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Bitcoin's Quixotic Search for Legality -- My Daily Caller Op-ed -- Part 10 Algorithmic Markets Series

If you are interested in understanding serious emerging problems with algorithmic markets, please don’t miss my Daily Caller op-ed “Bitcoin’s Quixotic Search for Legality” – here.

  • It is Part 10 of my Algorithmic Markets research series.

Algorithmic Markets Research Series

Part 1: Who's Looking Out for Investors? [6-14-01]

The Bitcoin/Virtual Currency Bubble – Beware of the Alchemy of “Abundance Economics” – Part 2 The Code War Series

Bubbles happen because people ignore economics and assume away reality in their excitement over a new idea. “Virtual currencies” could be the latest tech “economics of abundance” bubble in the making. Fans of abundance economics imagine that the free and open Internet’s near zero marginal cost of borderless transactions will ultimately slay traditional economics of scarcity.

Cyber-utopians imagine that currency, or money, is a simple function, like any other product or service that they have made openly available to everyone in the world at virtually no cost on the Internet. They imagine the only thing that matters with the business of money is how money is transmitted.

They assume creating money is just a coding and crowd-sourcing task. How hard could that be? What possibly could go wrong? It’s only money.

Google Price Index: Insider Trading & Market Failure?

Google announced it is working on an economy-wide Google Price Index, but has not decided whether to make it public, per Google Chief Economist, Hal Varian, who spoke at the National Association of Business Economists conference this week.

 

  • This development has under-appreciated implications for insider trading and also spotlights how Google's online dominance of market-relevant information suggests market failure and a new potential systemic vulnerability to the integrity of global capital markets.

 

I.  Insider Trading

In March, Google CEO Eric Schmidt said: "One day we had a conversation where we figured out we could just try and predict the stock market... and then we decided it was illegal. So we stopped doing that."

Now any hedge fund (or market regulator not born yesterday) understands that if Google is actively working on a Google Price Index, Google has not stopped trying to use its uniquely comprehensive and timely, repository of sensitive market information to predict information highly useful to predicting the stock market.

 

Systemic Flash Crash Vulnerability: Financial Crisis Root Causes: Part IV

The SEC/CFTC report on the May 6th "Flash Crash" helps confirm that automated index trading technology was a contributing cause of the 2008 Financial Crisis and why recent financial reforms are not enough to address the ongoing destructive systemic vulnerability that automated index trading technology increasingly poses for financial markets going forward.

 

Google's Liability Decade: Why Google's leadership ducks investors

The abrupt change, that Google's CEO Eric Schmidt will no longer be accountable to shareholders on Google's earnings calls, should prompt investors to ask why? 

  • Google claimed that they wanted to put more focus on Google's strong financials, but they did not disclose any more than Google's usual barest of minimum of information to investors.  
  • The most obvious reason for this abrupt change is the literal explosion of real franchise liabilities and risk overhangs to Google that reared their ugly heads this past quarter. 
    • Had CEO Schmidt been available to answer investor questions, Google's exploding liabilities could have dominated the Q&A and the investment narrative coming out of the earnings call.

What has changed, and what Google has been not been open about, is the very serious ripening of three different types of going-forward franchise risks (antitrust, privacy/security, and intellectual property) that cumulatively herald a de facto change in Google eras: from the roaring "Growth Decade" of 2000-2009, to the more unpredictable "Liability Decade" of 2010- 2019.

Will Google redefine insider information/trading?

Google's unprecedented mass-accumulation of material non-public information may force a re-thinking and broader definition of the concept of insider information/trading and related securities laws/regulations, in order to continue to ensure the integrity of public markets.

  • Public statements by Google's CEO Eric Schmidt last week unwittingly unveiled a new and potentially very serious material weakness in the oversight and integrity of public markets, that should trouble those responsible for policing insider trading and other public securities laws at the SEC, CFTC, FERC, Treasury and the DOJ.
  • From Jon Fortt's outstanding not-to-be-missed post in Fortune: "Top 5 moments from Eric Schmidt's talk in Abu Dhabi:"
    • Google CEO Eric Schmidt: "One day we had a conversation where we figured we could just try and predict the stock market..." "and then we decided it was illegal. So we stopped doing that."

