Is Fantasyland About To Get Real?

For much of this decade there has been no other industry that has laid claim to the “easy button” with reckless abandonment than the industry collectively known as: Wall Street or, investing in general.

Today it seems many an “easy button” are suddenly malfunctioning with devastating results.

The true issue with the above is this may only be the beginning of the real problems, for a product recall in investing parlance usually means something along the lines of a return of some, if not all, of those once considered “set it and forget it” easy-peasy trades for profit.

For some, it may be a recall of their entire net worth – and then some.

You should reread the above sentence one more time, especially the part about “entire,” “and then some” aspect. For if you never thought (or still don’t) think that’s possible, or believe it’ll never happen to you, because you have or partake in some “great retirement/trading strategy” told and sold via some “investing guru?” Wall Street has a term for that also, it’s called: “You’re next.”

It was back in 2010 the then Chairman of the Federal Reserve Mr. Ben “The Courage To Print And Print Some More!” Bernanke gave what many of us deem as his infamous Jackson Hole speech signaling another round of quantitate easing was at hand (e.g.,QE2) and that if needed would do more. 

It was here the all too easy BTFD (buy the F’n dip) because “the Fed’s got your back” trade was born.

The problem is those days are now long gone, but the after effects are only now beginning to be felt – and they are earth jarring. Here’s just the latest example:

Maybe you heard about the recent natural gas market turmoil, maybe you didn’t. For those that don’t know, the entire natural gas market went bonkers out-of-the-blue spiking to heights that wiped out many a trader if not entire trading funds.

The issue with natural gas markets (and oil et cetera) are that traders (and by that I mean: real, experienced, human, open-out-cry pit traders of old) understood they’re not called “widow makers” for nothing.

Anyone sporting some new-fangled “set it and forget it” type strategy system, let’s say like those involving “option strategies,” were usually known as “the walking dead, they just don’t know it yet” crowd. The reasoning was simple: it’s not called “widow maker” for nothing.

However, that hasn’t stopped those from thinking (as well as selling the idea) that “it’s different this time” offering ways to beat the system. One was named “OptionSellers[dot]com.” Focus on – was.

In an out-of-the-blue turn of events (obviously not anticipated, or maybe, not ever thought possible) this firm suddenly found both itself, as well as all its clients funds – lost. I bet people who were following the advice of this company never thought of this consequence when the they were listening to commentary given by the founder in a podcast as recent as October (hint: it’s now no longer available)

With that said here’s just one paragraph I picked out of its transcript titled, “Option Selling Opportunities So Good They’re Scary” Again, this is from just weeks ago. To wit:

We sell options probably much further out in time and in price than most people that are involved with doing this, not with the idea that we’re going to stay in the option until the very last day trying to collect the very last dollar. That’s really not necessary. If you sell options fairly well – sometimes we do – if you sell options fairly well, that option should lose probably 75-80% of its value in about half of the time that’s remaining on the option. So, quite often we’ll be buying options back that have 100 days remaining left on them, with the idea that you’ve captured 90% of that premium. Once it gets down to that low level, that’s really a good time to cause a buyback candidate and cash in the profit and start over anew.

James Cordier/OptionSellers[.]com

The above sounds great – until everything you thought couldn’t happen – happens.

Did this happen because of a natty gas trade gone awry? Hard to say, but the inherent issue with option strategies that those of us that have been around awhile (as well as traded) know all too well is this: they always work, till they don’t – and when they don’t they can cost you plenty.

And when you’re dealing in the commodity sector? Hint: focus on – “plenty.”

The above is just a microcosm of what I believe will become a far greater problem throughout the entire investing, as well as Wall Street complex. That problem revolves around what is also known as a “set it and forget it” type strategy to retirement riches. That strategy? Robo-investing. i.e.,  think outfits like Betterment™ and others for examples.

Automated investments (think: formulaic, algorithmic programed robo-trades) have been the buzzwords for investing since the central banks have been adulterating the markets these past years. I mean, what’s not to like, right? For if the Fed’s got your back, then the machines can surely handle your money, right?

Well, yes they can, until something goes awry. Then, well, just see above for clues.

Algorithmic, high frequency, robotic trades have one fatal flaw: Event risk. This fatal flaw gives no precursor for implementation. i.e., it just happens when no one is either prepared, or worse, never thought it ever could.

Remember: all HFT or algorithmic trading is predicated on one simple rule. i.e.,  “if this, then that” and it is as simple as it sounds.

It gets complicated when the machines interpret “this” as “that” when “that” was never contemplated as meaning “this” and so forth. Then, at the speed of light (literally) will feed upon itself executing millions, if not billions of robo-trades as other bots suddenly (actually, instantaneously) react and trade against or with it, exacerbating what may be an erroneous interpretation to begin with.

This is where AI (artificial intelligence) can suddenly become dumber than a box of rocks. The problem is the wake of disaster it can leave as a result can pound once considered hard profits, as well as entire net worths, into pulverized sand flowing down an endless rabbit hole of losses.

Currently we are sitting at a moment of time for event risk that not only the robots that will execute their preloaded programs have never seen, but that many of the coders for those programs haven’t either. i.e., they were still in school during the last fiasco.

Should the news coming out of Asia tonight be interpreted as dire (see latest APEC Summit for clues) for any resolution bearing merit in the ongoing trade wars, we could see a sudden risk event in the lightly manned (no pun intended) holiday trading week here in the U.S.

After all, as of right now, it’s the machines that have been left to man the “markets” while the rest have hit the road for the holiday travels.

What could possibly go wrong?

Maybe some should look to OptionSellers[.]com for possible hints or clues.

© 2018 Mark St.Cyr