SO, WHERE DID YOU GET YOUR DEGREE IN CURVE FITTING?
This article also published on thestreet.com and fidelity.com
Wall Street is the world's greatest venue for deception of the monetary variety. A wealth transfer mechanism that is perfectly shrouded behind fancy degrees, expensive suits and men who coach little league teams on the weekends.
The talents, you're told, come in all shapes and sizes. There are those who can rip through a companies books and figure out exactly where the stock should be priced. There are those who are able to look at bond spreads and figure out where the economy will be in the years to come. There are those who can read the tape so well that they rarely have a losing week.
The truth of the matter, contrary to what the general public believes, is that Wall Street is largely a talentless fraternity of overpaid men who are nothing more than masters of curve fitting. They look the role, they have documentation (degrees) to support their part in the role and they speak the role with abundant confidence. What is lost on 99% of people is that it's all hollow...an act...a drama, played out for the investing population so that they can keep feeding the machine.
Those massively intellectual decisions that fund managers and analysts make on a daily basis are rarely anywhere near what you are led to believe. The truth of the matter is that Wall Street is dominated by curve fitters. What do curve fitters do? They fit their research around momentum driven moves in the markets. Trends, if you will.
They rarely discover unique ideas. They rarely make moves at the beginning of trends. What they do, instead, is take a momentum driven move or steady uptrend in the market and tailor fit a set of data around the price move. Read it again, they take momentum driven price moves and tailor fit a set of data around the price move.
Trend-followers that curve fit data in order to intellectualize their decision beyond "it's going up and I want to be a part of it", that's what Wall Street is. You can't have that guy in a $2,000 suit, a degree from Wharton and a pound of hair gel telling a group of high net worth foreign investors that I am buying this stock because it has a lot of momentum and the trend is up. You have to act out the drama for them. As a Wall Streeter, you have to play the part, the lingo, the look...you must make these people feel as if they are sitting courtside at a seminal event in financial history. You must give them such a deep and wide variety of numbers, statistics and ratios that they become delighted in a cloud of illusion by the intricacy and seeming wisdom of it all.
Let's examine the repercussions of this quiet reality:
1. Asset bubbles are commonplace. If a majority of research on Wall Street is driven by price action and the curve fitting of data to justify prices, then it can be assumed that a self-reinforcing cycle of illusion is taking place, both on the research level and the valuation level. There comes a point in every price cycle where the reality of the valuation of an asset becomes horribly clouded by price driven, curve-fitted analysis. This leads to all the ills that come with your standard, modern-day asset bubble. The severity of the bubble will vary dependent upon how much obfuscation the financial system can handle before needing to be rinsed clean of its latest financial disease.
2. All price moves and trends are inherently unstable. This is an addendum to the first point, but it deserves to be listed on its own. The evolution of a trend in the price of an asset involves various stages. What is particularly dangerous about price trends is that research will have little to no positive influence in the early stages of a trend. Instead, its influence will become greater as the trend matures. Invariably, the research becomes increasingly erroneous the greater the maturity and severity of the uptrend. And what should be all the more disconcerting to anybody who takes comfort in the stability of the financial marketplace is that the investment population puts greater confidence, credence and faith in research as the price trend matures. This means that belief in the price trend on a fundamental basis is at its pinnacle exactly when the price trend is at its core diseased and susceptible to caving in on itself.
3. Financial markets require constant intervention. There is a growing movement on Wall Street that is counter-Fed, counter-intervention, counter-monetary policy. A belief exists that the financial markets should be allowed to function completely on their own without intervention. This is a far-off dream for the financial markets. The reality of the situation is that given the current environment of research, trading and investing - a market without oversight from the Federal Reserve or whatever authority steps in to create order when the curtain is pulled back on a price move, means that the financial markets cease existence. The current system is intertwined with the Federal Reserve. One does not exist without the other.
The current Wall Street landscape is built on unstable price moves, derived by architects who would be better served being on Broadway. The act, while being impressive to a high net worth or retail investor, has some very real consequences that are felt across the global economy. This is the core, essence and foundation of our current financial system. Until the system evolves, as an investor, it is imperative to greet maturing price trends and the abundant research that accompanies them with a great deal of skepticism. It is, after all, the job of those who occupy the many offices in Manhattan, London, Tokyo, Singapore and Beijing to come up with research to justify and fuel whatever price move is at hand, regardless of the validity of their work or the trend to which they are beholden.
