The World Has Too Many Traders

Includes: DIA, GS, QQQ, SPY
by: Tim Iacono

It occurred to me after watching this remarkable BBC interview with Alessio Rastani the other day – the one that went a bit viral despite the questionable background of the subject – that the “financialization” of the global economy that has slowly transformed the world over the last few decades has produced far more people like Alessio than it really needs.

Just like the little old ladies in Japan who try to compensate for 20 years of freakishly low interest rates with their FOREX accounts and like American punters who lost their shirts in the real estate crash and now intend to make it all back in penny stocks, traders like Alessio Rastani are a symptom of a problem that far too few people are talking about.

The BBC headline read “Anyone Can Make Money From a Crash” and that seems to be the attitude of an increasing number of slightly-above-average Joes in the world.

But, when you think about it, who can blame them?

In a world awash in paper money that steadily loses its value despite the government’s assurance that inflation is low and, during an era when the brightest and most talented college graduates go directly to Wall Street to figure out new ways to make money by pushing all that paper around, the incentives to speculate are just too high for many to resist.

Now, it’s not as is if the world doesn’t need speculators. More than a century ago when commodity exchanges were set up so that, for example, a farmer could lock in a “future” price for his corn crop long before he plowed any fields and, on the other side of the trade, a cereal maker could similarly guarantee the price he’d pay months from now, there were other players in that market that neither produced or consumed corn.

These speculators simply made bets on which way prices would go based on the available related information, adding liquidity to sometimes illiquid markets and profiting or losing money based on how shrewdly their buy and sell decisions were made.

If the speculator correctly figured that a dry summer would produce a small crop and bought low early only to sell high later, then he was playing an important part in the “price discovery” process that was and still is an essential part of a properly functioning market.

But, that quaint description is a far cry from the sort of large-scale leveraged speculation we see today in a world where money costs practically nothing to borrow and the fear of failure is virtually nonexistent, the latter being due in large part because men like George Soros (who bet against the Bank of England) and John Paulson (who bet against subprime mortgages) are worshiped as Gods (and almost as rich).

A good case in point are derivative products today where traders can bet on one country not making good on the money they owe another country or where they can wager on a credit downgrade that might weaken one sovereign currency versus another.

It’s not as if the world doesn’t need people who’ll make these bets because, if one thing is certain in this world, it is that someone needs to keep governments and markets honest.

But do we need so many? So many that they act as a sort of wolf population gone wild, thinning herds dangerously close to extinction?

Just like a wolf cares only about his next meal, trader Alessio Rastani doesn’t seem to care about anything other than making money, telling the BBC that he dreams of another recession, that the latest European sovereign debt rescue plan won’t work, and that people can make money on both of them.

Just like you can’t blame a wolf for being hungry, you can’t blame Rastani. They are both just following their basest instincts – working within the system, so to speak – on a good day, both filling their bellies.

It’s not the speculators that should be blamed here, it is the system that has been developed over the years that not only enables this sort of behavior but, through the tax code and in other ways, actually encourages it.

And, why is that? Because the financial industry has an undue influence on lawmakers.

Yes, the world has too many traders, but, more importantly, the world also has too many politicians for whom getting re-elected is more important than anything else and their re-election is enabled by the financial industry.

A vicious cycle if ever there was one.

As Rastani noted, governments don’t rule the world, companies like Goldman Sachs (NYSE:GS) do and until that changes, nothing else will.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.