Market Distortions
The old maxim of “this time is different” has been widely ridiculed over the decades, particularly as it pertains to the stock market. Many past instances when someone tried to explain that circumstances allowing for a continous bubble higher or a continuous decline lower were different than previous episodes, they were almost always wrong. Most occurrences were pretty much similiar to those of the past. This time, there are so many factors that are different which are distorting most markets. In the precious metals markets I have pointed out in a few posts how despite the ongoing manipulation of prices that has gone on for decades, enough factors have changed that an end to that manipulation and control is close at hand. In this post I am referring more to the factors that have contributed to the distortions in the stock and bond markets. While governments and central banks have always been involved in the debt markets, the amount of sovereign debt and the size of the derivative markets, including credit default swaps, has contributed to the distortions. The market that I believe has changed the most is equities. Little attention has been focused on it because it has helped to fuel the massive bear market rally in stocks since last October’s lows. Two of the largest changes include, the reformulated Vix and the massive use of it as a way to minimize the signals it used to convey about the market. Another major change is the introduction of single day options. Capital that used to flow into equities, even by short term traders, has now more than ever just become gambling with even more leverage, on same day moves. The final difference is one that is difficult to measure how great a distortion because so much of the trading that use to take place on the NYSE and NASDAQ is being conducted by the major banks in their dark pools. There is little transparency and where in the past you had a specialist or market maker keeping a book and supplying liquidity, now they are much less involved in the process. The real test of how important that was will come when this rally runs out of steam. In almost all the financial markets, I believe we are about to find out, this time really IS different!