The whisper talk, when backed by documented variables, is always most interesting. Take the comments made by the typically entertaining and insightful analyst Eric Peters. Peters has a knack for amplifying topics for comedic purposes that point to significant issues. Take his September 6 weekly adventure, one where he discusses the Fed facing two choices, one of which involves blowing up the world. To insiders this topic isn’t that unusual, but it is one seldom spoken in the mainstream. He also addresses PhD economists who “think they are too smart” to face failure. Funny how history repeats. Long Term Capital Management, an example of the elite saying they could not face failure, isn’t that different. In both cases the elite PhD club is asking their performance not be measured and the past ignored. Could we be approaching another major PhD induced market value adjustment? And if it happens will the mainstream responsibility once again pointed in a different direction than those who abandoned free market economic principles?  Peters didn’t go this far, but it is a topic of discussion.

Flash Crash time spread Eric Peters

Eric Peters – The Fed has two choices and PhD elites don’t like to face dilemma, Peters notes

It must be difficult being in Peter’s social circles because he quite frequently reports on conversations he hears. In fact, the voyeuristic nature of peaking at the world though Peter’s eyes are one reason his newsletter is compelling.

In Tuesday’s report Peters considers “artificial markets,” to steal a term from Donald Trump. The reality that those familiar with market structure understand is that markets can only be manipulated for so long. There is a reason the Commodity Futures Trading Commission fought a hard battle against the Hunt Brothers during the Go-Go 1980s. The Hunt Brothers market manipulation incident in the silver market was the second most significant criminal battle the agency of Brooksley Born fought. This leads to the present day.

“The Fed faces the choice between allowing a US bubble to form and blowing up the world,” Peters says, quoting an unnamed Chief Investment Officer with whom he speaks. “And they’re trying to have it both ways.”

Eric Peters: “No one likes facing a dilemma, particularly PhD’s. They’re too smart.”

In so many respects this speaks to Fed modeling. It is much more like a PhD professor who can’t even consider he is wrong and doesn’t have risk modeling just in case. When they were considering stimulus, was any modeling done about the addictive impact it would have on markets? “No one likes facing a dilemma, particularly PhD’s,” Peters wrote. “They’re too smart.”

Peters considers the unique situation we face:

Tight fiscal policy requires loose monetary policy. So today’s interest rates flat-line either side of zero. Everywhere. But as interest rates decline, so do investment returns. And as these grind inexorably lower, unfunded pension liabilities soar. Imposing more belt-tightening. A nine-year 80% increase in Illinois property taxes didn’t fill their sink hole. “By stimulating the economy with lower rates, monetarists reflexively turn these fiscal screws ever tighter, creating the opposite outcome to the one they expect.” And the multiplier is highly negative now. For every one dollar of rate cut stimulus, the fiscal screws tighten four. “This explains the growing disconnect between financial markets and the real economy.” Asset prices are many things, but mostly they’re the net present value of their expected income stream discounted by an interest rate. “As the reflexive relationship between loose monetary and tight fiscal policy slowly asphyxiates the economy, expectations for perpetually low interest rates become widespread.” Valuing a cash flow using a 10% discount rate yields a narrow range of possible prices, but discounting it using 1% generates a vast range of potential outcomes. Almost anything becomes possible. “People are nervous about the S&P 500 here because they can’t enunciate what I’ve just described. But there’s no longer a right price for the S&P, just an extremely wide range of possibilities. 2,000 isn’t crazy, nor is 3,000, or 4,000. Almost nothing is crazy.”

Almost nothing is crazy. In certain hedge fund circles the question is about the PhD’s running the Fed relative to trading acumen. In at 2008, for instance, amid the biggest derivatives bubble of all time, warnings coming from all corners, the elite PhD’s didn’t discover the hole in the elite consensus thinking. Hedge fund managers with eyes on risk management were documented to have modeled clear fundamental economic concerns. There is a difference this time. The Fed does appear to be increasingly cognizant of concerns, but will they be able to pull it off QE withdrawal without damage? That is the speculative chatter that is most interesting.

Eric Peters – Football season gets the juices flowing for equity volatility trader

Eric Peters doesn’t just tackle battle over free markets that is the Fed cadre. He also likes to tackle general trader talk, but does so with an entertaining bent.

When speaking with “the market’s biggest equity volatility trader,” he notes how trade room folk are “Looking forward to the fall.” Volatility over one’s weekly fantasy football team is often a top concern, particularly those using derivatives, which normally defines certain volatility strategies.

But then Eric Peters provides clues that his top equity volatility trader is discretionary. Fantasy football “gets the speculative juices flowing. Things start happening.” Programs that watch the math of volatility are not wanting to get “speculative juices” going as much as they are trained on a model. That said, the back and forth of betting inside a trade room is a spectacle to behold to be sure, and Peters provides a glimpse of the atmosphere along with market insight.