Wednesday, May 17, 2006

Bernacke, Hedge Funds, and the CPI

Our Fed Chairman may be mistaken about ease of regulation of Hedge Funds. The 140 point drop in the Dow emphasizes the rapidity with which the Hedge Funds respond to Market trends. It is obvious that Hedge Fund Market strategies rely too impactively on mathmetical formulas, where a arithmetic change in input data can generate a geometric sell-off in Stock. What would have happened if the CPI had been close to 1%, rather than the 0.6% it actually was? What would have happened if the core inflation had been 1%, instead of the 0.3% that it actually was? Hedge Funds are swinging too much weight in the Stock and Commodites markets. Cowboy Hedge Funds threaten the stablity of the Markets.

The real problem with Hedge Funds come in their leverage of existing assets. The later is what gives them their real weight in the Market. It is a weight which is granted to few other Investors, due to the normal caution of Bankers, and gives Hedge Funds undue power to control Markets. What caused the recent drop in Oil? It most certainly was not normal Market forces, and it was not normal Market forces which had driven the Price of Oil up in the first place. Shifts in Global Demand and current supplies did not trigger the reduced Oil pricing, Hedge Fund investment strategies issued Sale orders. Leverageing grants Hedge Funds the right to borrow more money, every time they make a Profit. Do We want Hedge Funds to develop weight in the Markets at twice the speed of all other Investors? lgl

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