If you think the US$ is headed for a currency reset, I suggest you think again. Last week I was asked if I agreed there would be a reset of the US currency and thereafter a possible reset of the global currencies. In short, my position is that I don’t believe there will be and the Game Stop saga gives a good deal of insight into the machinations of financial markets today. What makes a market and why is not always transparent or fair value.
Currencies, shares, commodities, bonds or crypto, they’re all market-driven assets. The difference between traditional currency markets and cryptocurrencies is the value of the former is underpinned by the competitive performance of global economies, trading on global regulated markets. Cryptocurrencies are market-weighted, primarily driven by the principles of supply, demand and the PR that generates it. Trading has become a complex sport and it will take more than a multi-pronged PR campaign to dislodge the US$ from its supremacy.
Securities trading exchanges are magnificent arbiters of change and influence and I offer my opinion from the vantage point of someone who’s made a career from adopting and adapting to market-making change. Sometimes that change is driven by technology, other times its a change in behaviour, but I’ve had a front-row seat observing the change that drives market dynamics.
In My Experience
In my time I’ve seen share trading shift from chalkboards to electronic trading; sold Knight Ridder financial information services to banks, brokers and treasury operations; launched online trading in Australia for E*Trade, followed by the IPO of a company that gave retail traders the same trading software the professionals use; I co-founded a boutique financial services business that had share trading (brokers and online), investor education and we developed a leading conditional order system licensed for use by E*Trade.
I’m no stranger to the impact of technology on trading. When the ASX switched to electronic trading, all discretion, mateship and benefit of the doubt were stripped from the transaction, effectively erasing the ‘humanity’ from the trade. That’s when the ASX credo ‘my word is my bond‘ left the logo…
I’ve seen the impact of heightened regulation and researched many and varied market environments to validate potential investments. Trading innovations like black-box trading, Robo advisors trading products like ETF’s have all touched my working life. More recently I’ve been disturbed by the power of social media to harness herd mentality to staggering behaviour. Algorithmic programmers have been very busy disrupting the market with AI, machine learning and advances in computing power. We are in a most profound time of change.
Navigating Unchartered Waters
We’ve entered unchartered waters where technology is having a profound influence on financial markets. For the trading exchanges, the revolution began with electronic trading, but for retail investors, it began with online trading giving real-time access to the markets and effectively removing the middle man from the trade.
In a short time, everyone had constant real-time access, to global markets for all asset categories. Most of these assets trade 24 hours and have synthetic trading products that can further complicate market performance. Now traders can trade for free with their trades passed on to brokers who purchase the trading data like Facebook data.
Exchanges traded markets move on price and volume, a factor that has traditionally put the small retail investor at a disadvantage and favoured institutional investors, who have the capacity to take large trading positions.
Now we know technology and social media’s ability to rally ‘swarm trading’ ie trades at volume, have thwarted that advantage.
The Vulnerabilities Of A Regulated Market
You might think more regulation is the answer to protecting a free market, but I’ve witnessed the incessant creep of regulation into financial markets, in an effort to ensure the integrity of what’s on offer and how its traded. Authorities implement these regulations to save investors from themselves, but the nature of trading ultimately makes them largely futile.
Ironically the requirement of an investor to accept the ever-expanding Terms and Conditions (T&C’s) that accompany the average trade account authority, has displaced the responsibility from the supplier to the investor. Although not a common practice, the Opes Prime disaster was an exemplary example of investors accepting T&C’s without realising the overarching powers they were assigning to secure the debts of the trading company.
At the time Opes Prime was one of few trading desks willing to provide leveraged positions on smaller cap (more risk) stocks for retail investors. However, the long-winded rarely read T&C’s required the investor submit all their assets beyond their shareholdings, as security over not just their own trades, but the Opes Prime business overall. Many lost not just their trade positions, but their homes, businesses and other assets when the ANZ called in its security over Opes Prime losses.
With the exception of one trader, in particular, the Opes Prime retail investors were innocent victims of a failed regulatory system. A system that relied upon the authorised traders to be able to refuse to place a trade without retribution if they believed it to be illegal or inappropriate. A system that relied upon the Responsible Officer to whom they reported to be responsible, not one who enforced illegal instructions from above.
What good is a policing system if those entrusted with enforcing the rules are intimidated into submission by those who would flout the rules?
Institutional investors are also bound by operational rules which dictate they must divest when a certain trade price or volume is reached. In an automated trading world, this is a gaping opportunity for those willing to exploit it, and there will always be someone willing to exploit it.
