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Rule 1: Power finds power

There is a natural tendency for people who have power to join with others who have power to increase their collective influence. That's why the world has always had military alliances, such as NATO. Corporate mergers are another example of power joining with power, and it's the reason monopolies are illegal. And powerful people tend to hang around with other powerful people. Brad Pitt and Angelina Jolie come to mind. In many different ways, power finds power.

That's the first rule. I'll turn this into a fascinating point after the second rule...

Rule 2: Technology Concentrates Power

Whenever there is an improvement in technology, you see a concentration of wealth and power. This comes in many forms too. The most obvious form is that technology company founders sometimes become influential billionaires. But more generally, wherever there is new technology there is a consolidation of power by someone. Here are some more examples:

The government of the United States becomes more powerful because technology allows it to monitor our financial patterns, phone calls, Internet use, and more. And the government can grow ever larger because technology allows all of its parts to communicate and to be fed by taxes.

Terrorists become more powerful because technology allows them to do more damage with less.

Small armies can beat large armies by using technology to increase their power.

Of course, technology can also transfer power from a dictator to the people, as we saw in the Arab Spring, albeit with mixed results. But dictators are the exception to the rule. Dictators don't do well when technology enters the pictures.  Eventually technology will transfer power from dictators to plain-old-billionaire industrialists.

And now to my fascinating point. . .

Our financial markets are a good example of the two rules I just described. Powerful (rich) people will, quite naturally, look for opportunities to collaborate with other powerful (rich) people to benefit their collective interests. So let's agree that powerful people are, in general, looking for ways to join forces to increase their personal fortunes. They compete when they need to, but often they would prefer collaborating for mutual benefit.

Now add technology to the mix in the form of impossibly complicated financial instruments that only computers can "understand," high-speed automatic computer trading, 24-hour financial news, and the ability for anyone to communicate with anyone else in less than a second, and you set the stage for technology to concentrate power with the rich.

It has always been true that power finds power. The rich have always looked for ways to work together to get richer. But now technology has the potential to accelerate the consolidation of power.

Earlier this week, I wrote a post saying that billionaires are probably manipulating financial markets because they have the motive, opportunity, and a near-zero chance of getting caught.  In response, some people said it was crazy to think a few players could manipulate a multi-trillion-dollar market and not be detected. I have an appreciation for that point of view, but I think technology has recently made it possible for the few to manipulate the many. That's a new development.

Allow me to describe a scenario in which the few could manipulate the entire market and still have a near-zero chance of being detected. I want to be clear that I'm not suggesting this specific scenario has happened. I offer it as a thought experiment to demonstrate the feasibility of collusion in a general way.

For starters, we know the stock market is jumpy and volatile, in part because of automatic high-speed computer trading that is based on "secret" algorithms. These computers do so much trading that they act as a giant lever on the market. If one knows how to trip the algorithms, it doesn't take much to send the computers into a buying or selling frenzy. And when the computers go nuts, the individual investors start chasing the movement, accelerating it even more.

Now add to the mix the impossibly complicated financial instruments that are growing like viruses on Wall Street. These too act like force multipliers. A savvy billionaire could learn how to tweak the exotic financial instruments just right to cause an outsized reaction that also spooks the market.

Now consider the financial news markets. There are probably a few dozen financial pundits in the United States who can move markets. And there is usually some sort of near balance between bears and bulls. That means moving the consensus opinion from "mostly bullish" to "mostly bearish" is a matter of changing the opinions of just a few influential people. You only need to move a few from one camp to the other to change the balance. And when the balance shifts, the 24-hour financial news organizations will exaggerate the change and transform it into news. Here again, small changes get magnified thanks to technology.

Now imagine a gathering of some of the most powerful financial people in the world. Surely some of them get together socially, because power finds power. But they don't entirely trust each other, so no one suggests an outright illegal manipulation of markets. That wouldn't be smart: too many witnesses. Instead, they listen to the host of the gathering describe which specific financial indicator he would use to decide whether to sell his holdings. Everyone in the room listens and nods. Months later, when the indicator goes negative, everyone who was in the room knows what to do, and none of it is illegal. They are simply looking at the same financial indicator, nothing more.

