Monday, 30 May 2011

Dark Pools Produce Black Swans, Black Pools Produce Black Holes

...And Other Aesthetic Fetishisms Of The Hyperlate Capitalist Disorder

Incipit parodia...

There is a Russian saying - another's soul is a dark pool...

The infrastructure of financial markets is an inverted underground pyramid, which would seem apt for such a pernicious Ponzi scheme.

Firstly, we are presented with the public markets with their tenuous links to Reality but then there are the Dark Pools and, most importantly, deeper still the even Darker Pools (Black Pools?).

All investment banks operate their own proprietary Dark Pool out of sight of regulatory bodies and non-insider traders.

This is dodgy enough.

But these separate pools then conglomerate and trade off one another in even Darker Pools which effectively are the High Stakes Poker Tables that determine every hyperreality.

And who can blame an antisocial corporate body for behaving in such a psychopathic manner?

Would one rather place one's trade secretly and anonymously in non-regulated underground markets and earn the kudos of the brokerage (plus rewards) while gaming the release of this information to the public markets OR would one prefer going to the public markets, dealing with the Commitment of Traders Reports etc with the associated risks of all sorts of upsets from the loss of input price to getting cornered?

Before moving to a more specific evaluation of Dark Pools, Black Pools and Black Swans, let us focus for a moment on three aspects of the ongoing Depression - Quantitative Easing (QE), the banks and outsourcing.

QE has only been successful in blowing an equity bubble.
There is no credit growth in the remainder of the economy.
Effectively, the investment bankers have been betting on a certainty utilising our money as their trading bank, having lost their cash and assets in a previous gamble gone wrong.
There is no investment in the 'real' economy because these people understand that it is fucked.
Meanwhile all of our existences go to pot.

As Noam Chomsky says, we are dealing with "cognitive regulatory capture" by the banks, shadow markets and exchanges.

The Economist: "My main worry is that central banks are repeating the same mistake they have made for the last 25 years. They have intervened to support asset prices by cutting rates whenever markets faltered. This encouraged speculators to borrow money to buy assets, inflating one bubble after another. QE is just the logical endpoint of this process where central banks are cutting out the middleman and buying assets directly.
In the long run, however, asset values are constrained by the growth rate of the economy. Any attempt to maintain them artificially will either end in failure or will be successful only by inflating other prices until they come in line."

Phillip Stevens: "There are a couple of things to say about Britain's banks. They still pose a serious threat to the nation's long term stability and prosperity. They rely for their profits - for the huge bonuses paid to senior staff - on the fact that taxpayers are underwriting the risks. Thus public subsidy is turned into private profit."

Additionally, the competitive nature of neoliberal banking causes structural deficiencies on the road to anti-competitive monopolies or, if we are lucky, duopolies or cartels.

In Australia, meanwhile, the Big Four Banks are forbidden by bipartisan agreement to take each other over.
John Grimond: "That meant they [the banks] had no incentive to pump up their share price or earnings through dealing in dubious products."

But Oz is progressive in both taxation and welfare, at the opposite end of the continuum from the psychoregressive HyperImperium.

And it is the HyperImperium and its client states that are seeing the first serious contraction in the broad money supply in modern times.

Psychopathic short-termism pervades all aspects of this system.

Take outsourcing...

The fundamental stupidity of the globalising firms utilising outsourcing, offshoring and other psycho-fads was that by removing skilled employees, supply bases and infrastructure, distribution networks and sourcing plants from their home country, they had absolutely nothing to return to once the inevitable wage inflation took off in the outsourced territories.
They destroyed, in an act of selfish greed, in order to optimise short term returns to their shareholders.
Strategic this was not.

Through leaving externalities out of their system, the Friedmanists produce successions of Black Swan events, statistically unlikely eruptions in the system caused by chaos and stuff.

Naseem Taleb sums up the current financial crisis even if the imbecility of his concept of Anti-Fragility is just another ruse to continue with a system that has nowhere left to turn.
Super-systemic risk out-quantums evolutionary shock absorption any day of the week.

The current crisis has three causes:
a) an increase in hidden risk and exposure to low probability events (Black Swans). Too much debt was taken on and debt forces one to be very accurate in one's forecasts as a small error leads to ruin.
b) there were asymmetric incentives allowing traders to bet against the probability of events with other people's money leading to lots of rich traders and lots of poor investors.
c) There was a misunderstanding of the tail risks fostered by 'theories' such as Value at Risk which Taleb describes as "the biggest charlatanism in intellectual history" - What? Even bigger than Hayek. Having such models is worse than having no models at all.

His within-system solution is to have maluses as well as bonuses to prevent traders and executives gaming the system.

A deconstruction of the entire farcical edifice would, of course be, preferable.

But let us return to the pre-hypothesis of Anti-Fragility.

Being human, all of our market constructs share structural similarities - currency markets, the insurance industry, options and futures, bookmaking - effectively a hierarchy of psychopathic matrices that only vary to the degree that they are willing to sell their own grandmother.

Taleb's attempt at deep thought is simply myopic.
For sure, all systems are in a state of constant flux and benefit from the shocks and new templates that roller-coaster along their evolutionary paths.
Such equilibrium states are a conglomeration of these instabilities.
But this does not justify pushing aspects like man-made climate change to the limits as there is another level to evolutionary progress - a quantum one.

For the sake of the argument, look at football betting markets in-running.
As the action unfolds in front of our eyes and the roles of the participants become clear, the state of equilibrium is repeatedly disturbed by micro-events on the field of play.
As these motivational and manipulated inputs progress, there is a build up to a completely different quantum reality - the change from a 0-0 scoreline to 1-0.
Once the goal has been scored, the anti-fragility continues but at an entirely new level.

So it is with climate change - Taleb needs to get holistically Real!

Living in a world of state-based economic systems, it should not be surprising that statist structures mimic the Dark Pool/Black Pool template.
For example, Jean Claude Juncker (Chair of the Euro Group of Finance Ministers) has spoken of the need for "secret, dark debates in economic policy making."

Ah! Democracy...

Jack Rasmus: "On June 1, stock markets in New York and around the world declined in levels not seen since last summer 2010. Days and weeks immediately ahead will likely register even further significant market declines, as the obvious becomes increasingly evident: the U.S. and other major global economies are once again on the cusp of a significant slowdown."

The double-dip Cassiopeia-shaped Depression is alive and well with even Barclays Capital pondering that "Malthus may turn out to be right, but with broader implications than he may have imagined."

The degree of simulation is surreal - we are experiencing "the generation by models of a real without origin or reality: a hyperreal" according to Baudrillard.
In 'The Perfect Crime' he goes further...
"The only suspense that remains is that of knowing how far the world can derealise itself before succumbing to its reality deficit or, conversely, how far it can hyperrealise itself before succumbing to an excess of reality (the point when, having become perfectly real, truer than true, it will fall into the clutches of total simulation)."

Meanwhile Slavoj Žižek foresees a time when "money will finally become a purely virtual form of reference, no longer materialised in any particular object."

The Hegelian concept is to progress from the green immediacy of life to its great conceptual structure allowing us to mature without losing the origin.

Free market capitalism, in its psychopathic short-termist greed, has lost this plot big style...