Now we know regulations hog tie those traditionally vested with accountability for the responsible operation of our financial markets, while those with social influence but no accountability have free reign to ignite market manipulation.
When Unbridled Mediocrity Has The Power To Override The Regulated Professionals
What happens when social media influencers are not bound by the same rules and regulations as the ‘professional’ traders? What happens when the force of masses can be rallied to take a market position, generating market demand in volume so sufficient it can override the traditional market-making power of the institutions?
The Game Stop rally is what happens. A rally fuelled by social media content that took an innocent and lacklustre brick and mortar video game business from a share price of a few dollars in 2020, to US$480 by late January 2021. thrusting a business formerly valued at $200 million to a value of $30 billion, before settling at US$81 by February.
Game Stop (NYSE:GME) was sited as a prospective investment around 12 months earlier on r/wallstgreetbeats (WSB), an investor chat room on reddit founded by Jamie Rogozinski, with three million at the time, now eight million mostly young, male amateur investors. The stock attracted investment from billionaire Ryan Cohen, founder of pet company Chewy (who now owns 10% of GME), who had plans to modernise the GME business. Hedge funds took an opposing position and shorted the stock.
The reddit traders decided to make GME stock a battleground, using in particular the Robinhood.com trading platform, pitting their co-ordinated efforts against the unsuspecting legacy hedge funds. Robinhood had to raise $3.4 billion in collateral in response to the volatility and hedge funds quickly found their shorted positions billions in the red.
Inspired by their impact on the unsuspecting financial elite, they moved on to AMC (cinemas) and Blackberry with similar effect, proving any company or asset category can be arbitrarily selected for the same treatment.
The Game Stop rally perfectly demonstrates the opportunities for unregulated traders to manipulate a market and how the traditional market protection mechanisms were not prepared for this type of manipulation. This rally is proof of what unregulated and determined cause-inspired influencers (read opinion leaders in key trading forums and platforms) can achieve when they provide sufficient validation and inspiration to their followers to ignite action. They wanted to demonstrate the power of a collective volume of independent traders to move a market to the detriment of the ‘big boys of Wall Street’.
They proved their point and they proved they’re essentially very effective marketers, who united a movement to prove a point as much as or more than making a profit.
In the words of Rogozinski “What’s being accomplished now is what Occupy Wall Street tried and failed to do—a power shift, a shift in some control from Wall Street to Main Street.”
“I’m proud in the sense that WallStreetBets has the potential to force the hand of the entire system.”
Now we know what Donald Trump has known all along: there’s money to be made in the gap no one else sees and if you can validate your opinion and convince enough people to take action, you can make a market.
Emotion And Trading
Reason is the most powerful driver of emotion, and emotion is a powerful motivator to buy, sell or hold tradable securities. They say every generation has it’s ’cause’, but in a time deprived society causes are born to strategically align with political, commercial or personal agenda, permeated by sound bite headlines and embraced by individuals looking for the purpose self-improvement icons tell them they should have.
Emotionally inspired movements include women’s rights, anti-conscription, black power, pro-democracy, right to life, climate change, human rights, black lives matter and the constant favourite protest cause – the egalitarian, anti-establishment David and Goliath battle. This is an omnipresent hobby-horse cause worth fighting for by those who feel oppressed, underrepresented and poorly done by.
Also when the reason to trade is the potential to deliver a life-changing increase in income, combined with its capacity to deliver the thrilling highs of an upside and crushing lows of trade losses, trading can be likened to gambling.
In my observation, those who do well at share trading are able to take a purely objective, strategic and analytical view and act on that view without the emotions of greed or fear undermining their decision making. Successful insto (institutional) or retail traders share this trait.
Now we know retail traders don’t necessarily have a financial rationale to trade, as much as an emotional reason to take a position and make a stand.
When Information Is The Primary Currency, Fake News Is Convincing Market Maker
There’s an old saying in markets that ‘perception rules reality’ and the various iterations of the currency reset headlines are attention-getting. Information flows are now disaggregated. Markets have traditionally relied on news about companies and the economy to come from meetings and reports that were governed by insider-trading and market-manipulation laws. But the Internet is the wild west of information.
Everyone now has access to the information that has the potential to affect a market, but some have better access than others through the use of technology. This includes AI and machine-learning driven initiatives such as scraping websites, industrial and trade sensors, social media monitoring and trade behaviour data.
