Posted by: guinness222 | September 5, 2011

“ETF’s, VIX’s, SPDR’s, Oil, Gold, and other “stuff”!”

….long ago in a far off galaxy I started my young business life working in the “back office” of a Mutual Fund firm and was basically an accountant type. The “fat cats” played with the portfolio of stocks and all those decisions(they all drank quite a bit, were never in and always gone within ten seconds of the stock market opening or closing each day, and lived large. I remember one of them telling me in 1971 he just had a telephone and a Television installed in his bathroom,….DUH?).

Anyway, with most things I attempt I try and learn every single thing I can about the business or field I am in and thereby better understand it, hence can do a far better job. My ‘compatriots’ used to go to the local restaurants to eat, then lounge outside in the park across the street or play in the local pinball arcade,…but not mt. I would tak a sandwich and go sit in the gallery area of the old Boston Stock Exchange and study what was going on. I took courses in investing, in market strategy, entire series of banking course from the American Institute of Banking, and read my little brains out. Now here we are coming up on 50 years later and it’s like “dumped” in some little third world jungle with only an Audubon handbook and no matches!

It’s called the “Stock Market” because it’s purpose was to raise capital for businesses through the exchange of capital from the investor for stock or “shares” in their company. Not a difficult concept to master, and one that ever since they started doing it under a Buttonwood tree in lower Manhattan decades and decades ago has been the gasoline that has fueled the Great American Economy. Later on they got into a new market called “Bonds” which were more sophisticated  little jewels that were basically IOU’s with a guaranteed payback PLUS a fixed dividend and rate of interest until it was all paid off at a date down the road a few years or a decade. This enabled Cities and other non-“business” entities to grow and expand as well. (Was never too appealing to me as the element of risk did not really exist, at least not back then. I always felt if a company really “put the pedal to the metal” and outdid itself hence increasing my “stake” in it that was far more appealing.)

Well before cascading into today’s “Circus Maximus” of finance it’s time for one of Mr. Guinness’s (that’s me!!) copyrighted “Laws of Reality”. Law number 658.6/b. We ran out of money decades ago, actually almost a century ago,….so we created “credit”. Intrinsically not a bad thing, but considerably less stable than cold hard cash. We allowed some folks with ,….ahem,…perhaps less scruples and integrity than we suspected to buy stock in companies without or with a fractional portion of the money. The Company worked hard, the stock rose, the owner sold it, paid off that which he never paid for originally and kept the profit over and above. (Not bad work if you can get it.)

Then the Great Depression hit, the “crash” of the stock market in 1929 when everyone realized it was all “blue smoke and mirrors”, credit and greed gutted this country to the bone. But we recovered, the Government took unprecedented steps and as I like to imagine it, “put it all on the line and called for the dice”. Heady with the accomplishments, and wealthy as well, it began the “democratic process” of “helping everyone with others money”. Well that’s for another day,…back to the stocks and all.

Somewhere in the process, perhaps after WWII or so, the “American Dream” of owning a home was rapidly becoming a reality. The “middle class” was trading boring dull labor and service and manufacturing positions into “tolerable” simply because it “paid the mortgage” had some “fringe benefits”, some promises of pensions and retirements, some ,….well let’s call a spade a spade,….some HOPE for their families based on their sacrifices and “punching the clock”.

But alas the greed and “What’s in it for me” mongers started looking for more ways to get more for less. Hence we started finding “new” stocks if you will. They weren’t necessarily new companies making new widgets, after all we sold all that to China and Japan and Malaysia,” let them make it cheaper and we can make more profit”. It was slowly becoming nothing more than Vegas with more “snake-oil” salesmen and thieves, (oops! Sorry “professional investors, hedge fund “Directors” and traders’.)

The advent of computers and technology became a stronger weapon than any Nuclear Device or Bio-weapon ever developed by man. Computers had gone from “1+1=2”, to millions if not billions, or larger, of calculations a second, with the simple “on/off” logic programmed to make money quickly and efficiently. Not to be outdone new “pseudo investments” like ETF’s, Futures, volatility indexes, and hundreds of things became available and because they could be so profitable greed and ignorance once again led the charge.

Push paper, create wealth, create investment, claim it’s worth something, and challenge anyone who says otherwise (Gee remember the Emperors New Clothes?) soon it begins to swell and the emotional rush to be part of this “great new wealth” turns into a plague amongst people. Pretty soon we begin to rationalize the absolute need, right and essential demand to make a fortune,…regardless of ethics, right and wrong, or ethics, fairness, reality or common sense.

Computers have been designed to be “soul less” executioners of numbers and orders, ethically and common sense devoid little black boxes just doing what they were ordered to do.

Guess what? They can keep it up, have a few “chips” replaced, a bigger storage area installed, a faster computational paradigm incorporated, but humans can’t!

Eventually someone slows down a bit and says “Wait a minute,…I can’t put volatility indexes in an envelope as my payment to American Express, or a “Financial SPYDR” in an envelope to Mastercard, or several ETF’s for my electric company, or ……..” Then the system does what it is currently doing. It begins to crash.

Unfortunately in the past 100 years we have become far to dependant on the Government to save us, and it from the inevitable, and as fast as we scrambled in the 80’s  with the Savings and Loan debacle, and the “High Tech” explosion of the 90’s, and the “Housing Boom” of the early 2000’s, we are fast running out of miracles and “new things”. The “financial penicillin shots” we been getting are not working any more.

What is the solution? I don’t know. But what I do know is as long as greed, lack of common sense, and the mentality of “YOU OWE ME” is out there,…well,…we’re a long way from getting better, regardless of who is President, House Majority or Minority leader, or head dishwasher at the local Mexican Restaurant.

-30-

“Ignorance is preferable to error, and he is less remote from truth who believes nothing than he who believes what is wrong. ”     -Thomas Jefferson


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