“I must say as to what I have seen of Texas it is the garden spot of the world.”
Davy Crockett said it and left it at the Alamo. So we’re glad to be inside Austin’s city limits sponsoring the NIRI Southwest Regional Conference. We doubt temperatures will be kinder than New York’s last week though.
There’s a pattern to what’s unfolding in the market and it impacts us. There’s also chapter tapestry to the investor-relations profession spread unevenly over the fruited plain and knitted in spirit, a durable comforter made hardy by decades and camaraderie. We’re wired to see the world as story. It makes those in this pursuit exceptionally adept at translation. It’s what we do.
Just as our corps is animated by the inexplicable genius of humanity, a most complex and marvelous machine, so is the evolving investment landscape. At root, human intelligence presses the button, and the machines thus run.
I’ve given this considerable thought in preparation for my TED talk Thursday in Texas. I’ll speak on market structure of course, but it’s more. An aside, make it IR duty to hear this TED video of 15 minutes from Kevin Slavin, masterful on market structure without meaning to be.
Current stock-market distress would move Rod Serling the impresario because it’s a Twilight Zone merger of Man, money and machines. It scares us. Right? We all live by the ticker (so to speak). Our profession is interlaced but now so is the planet.
Ever played poker? You pay twenty bucks for a stack of chips and you play till you win or you’re out. Suppose we floated the value of chips. Rather than a fixed buy-in, every table’s pot value would float versus another table’s, and all the dealers at all the tables would continually add to or subtract from chips in every player’s pile to balance out positions versus players at other tables.
This is what the world is doing with currencies. Money. You need to understand it in the IR chair. We borrow money from China and then depreciate our currency and depress our interest rates to zero so the impact of borrowing will be minimal. China then devalues its currency to keep from losing money on the debt we owe.
On Aug 12, the Chinese government devalued the yuan. There are some $500 trillion of interest-rate and currency swaps globally and if a big currency moves, it’s a de facto change to interest rates. Investors and their counterparties underwriting rights were caught out. So during options-expirations Aug 19-21, markets fell. This is Man at work.
Now we come to Exchange Traded Funds, the chief investment vehicle of the modern era. ETFs post positions every day by law. It’s inconvenient to continuously change share-holdings so they routinely use derivatives like options and futures instead, which is permitted by law. And machines modulate it. We last had a material stock pullback in 2011, last saw a bear in 2008. ETF assets have doubled since 2012. We have no idea how ETFs will act in a down market, frankly.
But we just got a clue. On Aug 24, the new series of options and futures marketwide began trading – and markets imploded. What happened? We think demand from ETFs for options and futures was so poor that markets simply imploded at the open. Lack of demand is as big a price-setter as selling (put that on a t-shirt).
Today, everything is connected. If ETFs, which are ephemeral supply or demand, stop using derivatives, it means indexes are faltering, which means you and I are getting wary in our 401k’s, which means fast traders are shy about setting prices, and all of it comes back to floating currency values, pontoons upon which global consumption dances in a delicate balance. Nobody knows what’s real.
It’s not one thing. And yet it is. Humans don’t like uncertainty so they transfer its risk to somebody willing to pay to cover it. Now that process is starting to reverse after seven years.
What we don’t know is who ended up with the risk. What we do know is that IR better be able to explain it. That’s market structure. Not story. So don’t miss my session tomorrow in Austin.