emerge stronger and leaner than before.

But given 2008 was an election year and the democratic party had made promises to the unions for their votes, GM went into bankruptcy but with the union workers given preference in the restructuring over the bond holders. In one full swoop Obama was able to rewrite bankruptcy laws for the people who helped elect him. The unions ended up with the majority of their contracts in place.( the U.S taxpayer ended up lending the money to GM) The bond holders were given cents on the dollar and many of the employees (who were non union) saw their savings wiped out but not those of the union workers. In the end, the needed reforms that were meant to take place never happened.

Fast forward to 2014 in 2014  GM began recalling 1.6 million cars with faulty ignition switches that were linked to 12 deaths and 31 accidents over the past decade…  And two weeks ago, GM announced that it had received reports as early as 2001 about the problem – three years earlier than previously disclosed.

 On March 11, the Justice Department said it would open a criminal investigation into GM’s disclosures regarding the faulty switch. 

As part of the investigation, authorities are now looking to see if GM committed bankruptcy fraud by not disclosing the massive future liabilities tied to the recall. On top of this GM has had a hard time selling cars.

Now, GM has been selling cars to people with less than stellar credit (The market is now known as the sub prime auto market) GM has been making money via its finance arm.  The way it works is the following, GM can borrow money at 2% and lend at way above that (19%). So what we have seen is soaring car loans, terrible credit lending standards and suprime cars loans being abut 25% of all car loans made. What happens next is that GM sells these loans to investors, pension funds, banks, etc..These loans are beginning to go bad and these loans average around  $25,000 and the average loan today is around 5 years.

“Americans currently owe more than $800 billion against their cars and trucks – 34% of this debt is owed by subprime credits. Another 10% is owed by “deep subprime” – folks with credit scores below 550. Businessweek quotes Morgan Stanley analyst Adam Jonas pointing out the obvious: “Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery.”

This story is not going to end well and capital will be destroyed once again. In California many years go the EPA banished brush clearing as it impacted the wildlife but a few years later, California was engulfed by horrendous fires that destroyed thousand of homes. One of the main culprits was that the excess brush fueled the fires to levels previously unseen.

I feel this story will end the same way as those fires, by not cleaning and clearing up all the problems in GM, this will start a whole new financial mess.

 

Steven Clark

 

 

Empire of Illusion Podcast

One of the main things we have witnessed over the last 15 years has been the decline of our culture, these cultural markers are everywhere if you are trained to look for them and have implications for  society at large. On our last podcast dated March 21, 2014, We talked about Chris Hedges latest book “Empire of Illusions” where he went on to explain some of the things he observed:

  • Professional Wrestling and how the story lines have changed over the years. American exceptionalism is no longer admired or revered , our enemies are the same institutions we once admired: finance, government, marriage etc..These story lines are reflecting back to us how these institutions have fallen apart.
  • How pornography has infected the culture and the rise of violent porn. The growth of the business, the amount of the users that now watch porn and the subjugation of women who are enslaved in these industries are trends that should alarm us all. The government has no problem instructing and regulating its citizens over the obesity epidemic yet there seems to be no government action regarding its citizens consuming violent porn.
  • Our elected officials are symptomatic of the cultural rot that is taking place. Our politicians lie to us openly and brazenly and now they will not be caught. From the lies of: Benghazi, ObamaCare, Fast and Furious, etc we have to be willing to call out our elected officials regardless of their political affiliation.

Posted by Steven Clark

 

 

Its All About Energy

Just a little intro to the perspective I bring to the podcast.

th (18)I’ve always been uncomfortable with the term “righteousness.” Mainly because its judgmental, subjective and been used to herd people into certain ways of acceptable behavior as defined by…who?

Everything in the Universe is comprised of energy. Everything. So I coined the concept of “rightuseness”®…the rightful use of energy. When we use energy in accordance with Universal Law, human behavior reflects the highest good for all concerned. It becomes not about what is good or evil but rather about what is life-supporting, life-enhancing, and the intention to create harmony and balance in the micocosm and macrocosm of our lives.

So, when the lawyer in me is done analyzing for you the factual part of the stories that are on everyone’s mind and all over talk radio in any given week…I perceive it all from the perspective of rightuseness and present those same stories from above the fray.

Carole