The Federal Reserve has released its latest biannual financial stability report and the contents are interesting to say the least. The report is designed to highlight the potential risks to the US economy, and, whilst we encourage everyone to read it fully to get the complete picture, we thought we’d highlight a few of the key points including Payment for Order Flow (Good), retail investing in memestocks (Stupid and dangerous) and inflation (inflation, what inflation?).
Flashy lights attract Apes
First of all, let’s deal with how the Financial Stability Report (fall 2021) talks about retail investors, especially younger ones. The report firstly attempts to paint a picture of brokerages making colorful, nice-looking sites with a funky user interface as a bit of an issue really.
This is really an issue because it attracts younger investors, a bit like one of those bandit fruit-machines with their flashy lights, and clearly it is inciting more stupid people with crayons up their noses to invest in the stock market, and this is rather a problem, because, well the stock market should only be for those sophisticated millionaires, not ordinary people in their thirties.
Many apps have color-coded graphical layouts that highlight stock movements, mark trading milestones, and have animations celebrating a user’s first stock purchase. With their ease of access and engaging graphics, such apps can make trading seem like a game, particularly for younger or less experienced investors. Consistent with this interface style, among users ofFederal Reserve Biannual Financial Stability Report Fall 2021
trading apps, the average age of account holders is 30 years, and nearly half of them self-identify as first-time investors.
Memestocks threaten US financial stability report says
According to the Financial Stability Report for Fall 2021, there are way too many retail investors involved in memestocks, and to coin a phrase from Monty Python, they’re “all very naughty” Apes. Don’t they realise that by piling into GME and AMC (both stocks which it highlights in detail in the report) that they are changing market sentiment?
It opines that people talking about stocks on social media is extremely bad because, er, people share information and come to their own conclusions, which creates an echo-chamber. Not at all like the mainstream media, they would NEVER be an echo chamber for a particular idea, would they Motley Fool? No.
This is very bad, presumably because their friends are short on these stocks, so the last thing they need is more people buying and holding, and refusing to sell. This from the report:
The widespread use of large, open social media platforms has also shaped how some retail equity investors communicate about markets. Recent academic papers have shown that social media can increase the information fl ow to retail investors as well as the amount of “noise” in markets from retail investor trading.
In addition, social media can contribute to an “echo chamber” in which retail investors find themselves communicating most frequently with others with similar interests and views, thereby reinforcing their views, even if these views are speculative or biased. More generally, social media platforms allow a single comment or post to reach millions of people and potentially affect market sentiment dramatically within a short period.Federal Reserve Biannual Financial Stability Report Fall 2021
What’s brilliant is what can be seen in the footnotes which accompany this quote. This states: In the financial market research, “noise traders” refers to investors who make transaction decisions based on factors they believe to be helpful but, in reality, give them no better returns than random choices. Right, so the OG Apes who bought GME and AMC shares at a couple of dollars haven’t done very well. And generally, they seem to be quite deadly serious about this. Don’t these people understand numbers?
Let’s not forget though, that this comes from a paper by two blokes from a university who have between them written a massive 12 scholarly papers, and a couple of their professors. Seems like the Fed is really reaching out to the best business minds in the world to get their information.
In addressing the financial stability implications, the report says that younger apes are more at risk of massive swings (but doesn’t mention the Tendies many of us are printing, and completely ignores the fact that investors are fully aware they are trading at their own risk). More importantly (and more tellingly) is the fact that Apes talking on social media means it becomes difficult to predict what is going to happen in the markets. Perhaps they should ask Nancy Pelosi’s husband how he picks his stocks? Or get a Reddit account maybe?
Finally, the report says memestock Apes are bad because “the risk-management systems of the relevant financial institutions may not be calibrated for the increased volatility or financial losses that could result from the trends highlighted here”.
What we take this to mean is that big financial institutions, like Citadel, might get a right royal ass-fucking, and this wouldn’t be good… Don’t these filthy apes know how much money Ken Griffin has donated to politicians in the past?
PFOF good. PFOF nice. More PFOF please.
And it’s not just that the Apes are involved in actually trading. These disgusting crayon-eaters actually have the audacity to be calling out Payment for Order Flow as a manipulative practise, rather than seeing it for what it really is, which is the nice market makers and hedge funds making your trade executions free (whilst siphoning off some nice fat profits at the expense of retail getting the best execution price).
The report waxes lyrical about PFOF, making it out to be something that really helps retail traders:
The structure of the current market for order flow was heavily influenced by a series of regulations adopted between 2005 and 2010 that allows retail brokers to choose the venues where customer orders are executed so long as customers receive the “national best bid or offer” price or better
Since 2010, several off-exchange venues, including those run by Citadel, Virtu Financial, and others, have emerged and thrived. Over the past two years, the PFOF paid to some of the largest retail brokers was in large part paid by these off exchange venuesFederal Reserve Biannual Financial Stability Report Fall 2021
Fed Financial Stability Report: Inflation, what inflation?
Despite the report highlighting that inflation is the most cited concern amongst the respondents to the report, which we might add was a massive grand total of just 26 market contacts which it doesn’t list, but refers to as including “professionals at broker-dealers, investment funds, political advisory firms and universities” (so no normal, retail investors then), there are only seven references to inflation in the entire 85 page report.
That’s right, despite the money supply exploding over the last couple of years to truly staggering proportions, the Fed doesn’t really think this is much of a problem. In fact in the entire report, it devotes not even 90 words to the problems that inflation brings to the economy.
To put that in perspective, the last 2 paragraphs between the last heading and the graphic above this contain 30% more words than the entire Fed report devotes to inflationary threats to the US economy. Essentially it’s saying don’t worry, the continuous printing of money backed by absolutely nothing and loaned at interest by private banks is really nothing to concern yourself with, despite the fact that inflation in the real world means the purchasing power of your dollar goes down. That’s economics 101.
Let’s not forget that the Federal Reserve is made up of some of the world’s biggest banksters. Not a single one of the main decision makers represent ordinary investors, or even the average guy in the street. Nope, they are all ex massive bank executives, hedge fund managers and political appointees. Let’s just keep this in perspective, but this is good because ordinary people are clearly too thick to understand the complex workings of finance.
The Fed’s Financial Stability Report appears to make it very clear that retail Apes are behaving very badly, and this is upsetting a number of people at the central bank, who are absolutely always on the side of the little guy, and forever coming up with innovative ways to make things fair, and create a better standard of living for everyone. Honest.