Excellent very important insight into the potential negative impact of ETF's, doing what they have to do, that needs to be better governed! Also, see May 2023 Accounting Today (pg 15) article "Could accounting have saved SVB?" Where the current requirement for "mark-to-market accounting" is examined, and the alternative valuation method of "discounted cash flow (DCF)" is discussed as possibly presenting a potentially stabilizing lack-of-confirmation regarding existing long-term investments. Of course such a use of DCF would have to involve interest rate assumptions deemed reasonable by both investors and the Federal Reserve.
"When it comes to the Fed and the economy, most of us are novices. We assume they know what they’re doing, and that it’s not political, because it’s not supposed to be.
But apparently they don’t know what they’re doing, it is political... and that’s sad."
I'm of the firm belief that most people don't want to admit what they don't really know, and when it comes to all things economic and the Fed, since they're in the headlines everyday, people think they're "supposed to know." Yet most of us don't, and even if we do, unless we're immersed in it we don't fully understand the nuances. On top of that, all of this is moving so quickly it's hard to keep up, let alone catch up! So glad you zeroed in on that... b/c it's the key point of the whole thing!
Ben Bernanke candidly admitted been at times in the dark during the 2008 crisis and getting the news by watching TV like the rest of us. His book The Courage to Act was a clarifying reading for me. However, this Fed is making the persistent mistake of not admitting their limitation which ends up in making wrong decisions for longer and eroding the public trust in their institution.
It's like doctors, we want to THINK they know what they're talking about, but sometimes they're making it up as they go just as the rest of us often are.
The Fed is not filled with stupid people, but with people who know about narrow areas of finance. The knock on effects of wrapping illiquid investments with "liquid" trading vehicles not only undermines capital formation for companies but presents systemic risk issues that they don't learn in PhD level economics programs. There are folks who can't explain margin lending against companies in ETFs who are in the industry. I've talked to them. I'm convinced regulators approve things they don't grasp well (e.g. SWAPs role in 2009 crash) because they don't want to appear stupid or anti-innovation. Most "innovation" in capital markets today s not productive to capital formation, and was "created" after the SEC did away with fractional trading and the profit margins for Wall Street market makers.
"But apparently they don’t know what they’re doing, it is political... and that’s sad."
Small correction - 'they know what they're doing but it is political...and that's even sadder'
Case in point - in late 2018 the Fed initiated a tightening cycle. Had they been allowed to continue we would have, for the most part, been spared this unholy mess. But one Donald J. Trump - who used the stock indices as a symbol of personal achievement - got in the way, reversed the cycle and so got us in this mess.
As far as regulations - when has the GOP ever met a regulation it did not want to eliminate? Mostly with the battle cry of setting the XYZ free and boosting profits. Which it does for a while enriching management and boosting campaign contributions before ol' Joe is taken behind the shed and shaken down once again.
So while the Fed may be somewhat culpable it is, at its root, the politicians and behind them, 'we the starry-eyed people'.
You said the quiet part out loud, and maybe I oughta rewrite this with that part, and it's this: That once Powell was in, and rates stayed low and went lower - and the market went higher - a certain President would crow every chance he got how the market was going higher. I bet we could find a quote where he points to HIS appointment of Powell as the reason... but also to his own greatness... that the market, somehow, reflected how "great" he was. However, that's like people pointing to stocks as confirming how great a company is. Sometimes they DO reflect reality, but often the two split, and as I often say: There's the company and there's the stock. Same goes/went for the market when it was spiraling higher... it did NOT reflect reality, let alone any single politician's greatness.
ETF's and Derivatives with No actual $, only placing paper/digital bets. Betting in the Trillions Beyond any Available Money. Then to add insult to injury, with "Money" that has No Intrinsic Value.
Map it out in Any Direction..... = Default Disaster........ and THEN the Consequences Beyond Comprehension.
Fantastic article. It is rarely the person or people fingers first point at.