The brilliance of pegging collusion to a particular financial indicator is that it adds a perfect cover story to sudden massive selling. The financial news folks will report that the indicator went negative, and that is the reason for the selling. The billionaires get out at the top of the market, spook the high speed computers and trigger a selling avalanche. After the drop, they buy back in. It's completely legal.

I should note that on any given day you can find a dozen financial indicators saying the stock market is sure to keep rising, and a dozen that say it has already peaked. The scheme I described works no matter which indicator you use, because the indicators tend to be volatile and unpredictable themselves.

I'm not suggesting that the scenario I described has ever happened. I'm just painting a word picture in which a few big players could use technology to manipulate trillion-dollar markets. My best guess - based on my assessment of human nature - is that market manipulation is already happening on a massive scale, although I probably have the mechanism wrong. But if it isn't happening yet, the normal evolution of technology will guarantee it happens later.

 
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+1 Rank Up Rank Down
Mar 8, 2013
I don't understand this nonsense about the "greedy rich." Whether or not you think they manipulate things, it's actually quite rational behavior. Let's go through it step by step:

(1) You have something worth protecting. For the rich, this is obviously money/wealth.
(2) You therefore, often justifiably (at least to yourself!), want to ensure that you keep that thing.
(3) There are several sinister actors who want to take that thing away from you (criminals, governments, people who scream "social justice," jealous family members, etc.)
(4) The more you have, and the more publicized it is, the more sinister actors you will attract.
(5) Money and/or wealth alone, do(es) not protect you from the people who seek to take those things from you.
(6) What is the only way to guarantee you hold on to something? Power, of course. That power might be a weapon, it might be the ability to hide, but the BEST source of power available is always going to be a government that presents itself as the legitimate authority upon and arbiter of all things, or at least everything it can get away with. Therefore...
(7) Human nature leads any rational actor with something of value to seek out as much power as they can find, lest it be wrested from them. Leading to...
(8) Once power is attained, a rational actor will want to strengthen that power as much as possible.

It's not so much that power equals power. It's more like power equals power, and everything else is just a tool to attain it (money included).

Another trick is that boards of directors always vote for huge salaries and golden parachutes. Why? All the CEOs are on each others' boards of directors, directly or indirectly. Investment funds and large companies are the largest shareholders of most everything - whose interests do you think they are primarily looking out for? I'm guessing it isn't the small investor.

As far as controlling the markets themselves, I prefer a "temporal transaction profits tax" to eliminate manipulation. Hold on to a stock for less than 1 second? Oops, the capital gains rate on that becomes 99%! The rate would eventually drop all the way down to 0% for investments in a 401(K) pulled out after retirement. And of course, no more "too big to fail" - if your bank or company goes belly-up, that's it. No second chances, no propping up failed companies.
 
 
+3 Rank Up Rank Down
Mar 8, 2013
Yes, I believe you're right. I'm not in the slightest way a conspiracy theorist, but this sounds totally plausible.
 
 
+1 Rank Up Rank Down
Mar 8, 2013
As Scott has pointed out, it is inevitable that at some point, the financial markets will be prisoner like a cat turd in a box. It's happened every 10 years or so and at some point, we won't recover. Those who desire money for the sake of more money will eventually destroy the very mechanism that provides their wealth.

How about this: Revamp the way the stock market works.

-The Book Value of a company is what determines the stock price. The actual value of the company as reported to the IRS.

-a certain percentage of dividends based on the profit of the company on a monthly or quarterly basis is dispersed to shareholders. That way, even your middle to lower-middle class can reap the benefits of even a modest portfolio.

-the value of the stock is reported once a month or every quarter (same as when you get your dividend). That's when the stock price changes, not the roller coaster of stupidity that it's based on now. You can buy and sell your stock in the meantime.

-commodities are different, I'm talking about company stock.

-no more betting on options, derivatives, craps, roulette, or Shang-hi

-To be publicly traded, the CEO can only make 25% of the lowest salaried employee.

-bonuses are even throughout the company (based on your pay rate %). The CEO don't do all the work, they have employees. And they did it for their paycheck, not the CEO's.

