By John Mauldin
400 Billion Yellow Aspirins
The US Government Is in the
“No-Money-Down” Mortgage Business
Crash Alert?
Is Social Security a
Ponzi?
Catastrophic Success
Europe, and Breaking the Light-Speed
Barrier
>
Breathes there a man with brain so dead
Who never to himself hath
said,
“Social Security looks like a Ponzi Scheme?”
- With apologies to Sir Walter Scott
>
Today we look at Social Security. In the US, Texas Governor Perry touched the
third rail of Social Security and called it a Ponzi scheme, which of course
immediately made him the leading candidate in the “shoot the messenger”
category. Behind the rhetoric, we look at some actual numbers. No, not the
unfunded liabilities, that’s too easy. Let’s look at what a heartless,
uncompassionate man President Roosevelt was when he started Social Security (and
that’s what many will call me after reading this!). Behind the tongue in cheek,
there are some very real issues that do not get addressed when we talk about
Social Security, but that need to be part of the discussion. And of course, we
must start off with the results of the FOMC meeting, which has me feeling not at
all amused. What are they thinking? Apparently, they are seeing the results from
another, alternative universe. There is a lot to cover as I head off to London,
where I will finish this letter.
But first a very important announcement. I am very excited to be able to
introduce my readers to a new mutual fund offered by my friends Altegris
Investments. This fund is a blend of five commodity trading advisors or CTAs.
Normally, to access a CTA you be to be an accredited investor, with all the
net-worth requirements and limited liquidity. But Altegris has figured out how
to wrap a mutual fund around CTAs and create a fund of commodity traders with
all the usual aspects of a mutual fund (daily pricing, liquidity, etc.).
I have long been involved in the commodity-trading advisor space (some 20
years) and am a proponent of CTAs as a way to diversify portfolio risk. I have
written a detailed report on this fascinating sector in relation to the fund,
and it is available for free at
http://www.altegrismutualfunds.com/landing/mauldinreports1.aspx,
along with more information on the fund (including the offering memorandum and
important risk disclosures, which are also included at the end of this
letter).
The fund has been very well received since its launch and has grown rapidly
to over $1 billion. There has been very active interest in the professional
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what I think is a very solid fund. My partners at Altegris have decades of
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relationships with many of the managers (I actually started my investment career
in the commodity fund space, so have more than a passing knowledge of the
arena). Given the potential for volatility in the global markets, I think it
makes sense to have some exposure to funds that can go both long and short
(depending on their models). I urge you to read my report.
My mother used to tell me, “John, if you can’t say something nice, then don’t
say anything at all.” So let’s see if I can find something to nice to say about
the FOMC announcement. How about: “At least they didn’t cause TOO much damage”? As
Rich Yamarone tweeted immediately after, they announced they would buy 400
billion white aspirins and sell 400 billion yellow aspirins. This was not
something that should have been done, but thankfully they only did some $400
billion and not a few trillion, which could have really screwed (a technical
economics term) things up.
With Operation Twist as part of their new mix, they announced they would sell
short-dated and buy long-dated treasuries. This sent the ten-year yield down to
1.72% (yields were already dropping), although as I write it is back up to
1.79%, which without the recent action would be the all-time low. The 30-year is
below 3%, at 2.85%, which makes those of us who have been predicting such an
event for many years finally right. I think I will just savor the moment and not
make any more predictions for a week or so. It was a long time coming. It would
have gotten there anyway, even without this Fed action. Which makes what they
did impotent and pointless. More below.
However, such low rates are not cause for merriment but for thoughtful pause,
as low rates might be good for the government and for those looking for
mortgages, but they threaten to wreak havoc on pension plans, as the bond
portfolios on which they are built are paying less and less, and that means they
are becoming more and more underfunded, and stocks are not helping. The problem
pension fund trustees have is that lower yields require them to raise their
assumption for future liabilities, which must be discounted at a lower rate.
Lower bond yields, like falling share prices, increase funding gaps.
While few are mentioning this aspect, Spencer Jakab of the FT sent me this
note: “A sensitivity study by Credit Suisse done in mid-August shows how big an
impact this can have. The underfunding for S&P 500 members was then an
estimated $390bn. A 25 basis point fall in discount rates would have inflated
the deficit to $435bn – about the same as 4 percentage points of investment
underperformance this year. In August alone the deficit among the broader
S&P 1500 widened by some $75bn, Mercer Consulting found. Slumping equities
and bond yields brought the deficit from 12 to 31 per cent since April
alone.”
