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Pixel8r

Why speculative trading is the downfall of the modern world

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How is it juvenile to try to work out a solution to what is wrong in the world currently? Why do you think that I don't realise that markets go up and down? I obviously realise that markets go up and down that is why I sold my house and moved into rented in 2006.

 

As I have tried to explain, in a way that isn't very clear I grant you, i think that people are better placed doing work which is productive rather than focusing their attentions on trying to out smart other traders. Trading is a game, as you say above, but it is one of winners and losers. For each trade there is a winner and a loser so the whole doesn't benefit from the action of the trade, equity just shifts from one place to another. If your work involves producing something that didn't exist previously the whole has gained the thing that has been produced, so there isn't a loser. Imagine if the whole world took up trading, there would be massive disruptions as things swung one way then the other as the PTB manipulated things in their favour. The game is always won by those in power as they control the rules to the game. Most traders and gamblers end up losing their money that is a fact. Read James Dines mass phycology book, in it he talks about how gamblers have a need to lose. I heard a statistic the other day which is relevant, 90% of futures traders lose all their money within 6 months. Who knows maybe you will be in the 10% who don't but ask yourself are you actually doing anything productive with your life.

 

I think it is juvenile to try and put down conversations that are trying to work out a solution to the mess the world is in. Perhaps a more forward thinking way for you would to be to realise that not everything in the world is about increasing your net worth, that quality of life actually stands for something as well.

 

Just to continue my response here Pix, I think you may have the wrong target in your sights. My impression is that the western governments have essentially now been taken over by the corporate sector, and that is what has allowed situations to develop that are almost unreal, eg such as Dick Fuld of Lehman earning $400 million over a few years. It's a sign of corporate control over government rather than the other way around. Going back to the trading my aim is to extract funds from the gamblers in the market (and they are legion) and put them to better use. If things work out for me I plan to get involved in a charity and give away a large slice of profit to worthy causes therefore I can enhance my own position and more importantly enhance the position of others, I view that as being highly productive, and of course if I am successful and others see that, perhaps they might be encouraged to do the same, who knows.

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If you buy Gold and Silver, you are speculating that you will get a better price in your "spending currency"

when you convert them back. That is my point.

 

They have been rising along with other essential commodities (like food and energy), but if monetary policy shifts, or deflation appears, then you may find that your speculative strategy has not worked.

 

There is no "magic" residing in precious metals, the "magic" has been in the Fed's aggressive monetary policy.

There is no speculation in swapping fiat currency for gold. Gold has been a store of wealth through all of history and remains so today, if not why have the central banks turned net buyers over the last couple of years.

 

I don't feel worried in the slightest about if, buts and maybe on changes of monetary policy or deflation. The fed has no choice but to continue on the path they have set out, there is no other option. They cannot remove the monetary stimulus that has already been created and they also cannot stop creating more, all that is going on currently is preparing the way for renewed stimulus. When it comes down to it the US debt is so huge and growing that they don't have enough buyers for it, so they have to buy it themselves. Monetizing their debt is all they can do, what else could you imagine they could possibly do?

 

Here's a graph for you to look at, it is crude oil valued in various currencies and gold. You will notice that since we have been alive gold always buys around the same amount of oil, which can't be said for any currency. So really when you think about it gold is the least speculative of all currencies, it has throughout history preserved it's buying power which seems pretty magic to me.

 

20110329-jrcq5u3ewn527ks31kktgqaied.jpg

 

 

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There is no "magic" residing in precious metals, the "magic" has been in the Fed's aggressive monetary policy.

Yes, you could call this the gold bug mantra: my ounce stays an ounce, but FRNs just turn into confetti.

 

The real magic is that the majority, the paper bugs, still take that confetti for real. It's truly magic, an illusion.

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Yes, you could call this the gold bug mantra: my ounce stays an ounce, but FRNs just turn into confetti.

 

The real magic is that the majority, the paper bugs, still take that confetti for real. It's truly magic, an illusion.

 

It is a wondrous illusion that can last for a long time but when the inevitable end comes, it is brutal.

depression.jpg

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Pix/GF, what's the worst thing that could happen right now, to gold?

Getting too expensive too fast, I'd say.