I have a lot more on this thought, but the general idea is to start removing the greed from our daily lives and business. Focus on the business, not making the shareholders happy. If you have a strong business, the profit will follow, not the other way around (as illustrated in almost all Dilbert strips pertaining to how the business is run).

So much corruption, scandal and just plain evil is so interspersed throughout our society, no wonder why we can't seem to get ahead very fast for very far.

I'd love to hear what some people would think on this idea. Again, it's in very short form, but I hope the idea gets across. I want to get a feel for the reaction to certain ideas I have, so when I run for Governor then President, I'll know what hill or mountain stands before me.

Thanks.
 
 
Mar 7, 2013
Could you snap some pics of the next ultra-rich "reveal the indicator" gathering and post them on your blog? It must be a sweet party.
 
 
+5 Rank Up Rank Down
Mar 7, 2013
Scott, I agree with your analysis though I suspect evidence will be hard to come by. Keep in mind that trading algorithms are programmed by smart people who make mistakes. After 9/11, the panic button on those algorithms were pushed and the market nosedived in the months following. However, if you had held your nose and jumped into the general market with an index fund at the depths of the sell-off, you would have been guaranteed a couple hundred-fold return on your investment in about two years.

Also, if technology and approach converges, it creates self-fulfilling prophecies. If a certain stock meets the general "sell" criteria in a computer algorithm, then everyone using a similar algorithm sells and the stock plummets. A smart trader could then scoop in and buy at rock-bottom prices and make a fortune. That is why it is a market.

Where you are right is your comment regarding data points. However, I would even take that further to say the data points themselves are manipulated. Look at inflation and unemployment for example. CPI is typically reported ex-food and energy...what? Isn't the point of inflation measures to gauge the spending power of individuals and companies? Energy and food have shot up over the past 4 years in case you've been paying attention. This decreases the purchasing power of people and companies and thus impacts the economy. Unemployment that is reported in the news is measured based upon people activitly looking for work...what? Isn't the point of unemployment metrics to measure the productivity of the citizens? What about the "real" unemployment rate of 15% of Americans of working age who cannot find a job and are therefore unemployed regardless of whether the labor says they are or not? Big difference between 15% and the publicized 7.8% (or so).

As an aside, I would propose a new set of metrics to measure the economy that would include the general status of the people. My proposed measure would weight traditional GDP numbers, unemployment rate, purchasing power (not CPI), plus measures that determine whether economic growth is really positive based upon whether we are producing goods to replace worn/obsolete goods or actual new goods are being produced. The current GDP of 2% would in my proposed metric actually be negative as I would discount phony spending (government throwing money/liquidity into the economy) designed to make the GDP look good.
 
 
Mar 7, 2013
Your second premise is wrong, especially with regard to information technology. As long as it is equitably distributed, information serves the people much more than the government, or whatever power cabal you are worried about. The Arab Spring is just one example; WikiLeaks is another. Even the Drudge Report qualifies.

The key is how difficult and expensive it is to propagate your message to the world. Once upon a time, the only methods of mass communication were slow and expensive. In the 20th century, with the advent of radio, and later television, mass communication became much faster, but was still very expensive. The Information Age has moved it to being fast AND cheap. the thing is, centralized blocs of power (CBPs?) actually prefer that communication be expensive, because then they can afford it but no one else can.

This is why I never understood why some people fret over the loss of privacy that has been happening in the last few decades. They equate "privacy" with "freedom" but that's totally false. We're freer than we've ever been even while the government and corporations amass huge amounts of data about us. We're freer, because the technology that erodes our personal privacy can also shine a spotlight on the shenanigans of the CBPs, restricting them and giving us more freedom than we ever had before. That's a tradeoff I'll gladly make.

Don't be fooled by anecdotal evidence; the reason you hear about more and more incidents of freedom being taken away isn't because there ARE more of them, it's because there are more spotlights out there. Anyone with a camera in their phone and an Internet connection -- i.e. pretty much everyone -- can be a reporter. It is becoming harder and harder for CBPs to get away with what they have gotten away with for, really, centuries.
 
