BlackRock – The Fed’s Wall Street Croupier
Central banks have not merely inflated the bejesus out of assets prices. They have also caused the very foundations of financial markets to metastasize, yielding an endless array of new products that have no real economic function except to facilitate new forms of pure wagering.
Foremost among these are exchange traded funds (ETFs). If you are inclined to give the latter the benefit of the doubt, you might well ask why the world was so benighted as recently as 2003 that only $204 billion of these swell financial instruments existed – a figure which is just 2.6% of the $7.74 trillion currently outstanding.
That is to say, if ETFs were the spawn of free markets and actually facilitated honest price discovery in primary and secondary capital markets, they would have been invented and institutionalized long ago; and upwards of 80% of outstandings would most certainly not have materialized just during the past eight years.
Total Assets Of Outstanding ETFs, 2003-2020
Of course, what has also materialized during the span of time encompassed by the above chart is essentially free money from the central banks. Massive eruptions of it. Since 2003, their combined footings have risen from less than $4 trillion to more than $35 trillion, thereby water-logging the markets with excess liquidity and turning them into fecund incubators of new wagering devices.
After all, if a real investment professional wanted exposure to the energy sector, for instance, he would undoubtedly investigate the relative merits and potential risks and rewards of all the significant players, including Exxon Mobil, Chevron Corp., Schlumberger, ConcoPhillips. Pioneer Natural Resources, Marathon, Williams Companies, Phillips 66, Kinder Morgan, Valero Energy, Occidental, Devon Energy, Hess, Halliburton, Baker Hughes, Diamondback Energy, APA Corp, ONEOK Inc., etc.
But the last thing he would do is buy all of them, weighted by market cap or some other third-party scheme. Yet that’s what you get when you buy XLE, which is the Energy Select SPDR for the sector: It includes 40 energy companies ranging from the above referenced giant integrated producers like Exxon Mobil to refiners like Valero, to oilfield services companies like Halliburton, to small E&P companies like Newfield Exploration. The iShares equivalent is called IXC and it is even more diversified with 96 companies spread among an even greater diversity of sizes, specializations and geographies.
Needless to say, no long-term investor would possibly believe that such a dog’s breakfast can be rationally analyzed or diligenced. After all, the whole point of competitive markets is to sort out the winners, losers and also-rans at the sector, industry and sub-industry level. So buying the entire industry amounts to embracing self-canceling financial noise and undoing all the hard work of Mr. Market at the operating performance level.
That’s why exchange traded funds, at bottom, are a product of the financial casinos, not the free market. They offer traders and speculators the chance to “bet on black” for just hours, days or weeks at a time based on little more than headlines and momentum. Not surprisingly, the XLE has now completed a round trip to nowhere during the last 15 years as the oil bubble erupted, collapsed, re-erupted, collapsed and is now rising again – even as this ETF’s price is exactly equal to its September 2006 level.
The argument that ETFs are a boon to homegamers who don’t have the time or skill to do the homework at the company level just doesn’t wash. In a world of honest money, they would put their savings in the bank to earn a solid rate of interest or would entrust their allocations to the equity markets to a professional with the skills and track record to pick winning stocks.
By contrast, the very idea of “democratizing” the process of equity investment is a scam that has arisen from the financial casino. It’s a Wall Street invitation to naive homegamers to throw their money at a kaleidoscopic wall of ETFs from which asset gathers scalp a flow of fees off the top.
Indeed, this fact alone tells you all you need to know: There are now more ETFs than actual single-company
Article from LewRockwell