Demand and Disinflation

Using the stock market as a measure of relative common wealth, retail investors fear being in the market. It's too noisy for an unhedged risk tolerance.

By focusing on the fear factor, professionals (the hedgers) want to minimize the loss of wealth being the primary reason retail investors are not "in." It is the hedged risk that retail investors really fear, however, which has and will reduce their net worth if put at risk.

Small, retail investors are not "big" enough to survive the business cycle (the current deflationary trend). They cannot be "in big" like the hedgers with wealth accumulated by deflationary trending which in the current case began back with the Bush tax cuts.

Combined with the Bush-era tax cuts for the rich (fitting the Hamiltonian model), consolidation of the financial sector along with lax regulatory oversight and market accountability predictably caused a great recession. Small investors (small businesses generally) have experienced consolidation of their net worth (exactly what the Hamiltonian model is supposed to do). The result is wealth being much less common and is the deflationary trend being experienced (the demand reduced), verified with a low consumer sentiment.

More than the fear of risk, the retail investor does not have the money to be invested, and what they do have they cannot, or will not, risk. Flash trading, for example, manipulates prices and technical trends (stops and limits) with high frequency and massive volume that defines (technically delimits) what it means to "be-in big." The large size and momentum causes the deflationary risk that accumulates the wealth and consolidates the risk for government management (and thus the uncertainty that supposedly keeps capital from pro-growth investment to make the wealth more common and reduce the deflationary risk). For the retail investor...the risk is "off" (which means the gamma risk is "on") for a very long time.

Low volume in the equity markets simply indicates a massive consolidation of the wealth. The wealth is much less common, and that reduction is empirically verified by the the low volume combined with the length and depth of the recessionary trend. It is less a function of fearing the risk than not having the funds to risk because all the risk has been consolidated and is being presented in the form of massive public debt. (Keep in mind that if the Bush tax cuts are extended the risk is assigned to the least able to take it--the least able to pay, or the highest credit risk that cannot get a loan to supply the demand--which will extend the recessionary trend and the budget deficits needed to provide the missing demand.)

Wall Street analysts are reluctant to describe and explain Main Street's lack of participation as lost net worth because it suggests an accounting of where it went (and the need for a massive public debt). Of course, mainstream economists maintain it does not exist in zero-sum but just vanishes into thin air. However, that would not explain the support equity prices are getting at low volume.

To avoid accounting for where the lost value went, support for equity values tends to be described as a function of QE--cheap money leveraged into investment instruments--inflating and deflating asset classes at high frequency, which keeps what retail money is left away. Retail investors, however, cannot afford the risk because their net worth is being used against them.

The level of risk present to the retail investor is a warning sign--the market is too consolidated. Until the deflationary risk is transformed into a more disinflationary risk (more alpha and less beta and gamma risk), professional investors are head-to-head in a zero-sum game.

QE, instead of expanding supply and adding alpha risk, is being used to accommodate its consolidation. Money keeps being added to be quickly consolidated by professional investors who are not waiting for it to trickle down to the retail investor, but taking a capital gain right out the discount window and onto the trading floor.

Instead of big, institutional investors being reduced to a competitive, alpha-risk dimension that relies on economic growth to produce a capital gain (having arbitraged and "derived" their own fate into competition over the spoils--i.e., the declining rate of profit), the risk is reduced to a gamma-risk dimension dependant on public finance.

Public finance of the risk proportion inflates the money supply. Gold, for example, being priced into an asset class (a store of current value) means investment is not being made to add supply (economic growth). Disinflation is being resisted, adding deflationary (gamma) risk and the need for more public finance, instead. The result is a debtor-financed recovery, building a huge bubble (a crisis proportion) just waiting to burst and send us into a hair-raising double dive.

Inflation of the money supply is not being used to a disinflationary extent. It is being used to support a deflationary extension of the risk. The result is continued demand reduction--the double-dip proportion that is the subject of so much speculation and largely dependant on the extent of political risk (the gamma risk proportion).

A high gamma-risk proportion bodes bad for Main Street because it measures the current value of deflationary risk (demand reduction). As long as the gamma is kept in high proportion, the disinflationary risk is proportionately reduced. Deflation will be extended until the economic environment is so hostile to small business survival the tax incentives made available for economic growth will be consolidated, which supports the problem.

The risk is rendered entirely political for both Wall Street and Main Street. We are head-to-head; and considering income determines the level of self-determination, the probable value of the risk is well consolidated.

After the value of the risk (capital) has been consolidated to the fullest extent, it is then converted into wealth (private property). The stored value (wealth) is retailed (converted) to investors in the form of working capital (a common good), but not without a big short on the long bond, ensuring the disinflationary risk (the probable commonwealth-valuation of the gamma risk--the demand needed to reverse deflationary trending) in the smallest of proportions.