Not to mention what low rates do to people who are trying to live off their
savings. How can you survive on 1% yields from a small income portfolio? That
means you start reaching for yield in places that are not as safe or liquid,
which is precisely what we do NOT want our retirees to be doing. Wrong, wrong,
wrong. An unintended consequence of this Fed policy is that retirees are being
put at serious risk. And it is an important consequence. So many retirement
plans were formed ten years ago, assuming they could safely withdraw 5% a year.
Now that is difficult, at least if we’re talking “safely.” There is going to be
a plethora of schemes to entice retirees with “safe” higher-yielding investment
programs. Please, remember that there are no free lunches. If you are getting
above-market yields, you are taking above-market risks.
Now, let’s look at what the Fed is actually likely to do. They have indicated
their actions will occur over the next nine months. This also means they will
sell most of their short-term treasuries and increase their duration, but not
necessarily their risk. It is still US government debt. These projections are
from Bridgewater.
Treasuries the Fed will likely sell:
|
What the Fed Has |
Likely Sales |
| 0-1 Years |
$138 |
$138 |
| 1-2 Years |
$156 |
$156 |
| 2-3 Years |
$221 |
$106 |
| Total |
$515 |
$400 |
On average, $400bn at 1.5-year maturity
Treasuries the Fed will likely buy:
|
Eligible Total |
Eligible Outstanding |
Eligible New Issue |
Likely Purchase |
| 6-7 Years |
$353 |
$179 |
$174 |
$140 |
| 7-10 Years |
$581 |
$383 |
$198 |
$160 |
| 10-30 Years |
$521 |
$395 |
$126 |
$100 |
| Total |
$1,455 |
$957 |
$498 |
$400 |
|
Rates have already moved in anticipation, as seen below.
One has to go out beyond 5 years to get more than a 1% yield. Who is buying
this stuff? Any pension plan doing so is locking in low returns and underfunding
for that period. This is just a disaster in the making in the pension and
insurance world. If you couple that with a recession, a Muddle Through Economy,
and a secular bear market, it is a prescription for a pension-funding train
wreck of epic proportions, which means that the large companies will have to
start writing checks, which will be a hit on earnings.
Note: Adding to pension concerns about the stock market, the ECRI weekly
leading indicator has been down for six of the last seven week. More evidence
that we are in for a real slowdown, if not a recession, sooner rather than
later. This just in from the Wall Street Journal:
“Providing fresh evidence of weakening global trade, FedEx Corp. said
Thursday it is cutting capacity and trimmed its full-year earnings forecast amid
weaker demand, mainly due to slowing sales of consumer electronics made in
Asia.
“The news comes as a slide in Asian air cargo traffic that started in July
has shown no immediate signs of abating. The slowdown extends to the makers of
perishable foods, high-end apparel and automotive and industrial parts that fill
the holds of planes flown by FedEx and rivals such as United Parcel Service Inc.
and Cathay Pacific Airways Ltd.
“‘The consumer just doesn’t have an appetite’ for spending more, Chief
Executive Fred Smith said during a post-earnings conference call. As a result,
he added, ‘we don’t anticipate a significant peak [shipping season] this year.’”
–Bob Sechler of the WSJ
But that’s just it. What happened with QE2? The money went into commodities
and stocks (for which Bernanke again took credit), giving us inflation and a
good feeling. But the economy, in terms of jobs, hours worked, incomes, and GDP,
went south or sideways. Where was the carry-through? I somehow don’t remember
that the stock market was part of the dual mandate, yet Bernanke listed its rise
among the results of QE2. My bet is that with QE off the table, that will come
to be seen as a temporary rise. A sucker’s rally.
And now that we have used that QE bullet, where are we? The stock market is
tanking, as are commodities. Bond yields are making new lows. The dollar is
getting stronger. Can someone tell me why we went through this exercise? It
seems we are right back where we were, yet with even more uncertainty. And now
we start something that my Dad would call a piss-ant (a small, rather noxious
and foul variety of Texas ant) program called Operation Twist, which has no real
hope of doing anything that will help the dual mandate. It simply creates the
illusion the Fed is doing something.