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Just to continue my response here Pix, I think you may have the wrong target in your sights. My impression is that the western governments have essentially now been taken over by the corporate sector, and that is what has allowed situations to develop that are almost unreal, eg such as Dick Fuld of Lehman earning $400 million over a few years. It's a sign of corporate control over government rather than the other way around. Going back to the trading my aim is to extract funds from the gamblers in the market (and they are legion) and put them to better use. If things work out for me I plan to get involved in a charity and give away a large slice of profit to worthy causes therefore I can enhance my own position and more importantly enhance the position of others, I view that as being highly productive, and of course if I am successful and others see that, perhaps they might be encouraged to do the same, who knows.

A noble cause but what happens if you are unsuccessful, you would have just played the game as they have encouraged you to. The thing about making money easily in the markets is that the money made will never be enough and the gambler in you will always want to push it just a bit further until it bites. Every dedicated gambler claims to have an amazing system which gives them the edge, to see this just chat to any of the regulars in the bookies.

 

I don't have my sights set on the wrong target, I have been talking mainly about the rise of speculative derivatives and ultra short term high frequency trading by the big banks. You and DrBubb have taken it upon yourselves to make this more personal, which makes me more sure that I am on to something.

 

I wonder how much of the money made by the years of trading by DrBubb has actually ended up being given away to worthy causes?

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A noble cause but what happens if you are unsuccessful, you would have just played the game as they have encouraged you to. The thing about making money easily in the markets is that the money made will never be enough and the gambler in you will always want to push it just a bit further until it bites. Every dedicated gambler claims to have an amazing system which gives them the edge, to see this just chat to any of the regulars in the bookies.

 

I don't have my sights set on the wrong target, I have been talking mainly about the rise of speculative derivatives and ultra short term high frequency trading by the big banks. You and DrBubb have taken it upon yourselves to make this more personal, which makes me more sure that I am on to something.

 

I wonder how much of the money made by the years of trading by DrBubb has actually ended up being given away to worthy causes?

 

It's not easy to make money in the markets. I am not a gambler.

 

I risk 0.3% of my capital on each trade (futures). How much are you risking on your trade?

 

Can't you see that you are also a speculator? And do you turn the mirror onto yourself regards to the worthy causes?

 

The reason I have been responding to you on this thread is largely because I believe (perhaps falsely) that you see traits in other people that you dislike, but, you also recognise these traits in yourself. To comprehend this dichotomy you seek to separate what you do (investing as you classify it) from what traders do (investing but on a very short timeframe).

 

What concerns me is that I have read recently that gold is "risk free" and also that you don't consider yourself to be a speculator. You are a speculator Pixel8r. You are speculating that Bernanke is less clever than everyone thinks (perhaps he wants people to think that) and that monetary policy cannot reverse course (as are many others).

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It's not easy to make money in the markets. I am not a gambler.

 

I risk 0.3% of my capital on each trade (futures). How much are you risking on your trade?

 

Can't you see that you are also a speculator? And do you turn the mirror onto yourself regards to the worthy causes?

 

The reason I have been responding to you on this thread is largely because I believe (perhaps falsely) that you see traits in other people that you dislike, but, you also recognise these traits in yourself. To comprehend this dichotomy you seek to separate what you do (investing as you classify it) from what traders do (investing but on a very short timeframe).

 

What concerns me is that I have read recently that gold is "risk free" and also that you don't consider yourself to be a speculator. You are a speculator Pixel8r. You are speculating that Bernanke is less clever than everyone thinks (perhaps he wants people to think that) and that monetary policy cannot reverse course (as are many others).

 

I wrote that but amended it to: Ok, there are no absolutes but the risk from theft, loss, natural disasters etc would be extremely small for a cautious person - the risk cannot be quantified because of the variables but most importantly, there is no counter-party risk - as you asked for quantifiable risk.

 

Bernanke is just the public face of a huge hidden system - it matters not whether he is the cleverest person in the world, the circle of debt, monetisation of debt and lack of productive output cannot be squared.

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I don't have my sights set on the wrong target, I have been talking mainly about the rise of speculative derivatives and ultra short term high frequency trading by the big banks. You and DrBubb have taken it upon yourselves to make this more personal, which makes me more sure that I am on to something.