Public market regulators responsible for protecting the integrity of public markets are likely to be concerned by this public admission by a publicly-traded Fortune 200 CEO, especially when the statements are put in a broader perspective by connecting the relevant dots.

FERC approves Google Energy -- Keep an eye on this one...

"U.S. energy regulators approved a request by Google Inc. to become an electricity marketer, allowing the Internet giant to buy and sell bulk power like a utility" per the WSJ.

My www.GoogleMonitor.com site will keep watch over Google on Google Energy's trading in energy derivatives because it is ripe for abuse, as I explained in my earlier post: "Google's Energy trading proposal sounds eerily like Enron's disastrous derivative scheme".

Per the WSJ: "A spokeswoman for the company has said Google has no plans to sell its energy management service or speculate in energy markets. But she acknowledged the company isn't completely sure how it will proceed."

The concern here is that Google publicly has given itself wide latitutde here to speculate in energy markets in the future... because of their statement above... and because the FERC approved in its order Feb 18th  "blanket authorization... to issue securities and assume obligations or liabilities as guarantor, indorser, surety, or otherwise in respect of any security of a another person..."

Systemic Uneconomics: Financial Crisis Root Causes: Part III

To discern the real “root” causes of the financial crisis of 2008, one must probe beneath the surface and examine the health of the “root system” of our capital markets “forest.” The roots of the capital markets forest are sound economics; the natural market function of automatically equilibrating supply and demand and risk and reward, that is commonly appreciated as Adam’s Smith’s “invisible hand.” We generally assume that the natural market strength of the capital market forest’s root system ensures that all the trees are not in danger of being blown over in the crisis of a storm.

 

In the fall of 2008, we all were shocked to learn that the root system of our capital markets, that we had always assumed was healthy and strong, was actually frighteningly weak and brittle requiring the slapdash reinforcement of multi-trillion dollar emergency scaffolding of whatever material was close at hand, a TARP, bailout lifelines, capital sandbags, etc. -- to buttress the main market “trees” from toppling over, trees that the Government judged to big to be allowed to fall.

 

Net Neutrality is a Made-Up Issue: The Smoking Gun

To see "smoking gun" proof that "net neutrality" is a made-up issue and argument, read the short but telling excerpt below from George Lakoff's Book: "Thinking Points" published October 3, 2006, when the only net neutrality incident at that time was the FCC's Consent Decree with rural telco, Madison River Communications in February 2005.  

From Thinking Points, Chapter 8, The Art of Arguments:

"Thus, the argument for Net neutrality becomes an argument for government regulation in this form by the FCC.

“Systemic Risk Laundering” -- Financial Crisis Root Causes -- Part II

How could American taxpayers get stuck with a multi-trillion dollar tab that they weren’t even aware that they were running up? How could that huge tab still be allowed to run up unchecked today? For the Financial Crisis Inquiry Commission, the sad answer is one of the biggest root causes of last fall’s devastating financial crisis and one of the biggest continuing systemic risks to the financial system and the economic recovery.  

 

A decade ago, in what may prove to be the most expensive bipartisan legislative mistake in U.S. history, a bipartisan policy became law that effectively ensured that no Federal regulator had oversight or enforcement jurisdiction over derivative financial instruments. The Commodity Futures Modernization Act of 2000 (CFMA) created “legal certainty for excluded derivative transactions.” That law allowed a shadow derivative overlay system to be built literally on top of the public financial system, with none of the inherent accountability of the underlying financial system.  In other words, a deliberate bipartisan U.S. government policy change a decade ago unwittingly created an unaccountable “black hole” market that sucked enormous value out of public markets, (Bear Stearns, Lehman, AIG, Fannie, Freddie, securitized sub-prime mortgages, etc.) while laundering the risk to the U.S. taxpayer.

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Q&A One Pager Debunking Net Neutrality Myths