Wall Street, Bay Street, The Markets. Do you feel that they exist on some other planet where normal rules of physics don’t always apply? For the past couple of days I’ve been watching the markets, Canadian, US and the International Bourses to see where reality lives.
I’m not an investment dealer, counselor, or broker, so anything that I say is not intended to give you advice, guidance, or some kind of insight into "the markets", so govern yourself accordingly as I am an ass and might be talking out of my ass too.
Here’s Economics 101: You sell services, time or things for more than it costs you to make or do them. The money left over is called profit. Businesses need profits. Even non-profit businesses have to pay for the electricity, insurance, photocopy paper, pencils and office chairs. Those are called costs.
When you subtract the costs from the amount of money you’ve billed, that’s profit. You sell 40 (or more) hours of your work to someone and in exchange for that, they give you money. At the end of the month, when you’ve paid for your own personal expenses, that’s your profit. Ta Da! Simple isn’t it?
Except when it comes to The Market. Let us take a simple example. Roulette, the gambling game. You bet that the little white ball will land on a certain number when the croupier spins the wheel one way and shoots the little white ball the other way. Eventually the little white ball slows down and falls into a hole on the roulette wheel.
How do you determine which slot the little white ball will call home? You guess, as roulette is a fairly randomized game of chance, as long as there are no magnets under the roulette wheel, the ball is evenly weighted and so on. Much like flipping a coin and betting heads or tails, you know you’re going to be right, at least some of the time.
Now, if someone comes up to you and says "The game is rigged and five times out of ten the little ball will land on Black 22, because they’ve got a magnet under Black 22 and there’s a little iron pellet in the white ball" That is a crooked game and only those who know the game is fixed, can profit from it.
Which brings us to The Market. Insider trading is illegal, much like fixing a roulette wheel, or stacking a deck of cards in Blackjack. Knowing that the company is going to tank, or has a recall of 9 million cans of tainted product coming tomorrow, or thousands of other things, is knowledge that is not commonly available to the average investor. This means that the entire Market is built on fiddling the rules. Stocks surge and plummet based on "the whispered street number" or "analyst’s reactions to a conference call" or "primary market determinants".
Since brokers take a piece of the action, if you buy or sell, the broker is incentived to make you buy or sell, as much as possible. Since the brokerage makes a percentage on every order, they too are incentived to make you sell or buy as much as possible. The companies do this by giving you all kinds of information, usually by subscription, based on how much you sell or buy. Call it Quick Quotes, or whatever name you want, it is information, opinion and a big dose of innuendo. The innuendo can only be divined by the broker, who whispers in your ear.
Now, to put it in a Casino setting: The Casino takes a rake, a percentage of all winnings. That’s their fee for running the game and giving you the impression that you can beat the house and win a pile of money. There is also a number of fees involved, if you do actually win. A cash-out fee is common, for the conversion of chips to money.
The Casino posts the rules, and the biggest rule is "If we don’t want to play with you, we can kick you out." and "We can review every big winner and hold their winnings." Meaning, if you find a way, or are just plain lucky, we’ll find a way to screw you, as the First Rule of the Casino is The House Always Wins. The Second Rule of the Casino? See Rule Number One.
Outside the Casino, there are tip sheets for sports gambling, systems for beating all the games of "chance" and of course, insiders who know the ‘fix’ is in, or who have a ‘hot streak’ picking winners and for money, you can tap into their specific knowledge.
Today, despite strong retail sales, reasonable borrowing costs, fine employment numbers and a good economy running nicely, the Toronto Stock Exchange tanked 400 points. The last time the TSE took that deep a dump, was in 1987. The reason, at least according to those who read the runes, is that analysts were disappointed with the results of two major transportation companies, Canadian National and Canadian Pacific.
The performance of CN and CP wasn’t "up to analysts’ expectations", so these invisible analysts decided to whisper to everyone they know "Sell". Of course, these analysts work for brokerages, who have brokers paid on commission, who make a piece of every transaction. Which is not a lot different from someone whispering in your ear that there’s a magnet under Black 22 and an iron pellet in the little white ball, so bet Black 22.
Now, what to do about it? Financial services are the lifeblood of our economy, but the game is rigged for a few, rather than you and I. Banks don’t want you to park your personal profit (savings) in an account for any length of time, so they don’t pay much more than an honorarium as interest. The banks also make damn sure that any transaction you make, like taking money out of your account, will make the bank money on the fees for the convenience and pleasure of the bank not paying you interest.
Look at the financial results of just about any major bank. Profits are through the roof and for this we get? Um. Nothing. We don’t even get the personal satisfaction of knowing that some of our money is going to microloans to small businesses, or green energy developers, or even to nice people who want to buy a house in your neighborhood.
Can we tell banks to pound sand in their collective orifices? Not really, as they are the casino owners. Can we tell the stock market to do something unsanitary and anatomically impossible? No, they own the dice, the cards, the roulette wheel and the little white ball. Can we leave the casino altogether? Only if you’re independently wealthy and have no debt whatsoever,or are willing to live in a yurt, off the grid, off the pipeline and off this planet.
RoadDave 