Monday, May 21, 2012

The Age of Information

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

"Working at my desk today was somewhat surreal. Global risk markets were closing out a dreadful week.  Newswires were full of disconcerting articles - J.P. Morgan, Greece, Spain, Italy, China, etc. Meanwhile, CNBC was in the midst of blanket coverage of Facebook's initial public offering. Mark Zuckerberg rang the bell to open Nasdaq trading, while helicopters provided live video of the employee gathering at Facebook's Menlo Park headquarters. Insiders are now worth billions, the "average" employee millions. Even U2's Bono pocketed $1.2bn (with a "B"). I noted above how I see J.P. Morgan's current predicament as a microcosm of global financial woes.  Well, it is difficult for me today not to see Facebook as emblematic of the incredible transfer of wealth associated with Credit Bubbles. It's almost as if this historic Bubble has been waiting to end with just such an exclamation point."
-Doug Noland, Credit Bubble Bulletin, May 18, 2012

A label used by promoters of the Internet bubble was "The Age of Information." Information itself is worthless unless the recipient knows how to employ it.

            The Zero Hedge website displayed a chart of Facebook's opening trades on May 18. Trading opened at 9:30. At 9:30.32, the price shot straight up to £50,000 a share. Zero Hedge calculated that Facebook, for a few milliseconds, was a $100 trillion (with a "T") stock.

            Was this glaring, electronic trading blunder mentioned on Bubble TV?

            Probably not. TV stars who hyperventilate over Facebook's IPO do not possess the "knowledge" - a refinement of "information" - to explain the flaws of electronic trading and the corruption of high frequency trading (HFT). Also, it is not in Bubble's interest to scare its remaining viewers from the markets. These non-SEC-investigated distortions happen with great frequency. The individual shareholder seems to have somehow inferred this, since individual shareholders account for only 10% to 20% of daily trading. This, too, is probably not publicized on Bubble.
            Nonsense that surrounded Facebook's IPO was an expression of the media's giddy and abiding adulation of technology as well as its faith in an evolutionary determinism towards the perfection of mass electronic communication. "Power to the People" or "Facebook will free us all." Some gooey and meaningless phrase of that sort. (Bill King The King Report wrote that when Facebook shares fell from $45 to $40, "we were worried about mass financial media suicides.")

            All this, despite the astounding amount of money spent on the electronic trading structure for Facebook shares or Greek government credit default swaps, is a calamity of error.

The financial media's idolatry for the common stock of a company that is in the business of people-to-people electronic communication is sacrosanct even as the electronic communications systems on which those shares trade are flawed, corrupt, unstable, and cryptic to a degree that was never true when all shares were bought and sold on the floor of the (then) non-publicly-traded New York Stock Exchange.