Wall Street Financial Truth

Chapter 12 Who Emptied Your Wallet (3)
Keelung and I were having a lively conversation when he suddenly yelled, "No! What happened to the Dow?" I suddenly looked up and stared at the TV screen on the wall, only to see the Dow slide down like a rapidly melting glacier. And it's "vertical down"!Impossible, could it be that the stock market system was hacked, or was the United States attacked by terrorists?

Keelung said, "Something went wrong! We can't talk anymore." Then he hung up the phone.

As I sat there my mind was in a state of confusion and spinning, and I couldn't help remembering that something like this had happened once.That time, the S&P500 (Standard & Poor's 500 Index) suddenly soared 10% within 20 minutes, causing chaos in the stock market.However, it was immediately discovered that the computer program trading (Programming Trading) system, which had just emerged at that time, caused the disaster.At that time, there were many similar systems using a similar trading model. When the stock price rose (or fell) to a certain point, it would trigger the system to buy (sell) at the same time, thus entering an endless loop. The more you buy, the higher the price, and the more The more you buy (or the more you sell, the more you sell), the more you sell, the more you have to stop the operation of these systems immediately, and all transactions within that 10 minutes will be invalidated.In the past few years, due to the establishment of more and stricter conditions in the computer trading system, it has become very mature, and similar problems should not occur again.

Ten minutes later, the stock market continued to fall and the Dow fell below 9869.62 points. It didn't stop falling until 10879.76, which was more than a thousand points away from the highest point of the day at 600!Then it rose by more than [-] points all the way, and the Dow showed a very rare "V" figure with a small angle.

At this time, all kinds of news came out.The "Fat Finger", who was first said to be a trader of Citigroup, sold millions of shares of m, but pressed it into b by mistake, and it became 10 billion, which triggered a domino effect in the stock market.is it possible?I have worked on trading systems for many years, and this situation would not have been possible ten years ago.Sure enough, the rumor was denied early the next morning.

There is nothing to say next.Some say it's a conspiracy by Wall Street, and they want to give the Obama administration a little 'color see see', and whoever makes it difficult for him to get along with Wall Street needs to strengthen supervision.But this obviously cannot justify itself.That night, U.S. President Barack Obama said that this was an "unusual market activity", and immediately organized a 50-member investigation team, demanding a thorough investigation into the real cause of the accident, and said that regulators were studying ways to protect investors to avoid The bizarre crash happened again.Obviously, after the "stock market crash", the call for financial reform will be stronger, and the government will strengthen its supervision of Wall Street.

The news website Politico pointed out, “Officials of the US Securities and Exchange Commission and the Futures Trading Commission are pursuing a series of huge transactions in Chicago’s S&P futures. Investigators said that after the series of transactions in Chicago was discovered by a computerized automated trading system in New York, it was immediately placed. A series of selling orders caused the selling pressure to snowball." Another senior investment manager said, "It may be that the yen rose sharply against the euro and the US dollar successively, triggering a large number of computer program selling orders." In short, from the point of view of the transaction itself, it is because several indexes simultaneously touched the switch of the automatic trading system, causing the computer system to start to automatically ship goods. The system is in chaos.

The above-mentioned technical analysis all point to computer program transactions, which are all kinds of reactions and guesses after something goes wrong. What is the real culprit that triggers this chain reaction?There must be a deeper reason behind this scene.Why in 2008, the news that the Dow was about to fall below 4000 points spread like wildfire, making ordinary retail investors uneasy, and finally had to bear the pain to accept the sharp decline in wealth; in 2009, when the global economy was not optimistic, the stock market However, it can still rise, causing ordinary retail investors to "miss" the opportunity for a good harvest; and after retail investors have entered the market one after another, the stock market has staged such a thrilling scene.

I suddenly thought, this scene is not right, can we try the function of our monitoring system?On the second day, the transaction volume entered into our system was indeed much higher than usual, but there were not many suspected transactions.I checked carefully and found that there are several times more canceled transactions than usual, and the canceled transactions are not monitored.It seems that the Tao is one foot tall and the devil is ten feet tall.

Regardless of the results of the final investigation, one thing is for sure, in this battle, there must be some people who have made a lot of money, and some people have definitely lost a lot, and most of the people who suffer are ordinary people.

I hope that the stock market can return to the track of economic fundamentals and truly become a barometer of the economy; I hope that one day the stock market will no longer be a cash machine for Wall Street financial giants; I hope that ordinary stockholders will no longer be played by them among!But it is estimated that these hopes are very far away from reality, and at present they can only be fantasies.

