Knowledge Is Power

Here is one way to think about the markets. It's one big arbitrage trade. Not an arb in the sense of locking in a profit between a real and synthetic instrument, but rather an arb for yield. The market is trying to capture yield. Or put another way, the market is trying to capture relative yield. There is a constant relationship between interest bearing products with less risk, and non-interest bearing products (equities) with more risk. Traders are chasing alpha. They are chasing performance. And every market in the world from the dollar, to the yen, to the sp 500, to the 30 year bond produces some return relative to its own risk. Traders are looking for that optimal level where they get the most return for the least amount of risk. The top of the food chain is not the equity guys though; it's the fixed income guys. These guys are pretty smart, the Bill Gross's of the world, who control hundreds of billions of dollars by himself alone.

Do you realize how big the swap market is? We are talking greater than 124 trillion dollars worldwide. Do you guys realize how big that is? That's trillion! These guys are trading swaps and options on swaps in size that you cannot fathom. This is what is pushing the equity markets. People live in their own little world, perhaps trading ES futures and they are completely oblivious to the big picture. They live in their own little world of paranoia and fear. Every tick that goes against their short position, they have a conspiracy theory waiting in their back pocket. All they really need to do is actually accumulate some knowledge of how the market really works and everything will become a little bit clearer to them. Knowledge is power guys.