I said at the time of the 2nd QE that the main problem I had was
that we were wasting a bullet that we would (and now do) need when the next
liquidity crisis came. And we have now kicked inflation up. As Rob Arnott wrote
me in a private message, when you look at the next four months, which will “drop
off” the year-over-year rate of inflation, it’s not pretty. Core could easily
run up to more than 2.5%. The Fed may have handcuffed itself at the very time we
need some liquidity. QE2 was a very bad and ill-conceived move, as is the
current one. It is not smart to mess with Mother Market. (Can anyone say Fisher
for Fed Chair?)
The Fed was very clear in its statement that it wants mortgage rates to go
down. But anyone with a pulse knows that the problem in the housing market is
not that rates are too high. Dropping rates another 25-50 basis points is not
going to help all that much if you can’t get the 20% down you need to finance a
house, let alone get a nonconforming loan or, God forbid, a jumbo loan. With
banks feeding into the market “REO” homes they get from foreclosures, it will be
several years until we get close to a bottom in housing. But new homes are being
built. So what gives?
This week I went to a fund presentation on new-home construction and sales. I
was invited by a very knowledgeable real estate consulting firm (John Burns),
and I was interested to know, how do you raise money in this market for new-home
“spec” construction? The numbers and the company sales history they presented
looked very impressive, but I could not figure out how they were closing the
rather significant number of homes per development they did. No one else I knew
of was close, from what I have seen (I watch these things). When the person who
presented sat down, I looked at the mailer they send out by the millions. They
send it to apartment renters. It says, “Why would you rent an apartment when you
can buy a new home for $699 a month with NO MONEY DOWN?” And at very low rates,
I might add.
These are starter homes, smaller but quite nice. (Note: a lot larger than the
houses I grew up in with three siblings!) But they are on the outskirts of town,
and that triggered a thought in the back of my head. Joan McCullough had tipped
me to this.
“Are you using USDA financing to get the no-money-down?” The short answer was
yes, along with FHA (3% down) and VHA. And what, you may be asking, is USDA
financing? And how do I get some?
The USDA is the US Department of Agriculture. They currently have $24 billion
they can use for government-guaranteed financing of homes (up from $12 billion
last year). This is not Fannie or Freddie, this is the good old US D of A. As in
farms and stuff (and food stamps and housing and… basically they got all these
odd mandates long ago, when congressional agricultural committees wanted to
expand their power). From Real Estate Economy Watch:
“Founded in 1949 to spur home sales and development in rural areas, the US
Department of Agriculture’s popular direct and guaranteed rural housing loans
today are one of the few places in America you can still get a mortgage with no
money down at competitive rates.
“Borrowers don’t have to be lower income; in fact they can make slightly more
than the median. To qualify for the government guaranteed loans, borrowers can
earn up to 115 percent of the median income for the area. Nor do they have to
buy in a rural area. They can live relatively close to a major urban area or in
a popular resort community, however qualifying areas were recently redrawn to
comply with the program’s rural mandate.
“Best of all, no down payment is needed to get financing through
approved lenders, which makes the USDA program more attractive to borrowers who
qualify than FHA.” (emphasis mine)
And there are actually subsidies available, so that you might not need to
make the entire payment. Now, you can’t use this to buy a McMansion. You have to
be in a rural area, which has come to be defined as outside the city limits
(except in certain areas). There are income limits. The program does attempt to
help lower-income families, and I am not trying to be snarky here, but these are
government-guaranteed loans (read: taxpayer-guaranteed) at 100%, being handed
out in areas where in the city homes are going into foreclosure and need someone
to live in them, yet right outside the city you can buy this cute new home.
Which is a situation more or less guaranteed to keep home values down in the
rural outskirts, yet we want first-time buyers to snap these up!
The intention here is all well and good. And the buyers are seeing it as a
way to reduce their monthly payment, and a house is still the American Dream.
And, over time, it will be. If they stay in them long enough and don’t need to
move, etc. I just think the unintended consequences (there are those words
again, as we’re talking about a government project) are likely to be larger than
anyone thinks.
I invite you to go to
http://www.rurdev.usda.gov/Home.html. Look around. Notice that
4 of the first 5 press releases on the home page have the words
job
creation in their titles. Plus a lot of other current buzz words, like
energy, environment, etc.
