March 26th, 2021, was yet another typical day in the latest bull market. Stocks barely moved, inching up 0.21%, and the VIX index, the go-to measure of market volatility, remained calm throughout the trading session. But while the S&P500 was in a lull, a mini-crash had arisen in various, seemingly unconnected stocks of big-name companies. Viacom, Discovery, and Shopify, to name a few, had plunged over 20% with no apparent news or catalyst to explain the sudden move.
It was only hours later, however, that we find out these stocks had something in common. These companies made up the portfolio of trader Bill Hwang who, according to the financial media, was a highly respected Wall Street veteran, “the greatest trader you’d never heard of”, said Bloomberg.
But how did this superstar trader go from a 20 billion dollar fortune to zero in just a few hours? Quite simply, this was a classic case of everyone being fooled by randomness. If you blindfold some, he will hit likely the dartboard one in ten times. So if you select fifty people who all want to become the next hotshot on Wall Street, someone will finally get lucky and pick stocks that outperform the broader market over time.
If we use logic — recognizing that no competent trader blows up on a day where the S&P500 moves only 0.2% — the narrative surrounding Bill Hwang’s superstar status does not add up. Cutting through the corporate lube of mainstream financial media will change our perception of the modern-day finance heroes we see covered all over the media every day.
Hwang’s past dealings show his downfall was more likely than him doubling his net worth in the next decade. In 2012, Hwang’s Tiger Fund committed securities fraud, short-selling three Chinese bank stocks based on confidential inside information, paying the SEC $44 million in fines. And not to mention, only recently, Cathie Wood revealed how he “played a central role in the launch of her asset manager Ark Invest.” Maybe, just maybe, these famous figures are not what the media bigs them up to be.
In truth, a lot of famous personalities' investment careers, fame, and fortunes have grown out of luck, not talent or skill. If we think about it, anyone can select a list of stocks and press buy and sell in a state-of-the-art brokerage account or trading platform. If Hwang knew his risk, he will have noticed the declining economic situation in China since the start of 2021, which requires nothing more than to keep an eye on a few macro indicators: The plunging Caixin PMI, declining money supply, and how the Chinese government had announced they would cut back on “stimulus” — the greatest sell signal in the liquidity-driven market era.
The cheap money age is a prime environment for us to fall for the narrative fallacy. Contrary to popular belief, we never know whether the decisions we make are strong or that we just get lucky. In a bull market, and especially this one, we forget that everyone becomes a genius. Lots of personalities reach celebrity and “expert” status in economic booms while, in reality, they had an extraordinary run of luck. This will not become obvious until the real crash occurs. But when the bubble that made these characters — briefly — rich finally bursts, most of them will lose everything and disappear from the public sphere — after the financial media uses them as a commodity.
In randomness expert Nassim Taleb’s book Fooled by Randomness, he introduces us to John “the High-Yield Trader”, who makes a fortune buying Russian debt during the 1990s. Taleb’s candid soul describes John as: “a brief professional conversation with him would have revealed that he presented the intellectual depth and sharpness of mind of an aerobics instructor”. Still, he makes a lot of money for his clients for years. He gets promoted. He gets the Lambo and the penthouse.
But all the while, John was never special or gifted. Anyone could have done what he did: constantly buying the dip. So when purchasing Russian bonds no longer made John money, he found it impossible to please his bosses. He couldn’t sell even when the Asian debt crisis looked obvious. In the end, Russia’s bonds went to zero and John lost all his client's money. He was never to be seen on Wall Street again. A victim of randomness.
When we take this and how Bill Hwang obtained billion of dollars in liquidity from megabanks to finance ultra-risky trades, we start to realize maybe everything is not as rosy and adept behind the scenes. But the collapse of Archegos barely scratches the surface. If you look deep enough, stripping back the mainstream narrative, several markers reveal that regulators and policymakers are asleep at the wheel. The financial and monetary elites have overlooked, neglected, and sometimes ignored what the modern financial system’s critics have been warning about for decades.
You don’t need to look far. Take the five largest banks under the Fed’s umbrella. If we consider the risk these institutions have taken since the 2008 financial crisis — and that massive taxpayer-funded bailout thing, the illusion of financial stability begins to fade rapidly.