6. The stock market is a legal casino
Not long ago, I saw a book in the library called "The Money Game" (The Money Game), and I was attracted to it after turning the first few pages.In addition to the attractive stories, the book also has incisive expositions, all of which touch on the key points of the money game, the stock market.A look at the cover, the author turned out to be "Adam Smith" (Adam Smith).Could it be that the father of economics is reborn?Looking at the author's explanation, it turns out that he used the father of economics as his pen name, and there must be a deep meaning hidden in it.

But I was skeptical at the beginning. I have never heard of many "famous" companies listed by the author.I have also worked on Wall Street for more than ten years, immersed in those listed companies every day, and there are still companies that I don't know?After reading it carefully, it turns out that this book was written more than [-] years ago, and it is updated every few years. Now, it has become a classic masterpiece exposing money games.

Adam Smith, the father of British economics, asked in his "The Theory of Moral Sentiments" (The Theory of Moral Sentiments): "What are we running around in this world for? What can ambition, the endless pursuit of wealth and power, get us?"

Like me, the author of The Money Game asks himself this question from time to time.Although the author declares that he did not use Adam Smith as his pen name because of this, I feel that the author has unconsciously realized this issue in the decades of playing the money game, and set the tone for writing "The Money Game": the stock market is It exists because of human greed, just like a casino, and because of people's endless pursuit of wealth and rights, the stock market is like a money game. To borrow the conclusion in his book: "The stock market is the biggest legal market. casino!"

Through many real stories, the whole book proves for us: why the stock market is just a big casino, a game of chasing money; why fundamental analysis, technical analysis, computer program trading, various models, etc., cannot guarantee participation People in the middle can make money; why the stock market is completely random, and past data cannot predict the future at all, so why no one knows whether the stock market will rise or fall at the next moment, and the returns of street beggars who choose stocks at will will exceed those of Wall Street top fund managers.

The author pointedly pointed out: "The stock market is a game, and more than 80% of investors do not make money." Then who can make money?Just think about who makes money in a casino.He proved even more poignantly that among the brokers on Wall Street who help people trade stocks, "no one is an honest and good person. If there are still good people, he will not continue to stay in that business. St. Peter will capture this once-in-a-lifetime good person, If there is an honest man, he will only court angels."

I think this is the real reason why the author uses a pseudonym instead of his real name. He is a Wall Street practitioner.However, apart from the insiders, who can describe the real Wall Street?Every story stated by the author is absolutely not hearsay. Once everyone knows who he is, it is hard to imagine what his "end" will be.

"The stock market is a money game, and the game may not really have any intrinsic value. If the copiers keep printing stock certificates, the NYSE stays open, and the banks pay dividends from time to time, even All steel mills, storage companies and railway companies are closed, and this game can continue to be played without hesitation..." Although this is the conclusion drawn by the author more than 40 years ago, it is like describing today's Wall Street.

The current global economic crisis has not affected the stock market, because the governments of Europe, the United States, and Japan "adopted the viewpoint of economists who believed in Keynesianism, that is, it is very labor-saving to expand government spending during economic recession", making a large number of investors Money is "created" out of nothing, stimulating the stock market to rise all the way.

It can be seen that since "the stock market is the largest legal casino", retail investors participating in stock investment are like gamblers, and sooner or later they will lose to the dealer; and due to the computerization and derivatives of today's stock market, the proportion of retail investors losing money Even higher than 40 years ago, it can reach more than 90%.But the human nature of greed remains unchanged for thousands of years. People who enter the stock market are like gamblers who go to casinos.The rules of the game in the stock market and casino are the same, and naturally they will not change.Human nature remains the same, the game remains the same, at most, the soup is changed without changing the medicine, and the new peach is replaced by the old character.

As I write this, I can't help but think of the famous words of Donald Trump, an American real estate tycoon: 'Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game.' (For me, money has never been the motivation for doing things. At best, it is just a record of scoring. What really excites me is participating in the game and defeating opponents); and in the autobiography of Buffett’s son, it is revealed that Buffett is the same players.These financial bigwigs did not play purely for money in the end, but just like playing a game, they longed for the pleasure of becoming a winner.

When you understand that the essence of the stock market is actually a money game, and you will face those gamers with super high IQ, EQ and financial quotient, do you still want to participate in the game of the stock market in order to get rich?Or choose to leave silently?Decide for yourself.

7. Credit risk, the lender pays the bill
In North America, in the past, I heard that the government was sued by the government for not paying the land tax, and I also heard that the property was repossessed by the bank because the loan was not repaid, but it is rare to hear that the bank deliberately let the bank take away the house in order to not repay the loan.But in recent years, this kind of "strategic default" has become a trend of American house slaves abandoning their houses and fleeing, which panicked the U.S. Treasury Department.Unexpectedly, Ali, a former classmate of my wife Xiaoling, became a house slave who tried to abandon the house and escape.