But the nature of social media means this info can be manufactured, manipulated, distributed and seamlessly contrived to suit an agenda, that’s skillfully made inconspicuous.
Enter Influencers, of many kinds, who are not required to have the obligatory qualifications or operational constraints the professionals do before offering their opinion or advice. They can encourage their following discreetly or otherwise, to take action, whether it be to cause a run on an exchange-traded asset by taking a position or a run on the Capital (apparently).
Now we know social’s ability to deliver instantly and the market’s vulnerability to take timely action means exchange-traded markets are an extremely volatile and vulnerable environment.
Timing Is Everything If You Want To Start A Revolution
This has coincided with the timing of a social revolution and a rage against elitism under the banner of democratisation of power. Some would say wealth has been unfairly distributed to the advantage of a few. Now the power of wealth has been subjugated to the power of market manipulating by few tech-savvy, who use their market knowledge and access to drive their own agenda.
The asset at the heart of the trading a victim of synthetic market traded instruments, wielded a swarm of motivated traders at the direction of market makers.
In today’s electronic trading world, this imbalance makes everyone vulnerable to market manipulation in a way sheer wealth could not, because the wealth (capitalistic) driven model had accumulated trading rules and regulations that impeded (to a large degree) market manipulation for self-interest. As has always been the case historically, the regulators are not prepared for the vulnerabilities of innovation in the market place.
Now we know creative opportunists will always look for and find ways to exploit these vulnerabilities.
Will Bitcoin And Crypto Currencies Replace Traditional Currencies?
Enter Bitcoin and other cryptos to a world of unrest and economic uncertainty, low yields and high unemployment, pandemics and fear of the future. The perfect storm and story to propagate fear of currency crumbling and the need to hold crypto or gold.
As with research on anything one must question the source, motivation and agenda of each source. In evaluating the potential for the US or international currency reset it’s wise to consider this: the currencies involved in the traditional currency markets were born out of a need to facilitate trade and can be dated back to 1400’s and the financial instruments of the noble merchants importing goods. Today’s multiple currencies represent their country and their respective economies, meaning they are backed by and achieve their value from the economies they represent, weighted against the other market participants.
Bitcoin and other cryptocurrencies in essence are a global currencies that are purely market driven by supply and demand principles for each currency. They are not backed by anything more substantial than that formula. Therefore it serves those invested to talk the market up for Bitcoin in particular or the perceived value of investing in any cryptocurrency.
Take this article for example published on Medium.com by MetalStream the issuer “of an innovative gold-backed MSGLD token”. The language is quite convincing and they offer links to other articles, quite possibly constructed to appear as independent and objective supportive information, but the motivation for the article remains the same – to convince the reader of the merits of buying their investment tokens.
In conclusion, the talk of a US$ and/or international currency reset is more likely a concerted effort to stimulate the market for cryptocurrency and even gold. Those with a vested interest in these currencies and gold have a compelling incentive to stimulate uncertainty and greed in the investor world. The cryptocurrencies with the loudest voice ie. publicity budget, PR and technology skills will attract more support than others.
The real money is in being able to predict the unpredictable, unimagined, the inconceivable. Changes to Federal Banking policy, banks collapsing or some other cataclysmic global monetary melt-down. Even then, governments and commercial forces would rally to the rescue. Point in case – Greece.
But the reality of a hard currency reset for any country, US, China or other, is still more likely to be as a result of significant and substantial changes in their position as a world leader and their economy as it pertains to its global standing going forward. Rest assured if the currencies that underpin the global commercial market is actually about to be derailed in favour of a synthetic global currency or currencies that trade purely on demand-side forces, we will see substantial evidence of it as the preferred currency for major transactions including property transactions, infrastructure development and government contracts.
Despite the upheaval in recent times in the US, to my mind, there are to0 many market forces vested in the US remaining as the world peacekeeper and the assets of the US extend globally far beyond it’s US$ currency. So while the dollar note may hold a value of X, the US economic force, democratic power, and the general mindset of its people and allies, will take a lot more than a social media-driven cryptocurrency revolution to topple.
Put it this way, as an investor I can see through the propaganda circulating by cryptocurrencies, and as a marketer, I wouldn’t like to be the competitor trying to topple the US$ from its top-of-the-mountain position – but that doesn’t mean others won’t try to. Just ask Coke what it’s like to own the mountain.
If you would like to discuss the economic forces impacting your market position, contact Wanted Consulting – Reward Offered.