Bottom, bottom, where's the Bottom?

No, this isn't a porno page. The "bottom" I'm referring to is the end of the current market slide into oblivion. Will it end in "oblivion"? What is "oblivion"?

Some market elves on CNBC seem to think that "oblivion" and the bottom are one and the same, and are at around a 7500 Dow, or another 2,000 points lower than today's drop ended at.

It's all psychological, at this point. Investors large and small are psyched out of the market, and banks have taken such a beating (Bank of America lost 24% of it's value today alone) that they aren't loaning a dime to a millionaire.

So, the bottom is a psychological thing, too. That why Bernanke and Paulson just bet 1.6 Trillion US dollars that they could firm up that bottom by spending taxpayer money (or printing some taxpayer-backed currency).

It appears that their little gamble didn't work today. It might not work tomorrow, either.

Here is the answer, learned economists, if you care to hear it:

The market is too complex for the average investor, and rapidly becoming too complex for the institutional investor.

Why is it so complex to put one's money to work in the market? One word - derivatives. Derivatives are basically any sort of financial trading instrument that isn't either a stock (equity position holding in a company), or a bond (promissory note of a company or government). Derivatives have strange names: "put options" (a bet that a stock will fall), "call options" (a bet that a stock will rise, a "short-sale" (a bet that a stock will fall, and that you will get the difference between the old higher price and the lower sold price).

Then there are futures contracts for commodities (sort of in-between in that you are actually contracting for the right to buy an actual product, such as soy beans, at a certain price in a time certain, but you usually don't expect to take possession of the commodity). Where it gets complex are the derivatives based on these futures contracts.

So, to me, the solution to the market crisis, both the actual cash crisis and the crisis of confidence, is to limit derivatives trading. If we're going to take control of the markets, as is happening all around the world, let's not only take control, but let's put trading back to where it started: you get equity, or you loan money to companies and get their IOU, and that is all we trade. Futures trading would be allowed for actual consumables: food, fuel, materials like metals (not "carbon credits").

If Bernanke and Paulson were to shutter the market except for equities, bonds and commodities, even for a test period of say, 30 days, the remaining market would rebound. The gamblers would have to fly to Vegas or play the ponies at an off-track betting parlor.

The value of shares traded would begin to equal the value of goods and services produced, not exceed it by a large multiplier (sometimes known as "leverage" but true gamblers know it as "odds"), as is now the case. Real money would chase real goods, and the manipulators would all be out of work and gone would be their ability to affect the markets we all have to play in, such as the oil market.

There have been stock exchanges for 500 years, and commodity exchanges for 400 years or so. There have only been "short sellers" in my lifetime and "spiders" in the last few years, and it's in my lifetime that the markets have become too complex. Criminals, manipulators and tax evaders have all enjoyed this shady marketplace, because the rules change on whims and no one can keep up with it.

If we dump the derivatives markets, honest investment capital will keep the real economy afloat, and even prosper it. The only losers will be the gamblers, people who care not a fig for actual production or sales or services rendered. We can do without them AND their plastic trillions.

Comments

[Aaron Neal]

I'd add one more rule change re: futures - speculators (who never expect to receive the final product) are what drove oil so ridiculously high this Spring and Summer.

Allow the purchase of a futures contract ONLY if they buyer is actually capable of taking delivery of said product.

That'll take the gamblers out of the futures market as well, leaving the market to those who honestly need to contract for things in the future (think SW Airlines; they contracted well into the future on fuel back when it was cheap, and thus came through this summer OK).