 

I wonder how much of the money made by the years of trading by DrBubb has actually ended up being given away to worthy causes?

That is a low blow, Pixel.

 

I think you should mind your own garden, instead of trying to look after mine.

 

BTW, I can tell you that I wrote a cheque one year to the US government for over $400,000 - can we call that as "charity?"

It felt like it. Had I been a UK citizen living in HK, instead of an American, the tax would have been zero.

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Here's a graph for you to look at, it is crude oil valued in various currencies and gold. You will notice that since we have been alive gold always buys around the same amount of oil, which can't be said for any currency. So really when you think about it gold is the least speculative of all currencies, it has throughout history preserved it's buying power which seems pretty magic to me.

 

20110329-jrcq5u3ewn527ks31kktgqaied.jpg

YOu should understand that Gold is a better store of wealth than oil,

for the very simple reason that it is cheaper and easier to store than Oil... and easier than food too (since food spoils.)

 

But without that, Oil would be just as effective a store of wealth as Gold, so Gold has no magic for retaining value beyond other essential commodities.

 

But oil in the ground, might be a better store of value than gold, because it is NOT SO EASILY STOLEN as gold is. Think about it.

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YOu should understand that Gold is a better store of wealth than oil,

for the very simple reason that it is cheaper and easier to store than Oil... and easier than food too (since food spoils.)

 

But without that, Oil would be just as effective a store of wealth as Gold, so Gold has no magic for retaining value beyond other essential commodities.

 

But oil in the ground, might be a better store of value than gold, because it is NOT SO EASILY STOLEN as gold is. Think about it.

 

Try telling Gaddafi that.

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Try telling Gaddafi that.

True.

But Gaddafi brought the risks upon himself, and his gold may be no more safe than his life.

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There is a big difference in mark-to-market accounting for financial assets and general business ones. I agree that mark-to-market doesn't make sense for a lot of businesses but they operate within their means and haven't become too big to fail and require bailing out at tax payers expense.

 

I disagree. Financial assets have an underlying value to the businesses that own them that may or may not be accurately reflected in market value at any given time. And no one is in a better position to evaluate that value than the managers who run the business. Take an example of a mortgage that a bank loans to a person so that they can buy a home. That loan is presumably recognized as an asset by the bank (you'll have to forgive me for not being intimate with the details of bank accounting, but the general concepts hold true for any company.) That asset will generate earnings for them over time as the homeowner pays interest on the loan. I don't know exactly how they value such assets, but if it were me I'd value it (for internal management/investment purposes) the same way I do any other investment - via a net present value estimate of future earnings. The accounting standards, however, probably require some other method of recording the asset value - probably just the exact amount of cash that was loaned out. So right away there is a disconnect between what the asset is really worth to me as a business and what the asset is valued at on a set of GAAP financial statements and we haven't even talked about the market yet. At any given day, the market value of that asset could easily fluctuate +/-10%. If it was a large asset, there may even be "no bid" on any given day (remember late '08?). No one can run a business, financial or otherwise, with asset values changing from 0-110% on any given day. The asset values aren't really changing that much for the business - it's just the market prices that fluctuate so much. Marking to market, then, just introduces a hell of a lot of volatility into a balance sheet. For some that may not matter, but for a bank that is required by regulators to maintain a minimum capital ratio or be forced into liquidation - it certainly does matter.

 

Now you are concerned that the homeowner has missed a payment or two on his loan and that the bank still reports the asset at full, unchanged value. I agree that there should be some partial reduction of asset value at that point (assuming the GAAP value wasn't way too low to begin with) as it is clear that the future earnings won't be as high as orginally thought or may be negative. If the bank hides that - that is fraud. It has nothing to do with mark-to-market. The market doesn't have a clue what the asset should be valued at because it will take many months to even get the homeowner evicted. And each situation is individual. Maybe the homeowner just had a medical incident, missed work, and will be back to work in another month and will be able to make their payments again - in which case the asset is still worth most of its originally expected value. Or maybe you are concerned that the market value of the underlying property has gone down and therefore you feel that the bank should write down the asset. The problem in this case is with how you are valuing assets. For a functioning business (i.e. not a business in liquidation), the assets are valuable because of their FUTURE earning power. As long as there is confidence that the homeowner can/will make their payments, I see no reason to reduce the asset value of the loan.