This whole side trip got started with our analysis of the Fed and its recent
actions. Let’s quickly return, before moving on to Social Security. This week’s
action is not useful. It falls under the category of “Let’s do
something to show we know there is a problem.” It will provoke
suspicion or opposition among those of a conservative monetary bent, probably
hurt small and medium-sized banks (as it drives down the yield curve, which
bankers depend on to make money), and lower interest rates for savers.
This is from my good friend Art Cashin today (he’s head of floor operations
of UBS, and you see him all the time up on CNBC). I thought it should go here,
after the market action of the last few days. Just as a heads-up.
“The Thursday/Monday Syndrome
– We had suggested yesterday that we should probably explore the history of what
old fogey traders refer to as the Thursday/Monday syndrome. While it would be
pretensions to say that was prophetic, it was, to say the least, serendipitous,
for yesterday’s action looked like the perfect first step in a Thursday/Monday
setup.
“We had intended to give you a more thorough history of the syndrome with
lots of analytical examples starting with the classic one – October 1929.
Unfortunately, events are moving too fast this week, so we have neither the time
nor space to wax poetic on the topic. So, you will just have to rely on my
recollections of 50 years of watching markets and hundreds of nights studying
market history.
“The classic Thursday/Monday syndrome starts with the kind of action we saw
yesterday. The markets open under pressure and selling accelerates in swelling
volume. By early afternoon, there is a virtual stampede of selling. Then, later
in the session, stocks stabilize a bit based on some reassurance. On Thursday,
October 23, 1929, that reassurance came in the form of Richard Whitney bidding
‘205 for 10,000 steel’ on behalf of the bankers’ rescue pool. (Read a terrific
account in the chapter ‘The Crash’ in Fredrick Lewis Allen’s marvelous and
essential ‘Only Yesterday’.)
“The action on Friday (and Saturday in the case of 1929) is uneven, often
ending choppily steady or somewhat weaker.
“Then on Monday, the trapdoor opens with liquidation and margin calls
bringing tsunamis of selling.
“Is that what’s going to happen? Who knows? If it were that easy,
kindergarten kids could do this. But chance favors the prepared mind. Old fogeys
will guard against undue risk and exposure. Some may even get out a special
shopping list. They will set their basket right, put in silly bids and hope some
panicky soul throws a bargain in. Recall the story of the floor messenger boy,
who, in 1929, according to legend, bought White Sewing Machine with his silly
bid of one dollar when all other bids canceled.
“One final note on the syndrome. Not infrequently, the Monday massacre spills
over into Tuesday morning – a capitulation bottom in mid-morning resulting in a
massive reversal to the upside.”
Breathes there a man with brain so dead
Who never to himself hath
said,
“Social Security looks like a Ponzi Scheme?”
- With apologies to Sir Walter Scott
Governor Rick Perry has been getting slammed of late for his comment that
Social Security is a Ponzi scheme. Note: This is NOT an endorsement of Perry or
any other candidate; it is a segue into the more important issue of Social
Security.
Perry is not saying anything that has not been said for over 20 years. I seem
to remember that back in my younger days (as in the ’80s) I actually published a
book on Ponzis. The classic Ponzi is where you get money from one group and then
find another group to pay the “returns” to the first, and so on, until you run
out of people and the game is up. The difference between a Ponzi and Social
Security is that SS is legal and is done in full view of the public with
everyone knowing the deal.
As long as each succeeding generation is willing to pay and is large enough,
SS can go on. But now we have trillions in unfunded liabilities. All Perry is
suggesting is that we admit the problem and fix it. Not exactly radical or
suggesting we end Social Security, as Romney and the others claimed.
(Side note. I found that use of the attack mode disgusting and totally devoid
of the leadership I want to see on that stage. It was trying to create a
“gotcha” moment. Why not turn it into a teaching moment, to say how you would
fix Social Security or admit you have no clue as to the true nature of the
problem? Afraid to touch the third rail of Social Security? Then get out of the
race. You have no ability to lead this country through what will be a crisis
presidency if you can’t even admit to some basic, obvious truths. And how will
you even get to the real problem, Medicare?)
