One of the often perplexing notions about markets is that there is some huge short-player who overpowers the market and forces it down. Every investigation since the notorious Pujo Hearingsduring the after math of the Panic of 1907 has begun looking for the mythical short player. Never has any investigation every found anyone. It was after a resolution introduced by congressman Charles Lindbergh Sr. to probe Wall Street assuming the crasg was abnormal and must have been caused by someone. Arsène Pujo (1861-1939) of Louisiana was given a congressional authorization to form a subcommittee of the House Committee on Banking and Currency. The lead prosecutor was Samuel Untermyer (1858-1940) who turned it into a ruthless mockery of justice and democracy. There was his famous interrogation of J.P. Morgan (1837-1913) that revealed how much this prosecutor did not know about finance.

• Untermyer: Is not commercial credit based primarily upon money or property?
• Morgan:    No, sir. The first thing is character.
• Untermyer: Before money or property?
• Morgan:    Before money or anything else. Money cannot buy it … a man I do not trust could not get money from me on all the bonds in Christendom.

Predominately, the problem that confronts the majority is the complete failure to comprehend what actually causes a panic. The assumption that there is some BUYER who buys the high and carries that to a loss all the way down providing the mythical short-player vast profits is another myth. The buyers on the way down are typically short sellers taking a profit providing vital support. There are some courageous attempts at bottom picking. However, these tend to die out the longer the decline prevails.

To find that mythical huge short-player has always been the goal. Herbert Hoover in his memoirs admitted that he had received a telephone call saying there was some plat against him and a huge short position created the 1929 Crash to ruin the Republican Party. Hoover thus began an investigation in search of this mythical short-player. Nobody was found after hauling in everyone from Rockefeller on down. The was the Pecora Investigation which began on March 4, 1932 by the United States Senate Committee on Banking and Currency, While the object was to investigate the causes of the Wall Street Crash of 1929, nothing could be determined so Roosevelt later created the SEC, which has never been able to find the mythical short-player or prevent a single crash.. The name refers to the fourth and final chief counsel for the investigation, Ferdinand Pecora (1882-1971). What was actually revealed was the opposite – the investors were all long and suffered losses right from the biggest names on down. Hoover apologized saying that sometimes when a government becomes enraged, it burns down the barn to get the mouse. Pecora was only in it to become famous. He was appoint to the SEC, but quickly resigned because he was not chairman.

Every investigation wants to hang someone. It is not interested in actually trying to understand how the markets function. The cause of the panic is NOT the short-player, but the concentration of long-players. When everyone who has thought about buying has already bought and is now counting their future profits, the end is near. Lacking a new source of buyers, the market becomes tired. As that unfolds, we end up with a dangerous position. The slightest scare creates a stampede no different than a heard of zebra. One may hear a lion and it starts the run. The others run because of the crowd and may have no idea why. When the majority are long and start to sell, lacking new buyers, they begin a spiral downward. There can be the FLASH CRASH where there is simply no bid. It becomes a Spiral Panic with some buying coming mostly from shorts taking profits. If is is a slow spiral decline rather than an instant flash crash, then there may be some attempts at bottom picking. This type of spiral decline becomes like a relay race with one handing off the torch to the next.

Introduction

The Evolution of the Global Economy

The economy is like a child. It grows, matures and evolves. Perhaps the greatest problem we face in attempting to reform our political-economy and move forward, has been the assumption that we are in control. We only to see things in our domestic political-economy and make our investments and policy decisions based upon this myopic domestic perspective. We assume governments are in control even though we do not understand what they are doing. They try desperately to influence what we think and do realizing that we actually respond to what we believe will happen in anticipation.

Yet the economy is far more complex and sophisticated. Everything is actually connected precisely as it is in nature for we are part of nature and that same grand design. The global economy is much like a rain forest with billions of lifeforms all depending on another. To analyze and model this kind of complex environmental and societal economic system requires research that views the system both as a whole and its component parts to reveal the interconnected data that lies hidden beneath the surface.  This allows for the combination of small influences to cascade into larger global trends just as removing one specie in a rain forest will set off a chain reaction since it is either a predator or the prey in relation to other species. This is why we need to see the flow of capital between all the players for linking the global data for the analysis reveals the whole complex system, and not just a subset of all the interesting operations and processes of the system.

We cannot reduce the trend to a single cause and effect. The global economy is akin to a rain forest with countless species interacting with one dependent upon another. Remove one, and you begin a chain reaction with unintended or knowable circumstances. We are incapable to constructing a rain forest because we do not understand all the subtle interconnections. Australian learned that lesson by importing one specie to accomplish one goal that introduced a predator altering the environmental balance. Likewise, altering taxes, trade regulations, and investment regulations alters capital flows that can be extremely destructive.

The Plaza accord starting the G5 (now G20) to manipulate the dollar down by 40% in order to reduce the US trade deficit, created the 1987 Crash and sent capital rushing back to Japan that they did not understand creating the 1989 Bubble.  The capital flow chaos unleashed by the G5 was devastating.

The G5 caused the capital withdraw from the USA and the 1987 Crash on a panic the dollar would decline by 40% and that set off a capital concentration back into Japan. As the yen rose and the Nikkei, that attracted foreign investors creating the Bubble in 1989. Capital then fled Japan and moved into South East Asia.

The capital then flows to South East Asia and created the peaks in 1994. That was the precise low in the S&P500 back in the USA. Capital then began to shift toward the US and European markets and this flow intensified because of the expect launch of the Euro in 1998. That led to the Currency Crisis of 1997.

The turning point in 1994.25 marked the precise low in the US share market and the shift in capital flows out of South East Asia. Every single thing is connected on a global scale. We must come to understand that the economy has matured and evolved in ways we have ignored and remain oblivious to their development. In many ways, we still assume the world is flat economically. We fail to grasp the global economic evolution all around us because it confronts our politicians, economists, and the central bankers who prefer the limited domestic economy view in which they can be masters of the universe.

The evolution of our global economy is challenging the very ideas and theories of economics that deprives them of the power they desire as interventionists. If the economy is malleable, then they can control it. If the economy is interlinked, then we are all in this together and we cannot control the economy with raising taxes to create “social justice” without endangering the entire system.

This basic assumption of a domestic economy within the grasp of government is what I call the Fish Bowl Economy entirely self-contained.  All economic theories are predicated upon this concept and justify government intervention to alter domestic trends that may be set in motion externally.  This domestic myopic view that supports centralized panning and governmental power was the foundation of communism that crumbled to dust. Government, assuming variable degrees of power, has been unable to prevent any crash and always seeks greater power in the aftermath with each event claiming they will prevent the next. They cannot see the global economy for it is beyond their power. This view of a domestic Fish Bowl Economy, excludes the possibility that a fish can leap from one bowl to the next. Therein lies the flaw in economic theories that justify government control.

(Full Work to be Published by 2014)

CapFlow-07-12