 

I don't invest in banks because I don't have the time to learn their business and their assets and understand their true value. No one expects GAAP accounting to be able to provide for truly understanding the underlying value of the business. And it is quite clear to me that mark-to-market wouldn't even come close. If I thought mark-to-market was a legitimate form of valuation, I wouldn't even bother investing as you're basically accepting the efficient market hypothesis. Why would you buy shares of a junior miner if you thought their business was worth their market value? It wouldn't make any sense. You buy equity in a miner because you think the market is UNDERVALUING their equity - hopefully by a substantial margin which gives you a lot of upside.

 

All of this is getting off of the main purpose of this thread, however. I'm still waiting to see if a case can be made to outlaw high frequency trading here. I haven't seen it yet.

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All of this is getting off of the main purpose of this thread, however. I'm still waiting to see if a case can be made to outlaw high frequency trading here. I haven't seen it yet.

Dave White on TFNN talks about HFT quite often.

 

What he dislikes about it is the ADVANTAGE that it gives to some traders, and he also thinks that those who have such an advantage should take some responsibility for "orderly trading" in the market, in the same way that market makers do (or did, in the past.)

 

In the Flash crash, the HFT "took" liquidity from the market - ie they were net sellers - rather than "providing" liquidity, being net buyers. He thinks that is wrong. And he sees an regulatory effort coming to force them to trade more responsibly.

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I disagree. Financial assets have an underlying value to the businesses that own them that may or may not be accurately reflected in market value at any given time. And no one is in a better position to evaluate that value than the managers who run the business. Take an example of a mortgage that a bank loans to a person so that they can buy a home. That loan is presumably recognized as an asset by the bank (you'll have to forgive me for not being intimate with the details of bank accounting, but the general concepts hold true for any company.) That asset will generate earnings for them over time as the homeowner pays interest on the loan. I don't know exactly how they value such assets, but if it were me I'd value it (for internal management/investment purposes) the same way I do any other investment - via a net present value estimate of future earnings. The accounting standards, however, probably require some other method of recording the asset value - probably just the exact amount of cash that was loaned out. So right away there is a disconnect between what the asset is really worth to me as a business and what the asset is valued at on a set of GAAP financial statements and we haven't even talked about the market yet. At any given day, the market value of that asset could easily fluctuate +/-10%. If it was a large asset, there may even be "no bid" on any given day (remember late '08?). No one can run a business, financial or otherwise, with asset values changing from 0-110% on any given day. The asset values aren't really changing that much for the business - it's just the market prices that fluctuate so much. Marking to market, then, just introduces a hell of a lot of volatility into a balance sheet. For some that may not matter, but for a bank that is required by regulators to maintain a minimum capital ratio or be forced into liquidation - it certainly does matter.

 

[...]

 

I'm a bit out of my depth with regards to accounting but, out of interest, don't you have to declare the assets of your company from time to time?

 

I know my company has to do this on an annual basis, and it's not easy to do with a number of chemicals on stock that heavily fluctuate in price.

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Off topic but interesting all the same;

 

http://www.youtube.com/watch?v=GuqZfaj34nc

There may be something to it.

But look at the experts they quoted:

 

Dr James Thring.

 

That name had a certain ring to it for me, so I looked into his background:

 

open050411_295_123.jpg

Dr James B Thring (founder Ministry of Peace & Legal Action Against War)

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If derivatives had been properly accounted for by the bankers what caused, Lehmans, Bear Sterns and AIG to go bust and the rest to sell tonnes of toxic debt to the fed?

 

They had obviously been using the accounting rules to hide their massively leveraged bets on a certain outcome, there was obvious fraud which was able to be achieved by the fact that the derivatives market, the biggest in the world, is unregulated and only needs to be accounted for when the contract finishes rather then when the contract becomes worthless.

 

I think the same sort of speculation is going on now as the amount of derivative contracts is still rising and still doesn't have to be accounted for properly, bad debt can be held till the contract ends then rolled forward that is why the amount continues to grow. The US allows bank to report their derivatives as net exposure this hides the amount of their total exposure and their fragility. So infect they can build massive positions but only report the net exposure, not included in this net calculation are loads contracts which are known to have failed but have not yet ended. This leads to the creation of the toxic debt.