Most of the “fixes” are some combination of increasing the retirement age,
raising the cap on how much is subject to SS taxes, and/or some form of means
testing. Social Security can be fixed if the political will is found to do one
or all of those. Some comments on those choices:
First, there is some resistance to means testing, as it would be an admission
that Social Security is a form of welfare and not a “savings account” that is in
some hidden lock box. By now, anyone with a neuron firing knows there is no lock
box and the Social Security funds are an entry into a government accounting book
that don’t really exist except as an IOU. Politicians of all stripes have used
the Social Security money to pay for other government expenses. Those funds were
even counted to offset the deficit, although now that Social Security is no
longer in a surplus, that has gone away.
Isn’t that what Ponzi did? He took money from one group, telling them they
would get it back later, and then spent the money with another group, telling
them the same thing.
OK, think using the term Ponzi is harsh? Some Republican theme? Then
let’s quote uber-liberal Paul Krugman from 1996:
“Social Security is structured from the point of view of the recipients as if
it were an ordinary retirement plan: what you get out depends on what you put
in. So it does not look like a redistributionist scheme. In practice it has
turned out to be strongly redistributionist, but only because of its Ponzi game
aspect, in which each generation takes more out than it put in. Well, the Ponzi
game will soon be over, thanks to changing demographics, so that the typical
recipient henceforth will get only about as much as he or she put in (and
today’s young may well get less than they put in).”
Let me say, I am all for Social Security. While I supplement my mother’s
income, her Social Security check is very important to her. Not enough to live
on, but every bit helps. (I have friends whose parents’ sole income is Social
Security, and I totally get how small it is in today’s world.)
I also have seven kids. Hopefully, most or all of them will not need Social
Security when they retire in 40-50 years. But some might. I want it to be there
for them if they need it. But if we don’t properly fix it, it won’t be. I want
it fixed.
I turn 62 next month. I am eligible for Social Security. I have paid in a lot
of money over the last 45 years of working, for the last 20 years at the max
level (with some off years here and there). Am I “due” something? Based on the
current law, I am. But I must confess that life has been good of late (there
have been times when I thought I would need every penny of Social
Security!).
I think Social Security should be means tested. We should recognize it for
what it is, for what Krugman called it: a redistributionist scheme. And a good
and necessary one from the perspective of civilized society. Means testing would
go a long ways to “fixing” the problem. But it doesn’t get us there.
We need to raise the retirement age, and by more than a few years. And this
is where I get called a heartless (insert expletive)! “How could you want us to
work until 70 or even later? How can we do that? Is that fair?”
Let’s use as our model that icon of the left, the King of Compassion,
President Franklin Delano Roosevelt (FDR). He created the Social Security Act in
1935. He put the retirement age at 65. From today’s perspective, that seems
about right, if not a little early. But what did it look like back then? I refer
you to a report from the US Senate in 2006 on life expectancy in the US.
Interesting reading, but for our purposes we will scroll down to page 26 and the
detailed life-expectancy tables. (
http://aging.senate.gov/crs/aging1.pdf)
In 1900, the average life expectancy was 47 years (shockingly, the life
expectancy for black males was only 32). By 1930 it was 59, which, if they kept
such records then, would have been what they were looking at when the designed
Social Security. In 1935 it had risen to 61.
So FDR set the retirement age four years above the average life expectancy.
So much for compassion. He (they) assumed you would work into what was for them
advanced old age. Today, 62 does not seem all that old (at least from my vantage
point!). Look around – there are lots of people in their 60s and 70s with very
active lifestyles.
Why is that? Let’s fast-forward. In 2003 life expectancy was up to 77. Today
it is 79 and change. Life expectancy has been rising more or less steadily rate
at about 1 year for every 4 years of the calendar. So that means that in 40
years life expectancy, if it continues as it has, will be around 90. Under
today’s laws one could retire at 62 or 65 or 67 and, if you just lived an
average lifespan, get far more in benefits than you paid in. Remember, 90 will
just be the average.
So when someone suggests that we move the retirement age to (gasp!) 70 in a
few decades, I just smile and think back to what FDR would do. If Social
Security had been set up to track life expectancy in 1935, when it was formed,
then retirement would be set at 83 or 84 today! Not exactly the golden-years
concept, is it?