In the years of frantic house buying, lending banks and lending institutions often tricked homebuyers into borrowing more money and turning them into house slaves.Their theory is: the house will only go up, never down.What if I lose my job and have no money for a house?How could it be possible, when the house price will increase by tens of thousands or hundreds of thousands, once it is sold on the market, the money will come.Afraid of rising floating interest rates and increasing monthly payments?We can let you Refinance (refinance, figure out a new monthly payment plan) before interest rates rise, sure no problem!
Under the bewitchment of the lending bank, Ali became a house slave by herself with a monthly salary from an accounting job. She saved money and paid the mortgage on time every month.However, after the outbreak of the subprime mortgage crisis, a batch of foreclosure houses were put on the market for auction, and even her house fell in value. Recently, she learned that her apartment 'Underwater' (shrunk), which means that even if she sold it The apartment is not enough to pay off the bank's mortgage.She calculated that renting the same apartment around her would be cheaper than submitting mortgages to the bank every month, and she could save $1000 a month. Over ten years, she might be able to save money on a house.Therefore, Ali inquired from others about the method of becoming a "runaway house slave": reach an agreement with the lending bank, and pay a "closing fee" of 10 US dollars for every 800 US dollars in loans, and then she can become a successful "runaway house slave". House slaves".

But Ali was not so "lucky". Her apartment was bought in 2006 with a loan of 50 US dollars.She didn't notice that there was an additional clause in the loan documents that even if the bank repossessed the house and took it to the market for foreclosure, the shortfall must still be repaid by the borrower.What does that mean?That is to say, at that time, Ali bought the apartment for 50 US dollars, but now it has dropped to 30 US dollars. After deducting the down payment of 5 US dollars, she still owes the bank 15 US dollars.The original loss of US$15, which was borne by the bank after the foreclosure, was transferred to Ali.

Can you walk away without repaying the mortgage and deliberately throwing the house to the bank?wrong!At least, don't think about it after 2007!Even if the house is foreclosed, you have to pay back as much as you owe the bank!

Although the behavior of "house slaves abandoning houses" is not advisable, bank borrowers lend money at will and charge fees against their conscience, "create" maximized profits, and receive high salaries and bonuses.Once the people are unable to repay their mortgages, the bad assets of financial institutions will pile up like a mountain. After the financial tsunami is caused, taxpayers' money must be used to rescue the market.This is where the term 'Moral Hazard' (moral hazard - the risk taken because the policyholder may be unreliable) comes into play.

The term "moral hazard" was originally used in the insurance industry.After the homeowner buys the house, he also purchases fire insurance from the insurance company. If a catastrophic fire occurs in the house one day, he can claim full compensation for the house from the insurance company.It is worth noting that if a fire breaks out and the conditions change, the insured house is already lower than the market price, that is to say, the house has fallen in price, but the insurance company has to pay insurance compensation higher than the house price, which creates morality. risk.This term has since been widely used in various fields.At present, bank lending also creates moral hazard.

Everyone is familiar with Shakespeare's play "The Merchant of Venice". In Venice in the 15th century, there was an upright businessman named Antonio who opposed Shylock, a Jewish usurious businessman.One day, Antonio borrowed money from Shylock in order to complete his friend's marriage.Since Antonio never charges interest on lending money, this blocks Shylock's way of making money.In order to retaliate, Shylock also pretends not to charge interest, but if he fails to pay back within the time limit, he will cut off a pound of Antonio's body, with the purpose of killing Antonio.Unfortunately, Antonio's merchant ship was wrecked, and his capital turnover was not good enough to repay the loan, so Shylock sued him in court.Of course, in Shakespeare's writing, Sherlock's conspiracy failed, and finally shot himself in the foot, thus losing all his property.

Despite Shakespeare's hatred of usurers, collateral has always been the way to lend money, and it is protected by law.Money lenders usually set limits on the use of funds by borrowers, and borrowers sometimes have to put a lot of their money in the same purpose, in order to give money lenders a good reason-to avoid losses.But sometimes lenders seem to forget about these lending principles and lend out large amounts of money (like subprime mortgages).An important reason for these lending rules being broken is the moral hazard game at play: taxpayers, not banks, are now responsible for lending losses. The behavior of "housing slaves abandoning houses" further reflects that the moral hazard of the whole society has reached the verge of no cure.

(End of this chapter)