In the last quarter of 2020, the OCC reported that five major U.S. banks — Morgan Stanley, Citigroup, JPMorgan, Bank of America, and Goldman Sachs — held $185.61 trillions worth of derivatives. That’s a whopping 85% of the global total. All this even though the official Financial Crisis report stated that “Large derivatives positions were concentrated in a very few firms”.
Since the megabanks have never had more soon-to-be toxic balance sheets, the only way to consider these institutions safer is if we believe the state will bail them out in the next crisis and everyone will play along as if this is the new norm — which, let’s face it, is now the most likely outcome.
It gets more absurd when we examine the Fed’s stress tests, the official barometer of the system’s financial health. On the surface, if we believe the theatrics, these look legit and reliable. But further scrutiny reveals they are seriously flawed and border on the verge of propaganda. In 2016, the Office of Financial Research (OFR) found a serious flaw in the central bank’s methodology. The stress tests measured systemic risk bank by bank, failing to consider potential contagion that could spread if a counterparty ran into difficulties or, worse, failed, which meant they never weighed the risks of an institution being a counterparty to a major Wall Street bank (because they never fail, right?).
In the end, however, we can’t blame them. Since the 1950s, the Federal Reserve has slowly lost control of what money is and how to calculate the total supply. As major financial institutions began to conduct most of their business in the shadow banking layer, the exotic marketplace that facilitates bespoke transactions such as Archegos’s leveraged bets, bank liabilities became the dominant form of money. Right now, there’s an estimated $1.2 quadrillion worth of financial derivatives floating around in the global financial system, and these debt instruments have grown so much in size, volume, and complexity, everyone, even the bankers themselves, can’t price or define them.
But instead of central bankers admitting to everyone that they had lost control of the monetary system to the major financial players, the Fed created a lie that they still held the monopoly on money. They replaced monetary policy with expectations-based policy, but everyone played along. They fooled market participants — and the general public — back then and have done so since. Even despite the financial crisis of 2008 exposing this lie in several ways, to this day, the market moves depending on what everyone thinks the Fed may or may not do next. But they don’t have to do anything. The market front-runs them.
So as central bankers don’t want us to worry about contagion risk, they may as well distract us from the status quo. It seems Fed governor Brainard thinks the imminent danger is not the trillion-dollar chains of toxic derivatives but a crypto-induced bank run, where people pull their funds from the legacy financial system and adopt the U.S. central bank’s new cryptocurrency: FedCoin. This is the least of his worries. He forgets the entire financial system and the global trade it enables relies on multiple, complex offshore and onshore systems that will send us back to the monetary stone age if they somehow disappeared overnight.
This is the state of the system in a nutshell. Safety in markets is a wild delusion to which the Federal Reserve provides false optics. The phony and flawed stress tests, flimsy financial stability reports, corrupt monetary programs and institutions, and parody-like congressional hearings provide a theatre for citizens to believe that the monetary elites have any power to stop a systemic financial collapse. They — and we — have no idea what force a market-wide, Archegos-esqué event will unleash on the global financial system. The Archegos collapse proves the assumed stability in the financial system, which the media and the monetary elites have been preaching for years is, quite frankly, nonsense.
We have not only failed to learn our lesson from 2008 but have strayed further toward both financial and economic insanity. Nothing has changed since the last financial crisis a decade ago. Megabanks are now three times as larger. Financial institutions still pay off ratings agencies to rate their toxic debt as pristine collateral. Banks still manipulate their stock in Dark Pools unabated. And central bankers have no way to measure or define the trillions of exotic financial instruments and derivatives that lie in the offshore, unregulated darkness of the shadow banking layer.
The collapse of Archegos Capital is a smidgen of possible hazards that exist in the global financial system, and Bill Hwang is only one of many bad actors toying with cheap money who the most influential banks on the planet keep bankrolling. Who knows what risks others have taken deep in the financial shadows. Maybe it’s best not to find out.
Right now, we recognize the various situations that could bring down the financial system, but if we’re realistic, we have no idea what black or white swan event will create the crisis that everyone has been anticipating for a decade or more. But what we do know is that to have any chance of crushing the cheap money status quo, this event must be colossal in magnitude, rivaling and surpassing the effects of a global pandemic and a following civilian lockdown. A situation that, right now, no one can really comprehend, let alone foretell.
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This article is for educational purposes only, not financial advice.