But then we come to what I call Catastrophic Success. Advances in medicine
and biotech in the next 10 and then 20 years are going to radically alter life
expectancy. Alzheimer’s disease will be gone. I will tell you about a potential
cure for cirrhosis of the liver (and all kinds of cirrhosis) in a future letter.
Heart disease? Soon be something that can be dealt with. Diabetes? Will be
controlled or gone.
And cancer? There are numerous approaches, but I am following one that will
be in human trials next year and that, in numerous mice studies, shows the
potential to be a silver bullet for cancer in general, and relatively
inexpensive (not a public company).
I could go on and on, but the point is that this Boomer generation is not
going to live up to its part of the generational Social Security bargain. We are
not going to die on time in anything close to the actuarial certainty the
government now assumes (nor do the private pension funds!). Short of a Soylent
Green-type debacle, Boomers will not only break the deal, they may destroy it,
if we do not tie Social Security to the average lifespan.
Health care will soon be a Catastrophic Success. Wildly successful from the
point of view of the individual, but a catastrophe from the point of view of
Social Security. And we are debating whether to raise the retirement age from 67
to maybe 70 at some distant time in the future?
We need to be raising the retirement age by one year every four years. That
means in 20 years the retirement age needs to be five years higher. I can hear
the screams and moans from those 45 and under.
“What a heartless [insert
expletive] Mauldin is. How long does he think I should have to work? It is all
well and good for him,” etc.
I want the Social Security system to be there for my kids in 40 years. And
not dealing with the rapid age increase is one way to make sure it is not. OK, I
will offer a way to retire earlier. If you agree to forego any new medical
treatments introduced after, say, 2014, then I will say you get to retire at the
current SS levels. Like that trade? I didn’t think so.
Think I am being overly optimistic about lifespan? I am not even close. I am
having a small private dinner in a few weeks with Mr. Optimistic Future himself,
Ray Kurzweil (among other books, he wrote The Singularity Is Near – a
very important work on the waves rolling toward us from the future). We will
talk of many things, and I hope to get him to contribute to my next book,
The Millennium Wave, which is all about how the world will look in 20
years. If we stay on his track, then shortly after that time (by 2032) we will
be regenerating the entire human body. Ray (and many others) see a path to
humans living to 150 and beyond, in good health, with younger bodies. It doesn’t
make you immortal. You can still look the wrong way and step in front of a
London bus or climb the wrong mountain and fall off. (Note: Ray does see a path
to immortality of a sort, when we can download our minds into machines and then
reverse the trip. But that’s a whole different level of discussion and farther
down the road.)
I am talking to scientists who are doing the human trials on the first real
regeneration of a human organ, the cardiovascular system. How about a 50-year
warranty on your new heart and cardio system? Then it’s on to the next organ
system. One down, 203 to go. (Start with cardio, as it’s the easiest to deliver
the targeted stem cell to.) Sadly, it will be done in Asia and not in the US, so
we lose tens of thousands of high-paying jobs and don’t get to train a cadre to
physicians on how to do it. Nothing against Asia, but this is US-developed
technology … that would take five years to get through the FDA. For the
management team of the company doing the work, who really do hate the concept of
people dying from old age, that’s too many deaths as a result of waiting. And
there is still a long way to go before we get true regeneration. We (as in those
of us over 60) won’t have time for 20th-century regulators to get in
the way. The clock is ticking.
(Side note for those of you who don’t want to live a very long time: I am
sorry your life is so boring. I see nothing but wonder and new worlds to explore
and cultures to find and tens of thousands of books to read. Ask me in a few
thousand years how it’s going. I’m in no hurry to knock on the gates of the
Other Side. We get there soon enough.)
Social Security as it is set up today is close enough to a Ponzi scheme for
government work. That can be changed, but we have to have the will to do so.
Let’s hope that not just Perry can decide to lead us there.
Heads up, you Junior Rocket Man Kids (remember those days?). Physicists are
doing amazing things. My son Trey and I got a private tour this summer of CERN,
the great physics lab in Geneva. Very cool. But Wall Street is also legendary
for the number of physicists it hires to work on high-frequency trading
programs. Evidently, they have figured out how to get trades done 190
milliseconds in the future. Is the race on to see who can cross the one-day
mark? What is the speed of light when compared to the speed of money?
