Saturday, November 23, 2013

Even Wall Street isn't forever...

All is not well among the Masters of the Universe, it seems. 

The article features lots and lots of boo-hooing about how hard they work and threats to move to Silicon Valley and be the next Zuckerberg. But this article makes the case that Wall Street itself is in a very serious retrenchment the likes of which have never been seen before. The insane compensation structure is over and the industry is facing the unpleasant task of figuring out how to make money legitimately again. Part of it stems from Dodd-Frank, which everyone knows was inadequate, but is potent enough to have made the banks change their structure in anticipation of the presumed effects. But the bigger factor is that it finally dawned on these guys that their model was unsustainable --- they were basically selling air. To each other. [More]
It has been hard for me as a free market enthusiast to understand the arithmetic of finance as well. I found it difficult to believe they made all that money by making the markets more efficient in allocating capital. Further I could not see the finance sector delivering so much value as to constitute the biggest sector in our economy.

While the regulation mentioned above is certainly a factor, I think the rise of black-box trading and the absence of the public to regularly fleece have been equally corrosive to extravagant profits. Moreover, the fees are being side-stepped by large investors in the wonderfully mysterious "dark pools".
So-called dark pools – off-exchange facilities that allow trading of large blocks of shares, with prices posted publicly only after trades are done – are perceived by many as offering an advantage over exchanges.Tensions between exchanges and brokers have escalated in recent years as trading outside public markets has crept up to record levels and put further strains on the once-dominant share trading institutions such as the New York Stock Exchange and Nasdaq.Rosenblatt Securities estimates that more than 37 per cent of all US stock trades are now executed at off-exchange venues run by brokers. Exchanges and some large investors argue that the increased trading away from the public markets has diminished the value of publicly quoted prices. [More]
In other words, eventually people leave inefficient markets. Just like farmers buying and selling farmland privately, who needs to pay 6% if you can reach an agreement on your own?

However, one ongoing premise in my view of what is happening in global finance is an excess of assets in relation to investment opportunities. Stocks are historically overvalued already in light of returns, but with bonds and other alternatives offering slim to negative income streams, where should excess capital go?

In fact, I am less bearish on farmland than most, simply because I think we could see the return of outside investors as farmers back away (or are pulled back by bankers). There is simply too much liquidity, too little growth, and growing desperation by investors to try to find work for their money.

One thing it seems they have learned is, after the fees, it won't earn much on Wall Street.

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