 
+6 Rank Up Rank Down
Mar 7, 2013
I declare EMU's contribution to this discussion invalid as it appears he may know what he's talking about.
 
 
Mar 7, 2013
Tom Clancy has written a good novel in 1994 with part of that market manipulating thing. Japanese nationalists infects Wall Street with a computer virus that causes an instant crash in the economy because it triggers the algorithms of the trading computers. This was a good novel, a sequel to the The Sum of all Fears (that also made it to an excellent movie later).
 
 
-1 Rank Up Rank Down
Mar 7, 2013
I prefer to believe that the rapidly increasing concentration of wealth (and therefore power) in the hands of a few is random chance.

http://www.youtube.com/watch?feature=player_embedded&v=QPKKQnijnsM

To believe otherwise, is....sort of uncomfy.
 
 
+4 Rank Up Rank Down
Mar 7, 2013
Sorry, I still don't see it.

I am assuming you imagine this as a way to fleece the robotraders (quant fonds).
So you've got a bunch of autistic geniuses programming secret algos for quant fonds. These guys don't talk to the rich people because they don't talk to anyone except the psychologists paid to keep them happy.

Then you've got some pundits, bought by your billionaires who guess what those autistic geniuses tell their secret algos to react to, how much this will depress prices and then spread the rumors.

Then you hope that all the quant fonds react in the same way AND leave the billionaires enough time to buy at the bottom AND don't cause circuit breakers to butt in at the exchanges.

Sorry, I don't think so. Mainly because surely some quant fonds will buy before the billionaires. Any algo that does value investing, for instance. And your billionaires are probably not stupid enough to think they can reliably outthink the quant fonds.

In my opinion markets are chaos (in the mathematical sense) overlaying some long term trend. Or, what George Soros calls a "historic process" which means much the same, namely a nonlinear system bumping along a trend. This means you'll get Minsky moments whose arrival you just can't predict.

If I were to fleece "the markets", I'd use the Goldman Sachs method. Send your people as finance ministers, FED bosses and advisors into the white house. No cigars required and the profit is even legal.
 
 
+3 Rank Up Rank Down
Mar 7, 2013
Very interesting and plausible-sounding conspiracy theory, but I'm still not buying it. Plus, I recognize your mind-manipulation games. You overstated "It has always been true that power finds power" too often. And power usually competes with power. This is true in markets as well. Institutional investors make up the vast majority of the markets, and to game it, you would need to do the opposite of what the majority is doing. The folks you talk about are in competition with each other, not collusion.

And for those discussing high-frequency trading, I'm unsure whether it should be allowed, but... if you're a long-term buy-and-hold investor (like Buffett), it doesn't affect you. He has owned Coca-Cola for decades; someone getting in and out fifty times yesterday has zero impact on anyone who didn't trade yesterday; and then it's a tiny fraction of a penny.
 
 
+8 Rank Up Rank Down
Mar 7, 2013
Close, but it's not quite like that. Me and Warren Buffett sit around smokin' fatties, listenin to Snoop. Branson rolls up with some Cristal and is all like, whaddup wit apple? That last quaterly statement was whack!
 
 
Mar 7, 2013
All technology is a two edged sword. Have you already itemized the indicators? That might be interesting.
 
 
+3 Rank Up Rank Down
Mar 7, 2013
Your first post on this was very clear, i am surprised that you had to spell it out again. Did you get a lot of feedback saying it is impossible?
 
 
Mar 7, 2013
In different paragraphs, You state in your post:
a) The government of the United States becomes more powerful because technology....
b) Terrorists become more powerful because technology....

I assume the US govt and the terrorists are on different sides of the fence. In which case, the increase in power in one is nullified by the increase in power in the other.

Likewise in the financial markets, if technology increases the power of the billionaire manipulators, it also increases the power of the not so rich small investors.

Status quo.
 
 
Mar 6, 2013
I think I would modify your two rules thus:
1. Power attracts Power
2. Technology creates power.

It isn't that technology concentrates power, it is just that the power created by technology is most likely to be weilded by those who already have power, rather than by someone else.