Excellent very important insight into the potential negative impact of ETF's, doing what they have to do, that needs to be better governed! Also, see May 2023 Accounting Today (pg 15) article "Could accounting have saved SVB?" Where the current requirement for "mark-to-market accounting" is examined, and the alternative valuation method of "discounted cash flow (DCF)" is discussed as possibly presenting a potentially stabilizing lack-of-confirmation regarding existing long-term investments. Of course such a use of DCF would have to involve interest rate assumptions deemed reasonable by both investors and the Federal Reserve.
This part resonates with many people.
"When it comes to the Fed and the economy, most of us are novices. We assume they know what they’re doing, and that it’s not political, because it’s not supposed to be.
But apparently they don’t know what they’re doing, it is political... and that’s sad."
I'm of the firm belief that most people don't want to admit what they don't really know, and when it comes to all things economic and the Fed, since they're in the headlines everyday, people think they're "supposed to know." Yet most of us don't, and even if we do, unless we're immersed in it we don't fully understand the nuances. On top of that, all of this is moving so quickly it's hard to keep up, let alone catch up! So glad you zeroed in on that... b/c it's the key point of the whole thing!
Ben Bernanke candidly admitted been at times in the dark during the 2008 crisis and getting the news by watching TV like the rest of us. His book The Courage to Act was a clarifying reading for me. However, this Fed is making the persistent mistake of not admitting their limitation which ends up in making wrong decisions for longer and eroding the public trust in their institution.
It's like doctors, we want to THINK they know what they're talking about, but sometimes they're making it up as they go just as the rest of us often are.
The Fed is not filled with stupid people, but with people who know about narrow areas of finance. The knock on effects of wrapping illiquid investments with "liquid" trading vehicles not only undermines capital formation for companies but presents systemic risk issues that they don't learn in PhD level economics programs. There are folks who can't explain margin lending against companies in ETFs who are in the industry. I've talked to them. I'm convinced regulators approve things they don't grasp well (e.g. SWAPs role in 2009 crash) because they don't want to appear stupid or anti-innovation. Most "innovation" in capital markets today s not productive to capital formation, and was "created" after the SEC did away with fractional trading and the profit margins for Wall Street market makers.
The above Harold is THE Harold Bradley.
"But apparently they don’t know what they’re doing, it is political... and that’s sad."
Small correction - 'they know what they're doing but it is political...and that's even sadder'
Case in point - in late 2018 the Fed initiated a tightening cycle. Had they been allowed to continue we would have, for the most part, been spared this unholy mess. But one Donald J. Trump - who used the stock indices as a symbol of personal achievement - got in the way, reversed the cycle and so got us in this mess.
As far as regulations - when has the GOP ever met a regulation it did not want to eliminate? Mostly with the battle cry of setting the XYZ free and boosting profits. Which it does for a while enriching management and boosting campaign contributions before ol' Joe is taken behind the shed and shaken down once again.
So while the Fed may be somewhat culpable it is, at its root, the politicians and behind them, 'we the starry-eyed people'.
You said the quiet part out loud, and maybe I oughta rewrite this with that part, and it's this: That once Powell was in, and rates stayed low and went lower - and the market went higher - a certain President would crow every chance he got how the market was going higher. I bet we could find a quote where he points to HIS appointment of Powell as the reason... but also to his own greatness... that the market, somehow, reflected how "great" he was. However, that's like people pointing to stocks as confirming how great a company is. Sometimes they DO reflect reality, but often the two split, and as I often say: There's the company and there's the stock. Same goes/went for the market when it was spiraling higher... it did NOT reflect reality, let alone any single politician's greatness.
is this an instrument we should outlaw?
ETFs, no? But possibly better regulated? Yes, but I wouldn't hold my breath because they've become the market!
ETF's and Derivatives with No actual $, only placing paper/digital bets. Betting in the Trillions Beyond any Available Money. Then to add insult to injury, with "Money" that has No Intrinsic Value.
Map it out in Any Direction..... = Default Disaster........ and THEN the Consequences Beyond Comprehension.
genearly.substack.com
Great article. A short selling ban = running out of people to blame. I am confident the Fed is a 20,000+ employee bureaucratic mess.
Short sellers are the easy target? The mechanics of how ETFs operated are not easy.