 

There is currently accounting changes being discussed but as usual the US banks are protesting.

 

Big U.S. banks oppose derivatives accounting plan

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I'm a bit out of my depth with regards to accounting but, out of interest, don't you have to declare the assets of your company from time to time?

 

 

Yes, but our assets get recorded at cost and then depreciated over a time period for tax purposes. We have zero asset value for our vehicles, for example, because they are all fully depreciated.

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BTW, I can tell you that I wrote a cheque one year to the US government for over $400,000 - can we call that as "charity?"

It felt like it. Had I been a UK citizen living in HK, instead of an American, the tax would have been zero.

You can't escape THE Empire. Just look how Osama ended up. However, if you went back, you would enjoy the cheapest energy costs of the Western world.

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If derivatives had been properly accounted for by the bankers what caused, Lehmans, Bear Sterns and AIG to go bust and the rest to sell tonnes of toxic debt to the fed?

 

Companies can and do go bust every day regardless of how they prepare their financial statements. You can mark-to-market derivatives all you want but what causes companies to go bust is CASH.

 

When you run out of cash, can't borrow more, and can't liquidate assets, nothing else matters.

 

On the other hand, if you have lots of cash you can be completely, utterly insolvent and losing billions and it's no big deal as long as you have plenty of cash to cover your obligations as they come due.

 

The point of all this is that it doesn't matter how you value assets and liabilities because value is subjective. The value of any particular item is different for different persons and businesses. And it is often the case that the market value of an asset is significantly less than the value of that asset to the business that owns it.

 

You seem to think that a set of financial statements exists for the purpose of showing the liquidation value of a business at any point in time. That is wrong. The financial statements allow the business owners or officers to manage their business and ensure that it is functioning properly in fulfilling its goal of providing goods and services to human persons at a profit that rewards the owners. If the financial statements don't fulfill that goal, they are worthless for the purpose of managing a business. If I was an auctioneer of liquidating businesses I guess mark-to-market would make sense, but as a business owner and investor it doesn't make any sense.

 

On the specifics of the investment banks you mentioned, I am ignorant, but I suspect their demise had little to do with their financial statements and a lot to do with bad management and taking on too much risk.

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You can't escape THE Empire. Just look how Osama ended up. However, if you went back, you would enjoy the cheapest energy costs of the Western world.

Remember: $400,000 would buy a nice house in the US - and even a decent flat in Hong Kong.

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On the specifics of the investment banks you mentioned, I am ignorant, but I suspect their demise had little to do with their financial statements and a lot to do with bad management and taking on too much risk.

Indeed.

The 50:1 gearing they had (or whatever it was) showed they were taking on enormous risks.

 

Is it lower today?

Probably. But still too high, I reckon. I think 20:1 is a reasonable maximum, and much less than that, if assets are high risk.

 

I think part of any bailout should have been to force the top management (ie top 5-6 guys) to leave the company, and forfeit to investment a part of their pensions in the post-bailout bank they left behind.

 

A precedent like that, would have make testosterone-fueled "big swinging Dick" risk takers at the top of big banks think twice before repeating old mistakes. It would get rid of most of the "moral hazard" issues.

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The U.S. investigative news show "60 Minutes" had a segment Sunday on high frequency trading:

 

 

http://www.cbs.com/primetime/60_minutes/video/?pid=hQ6KF5TPh3jqZAVh9lwCmDg6WsDcmjqp&vs=Default&play=true

 

 

 

Not much of an investigation in my opinion. The major idea suggested: via colocation the major exchanges are giving the quants first access to the data which puts non-colocated investors at a disadvantage. The exchange's rebuttal: colocation is for sale to anyone who wants to pay our fees. Ultimately the exchanges may be undermining their future if a viable alternative arises. I wonder, however, if all the volatility is not actually an advantage for small retail investors. I have been seeing good opportunities in the last months (both to buy and sell) based on fundamental metrics whereas in the past those same metrics usually indicated that basically all large/mid-cap precious metal equities were overvalued.

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