It is the very nature of power to concentrate - as shown by the first rule, by adding technology there is just more power available to concentrate.

 
 
+3 Rank Up Rank Down
Mar 6, 2013
Humans are opportunistic creatures that respond to incentives. That's not always a bad thing but these traits play into the hands of manipulators that understand us better than we understand ourselves. The obsession we have today with technology which is ego driven is inversely proportional with the advancement of our human dignity. I am afraid the path we're currently on is akin to handing an infant a loaded gun.
 
 
+11 Rank Up Rank Down
Mar 6, 2013
These algorithmic computer trading companies currently pay the stock exchanges to see ask/bid before the regular public. If this was not valuable and/or did not provide an edge they would not be paying for it. Therefore the markets are definitely stacked against the small/individual trader.
 
 
Mar 6, 2013
I'm not trying to be contrarian, but you have conspiracy on the mind and nothing will dissuade you. But your degree in economics must have missed discussions of financial markets.

Once again, let's take a look at what you call "the market." There are currently over 3,700 stocks listed on the NYSE. There are slightly less than 3,000 listed on the NASDAQ.

To manipulate the market, you would need to somehow manipulate the value of all those stocks. If you want to manipulate an index, like the S&P 500, then you'd only need to manipulate the value of 500 stocks. Or the stocks of 30 of some of the largest companies in America.

That is not only a nearly impossible thing to do, regardless of how much technology you have at your fingertips. Not only that, but trying to manipulate those stocks requires you do something in advance of the manipulation. If, for instance, you're going to make money on shorting a stock, you need to place a 'put' option before you do it. To make a lot of money, you have to place a really big 'put' order in. Guess what? Big orders like that are scrutinized with a fine toothed comb, and if it can be shown that you have manipulated the market and profited from it, you go to jail.

As to your premise that technology concentrates power, I absolutely disagree. Technology enables individuals to gain access to information and make decisions based on that much faster than ever before.

Recall the old Soviet Union. One of the things that killed the Soviet Union was that they tried to keep information from their people. To do this, they had to limit individual's access to technology.

It has been said that the lack of Xerox machines was a significant factor in bringing down the Soviet Union. It certainly kept them from increasing their productivity. The Soviet leadership wanted to maintain their power, so they didn't want the people to have a mechanism that would allow them to more rapidly disseminate information. Thus, they limited the number of duplicating machines that were available in the country.

The same with computers, and the Internet. Not having a totalitarian government allows regular folks to have access to the type of information that before only the big shots had. If anything, technology has amplified the power of individuals.

Let me give you a personal example: when I was young (dinosaurs roamed the Earth), it took a trip to the library and hours of searching to find out complete information on a single topic. Now, it takes seconds to search the Internet for what you want to know. I'm writing a novel now, and it hits on a lot of information about which I know very little. But if you read what I've written, you'd think I was an expert at everything from martial arts to accounting. And I got it all from the Internet.

Now, currency markets might be open to manipulation. Recall what George Soros did in 1992: he shorted English currency by selling short $10 billion worth of English Pounds. That earned him an estimated $1.1 billion. How did he know to take such a huge position? But no wrongdoing was proven. Then.

But in 2002, George Soros was convicted in France of insider trading during the 1980's, and had to pay a $2.9 million fine (reduced on appeal to $2.3 million). He appealed the decision, but in 2011 the European Court of Human Rights refused to overturn the decision. He is continuing to appeal.

And yes, all that information came from the Internet. See how empowered technology has made this individual?
 
 
Mar 6, 2013
"no one suggests an outright illegal manipulation of markets. That wouldn't be smart: too many witnesses. Instead, they listen to the host of the gathering describe which specific financial indicator he would use to decide whether to sell his holdings. Everyone in the room listens and nods. Months later, when the indicator goes negative, everyone who was in the room knows what to do, and none of it is illegal."

This is what I said to the last blog post, it's not so much a deliberate evil conspiracy of acting together to manipulate markets so much as it is individuals all doing the same thing independently but simultaneously for their own self-interest. The result is the same, I guess, but it's just good old free market capitalism rather than something sinister.
 
 
 
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