Will the real bad guy’s please stand up?

Warning: Saturday Afternoon prognostications ahead!

Recently the House Financial Services Committee passed a 67 to 1 vote to required Hedge Funds, Private Equity Funds, and even Offshore Funds to register with respective regulators. Add on top of that a slew of insider trading and fraud cases hitting the wires, most notably Raj Rajaratnam from Galleon funds. While these have no doubt cast a shadow of the advisory landscape, you will find very very few financial professionals surprised by any of this. Wall Street’s biggest advantage is information or technological arbitrage; these players either know more then you or have more capital to invest in technology. It’s somewhat understood though in most circles, in fact, one can say insider activity gives many of us an ‘edge’ in terms of technical analysis (aggressive buying usually displays itself in some sort of trend or relative strength) or for example option flow and implied volatility spikes.

What seems to be escaping the light, and unfortunately taken for granted by the vast population, is the insider activities of Washington Politicians. The House Panel on Ethics (irony?) has begun investigations on at least 7 members of a House Panel that controls the allocation process for government contracts, a lucrative area per the article linked. It is likely that the numbers of Representatives under investigation will expand and will include the ever popular in finance circles, Maxine Waters (D-California) who gave anyone watching the Bailout proceedings many moments of hilarity. Additionally, congressmen and women are not barred from trading on their own information as Wall Street is.

So politicians are crooked and so are bankers. Nothing new here? It boils down to a philosophical debate, does one take corruption as the status quo and merely play by the given rules? Or perhaps take the view that the summation of individual acts can change the whole? History would support the former view while the latter has some rather poignant examples of success. The American Revolution and World War I are two examples that come to mind of individual incidents that led to a dramatic change in the overall landscape. Martin Luther King & Mahatma Gandhi are two individuals that created a driving force almost alone to change society in profound ways. But inevitable after a change, some new equilibrium was met and a stability created.

In financial markets, we undergo regime shifts, sometimes violently, often and with large monetary consequences. Most are difficult to impossible to forecast, the timing of the event that is, history is replete with individuals who ‘saw the writing on the wall’ well before events actually unfolded. But after some time, volatility decreases both in headlines and in markets and for a majority of time we prod along.

My trading style is mean-reversion and is a bet on ‘stability’. Violent regime shifts can and do hurt but unlike the unfolding of history, I can utilize stops and options to mitigate my risk. These regime shifts occur with some regularity but more often then not we are at some equilibrium. Or in other words, I can profit enough during good times to make up for downfall in bad times if I manage the risks.

So what does this have to do with bankers and politicians? Although all of us see what is happening in the corridors of power, my belief is that the majority of your life will see some equilibrium phase. In fact one could argue that the seeds of a regime shift occurred with the election of Barack Obama. What it’s looking like after several months, welcome as it is, as a slight modification of politics as usual. Hence if one wishes to thrive, one has more chance of success by playing by the rules. Winks and nods, favors, scratching of backs, purveying of information, etc is a safer bet then changing the world. I don’t consider myself a cold-hard conservative, in fact I think that I started out as such in college and have steadily moved more towards the center! I am just reporting the way I see the world and what has been successful and what has not been, analogous to my approach to the market.

I leave you with those thoughts and a link to a documentary entitled, “The American Ruling Class“. It’s admittedly not the best produced documentary but the content was very interesting to me as a young man looking for ‘success’ and contemplating the choices of an uncertain future. A brief synopsis: Two Yale grads are introduced to various power players in America and given the choice between Investment Banker or to pursue something more meaningful or fulfilling, we get to follow along through the process. Please leave comments to discuss!


~ by largecaptrader on October 31, 2009.

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