“Nanex: On September 15, 2011, beginning at 12:48:54.600, there was a time
warp in the trading of Yahoo! (YHOO) stock. HFT has reached speeds faster than
the speed-of-light, allowing time travel into the future. Up to 190 milliseconds
into the future, or 0.19 fantaseconds is the record so far. It all happened in
just over one second of trading, the evidence buried under an avalanche of about
19,000 quotes and 3,000 individual trade executions. The facts of the matter are
indisputable. Based on official UQDF/UTDF exchange timestamps, there is
unmistakable proof that YHOO trades were executed on quotes that didn’t exist
until 190 milliseconds later!” (
http://www.nanex.net/Research/fantaseconds/fantaseconds.html)
Going forward in time is cool, and the same day I got the above notice I read
that the physicists at CERN and in Italy have found subatomic particles that
move slightly faster than the speed of light, making it possible to travel back
in time (only a few nanoseconds, but it’s a start):
“But now it seems that researchers working in one of the world’s largest
physics laboratories, under a mountain in central Italy, have recorded particles
travelling at a speed that is supposedly forbidden by Einstein’s theory of
special relativity.
“Scientists at the Gran Sasso facility will unveil evidence on Friday that
raises the troubling possibility of a way to send information back in time,
blurring the line between past and present and wreaking havoc with the
fundamental principle of cause and effect.
Now, just in case you buy this (and if you did, contact me about a bridge I
have), let me attempt to disappoint. First, as my curmudgeon PhD from MIT and VC
friend Bart Stuck writes, “I think they both had time-stamp errors.” I can’t
vouch for the Swiss and Italians, but I would bet the keys to the kingdom that
there is a computer glitch at the NYSE. High-frequency trading (HFT) is
distorting the markets. It is enriching a few pockets (and that of the
exchange), and I simply do not see how it is in the interest of the public to
allow it.
I also know that fighting HFT is spitting into the wind, as faster tech comes
along every few months. If you force the HFT funds to put their servers across
the street (losing the time advantage of not being co-located with the exchange
servers – milliseconds count!), it will only be a few years until technology has
given the edge back to them. In ten years, when artificial intelligence and
connection speeds are far more advanced, how will human traders compete? Hire
yet another AI to fight back? Wire yourself into the system (already being done,
by the way, in rudimentary ways)?
The only way to effectively end HFT is for the exchanges to stop giving
incentives for such trading. I can see the profits for the traders and the
exchanges. I just don’t see the benefit to the rest of us. The SEC should step
in and settle some hash over missed time stamps. If a small broker-dealer has a
wrong time stamp, they are all over us, and you can bet there are fines.
Something is wrong here. If one trade can go “back to the future” then how many
more? Really? A one-off or a symptom? And to finish this on a light note, here’s
a cartoon from my favorite cartoonist, Gary Larson.
It is getting close to time to hit the send button. It has been good to be
home for almost seven weeks and let my body recharge, and spend more time with
my kids and grandkids. Life is not easy for all of them at times. Poor Lively
(perfect angel that she is) was getting a “spanking” as I left for the airport.
I can’t imagine her doing anything naughty, but her mother (Tiffani) thought
otherwise. Two of the adult kids needed some help. It is never the same two at
the same time. And on and on.
This trip should be fun. I love London. And I’ll be in Malta with my European
partner, Niels Jensen of Absolute Return Partners. I will be hosting CNBC
Squawk Box on Wednesday in London. Then it’s on to Dublin and lots of
meetings, as I try to get a handle on the crisis there (my first trip to
Ireland). And a little time driving through the Irish countryside, on our way to
Galway. Then to Geneva to be with friends and clients for two days as I turn 62.
First, dinner with the always fascinating Lord Alex Bridport (the only lord I
know, so I love applying that title) and then a birthday dinner hosted by Herwig
van Hove of Notz Stucki. And then it’s back home to Texas.
In four weeks I head to Cape Town, South Africa, where I will speak at the
Momentum Wealth Investment Summit, and then, back in Texas, I’ll speak November
6 for a charity fund-raising event sponsored by Hedge Funds Care, a wonderful
group that raises money for children’s causes. You can learn more by going to
http://www.hedgefundscare.org/event.asp?eventID=74. I hope to
see you there!
Have a great week and enjoy the weather if you can. The forecast for Europe
is beautiful.
Your wondering if he’ll find his Irish ancestors analyst,
John Mauldin
