The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Derivatives Ownership Even More Concentrated Than Ever

As I noted in 2009, 5 banks held 80% of America’s derivatives risk.

Since then, the percent of derivatives held by the top 5 banks has only increased.

As Tyler Durden notes:

The latest quarterly report from the Office Of the Currency Comptroller is out [shows] that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure …. the top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that’s your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

Amazingly, the top 5 banks have virtually 100% of all credit derivatives held by American banks (see the second to last line in the above table).

Dwarfing the World Economy

The amount of derivatives dwarfs the size of the world economy. As Bloomerg reported in May:

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.

“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said …“Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”

The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said.

The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns and leading to the collapse of Lehman Brothers Holdings Inc. in September 2008.

Huge Amount of Derivatives Are Dangerous

Credit default swaps were largely responsible for bringing down Bear Stearns, AIG (and see this), WaMu and other mammoth corporations.

And unexpected changes in interest rates could cause a major bloodbath in interest rate derivatives.

And, no, there have not been any reforms or attempts to rein in derivatives, and the Dodd-Frank financial legislation was really just a p.r. stunt which didn’t really change anything.

But the big banks and their minions claim that the huge amounts of derivatives themselves is unimportant because these are only “notional” values, and – after netting – the notional values are deflated to much more modest numbers.

But as Durden – who has a solid background in derivatives – notes:

At this point the economist PhD readers will scream: “this is total BS – after all you have bilateral netting which eliminates net bank exposure almost entirely.” True: that is precisely what the OCC will say too. As the chart below shows, according to the chief regulator of the derivative space in Q2 netting benefits amounted to an almost record 90.8% of gross exposure, so while seemingly massive, those XXX trillion numbers are really quite, quite small… Right?

…Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else whole on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd’s bank “resolution” provision would do absolutely nothing to prevent an epic systemic collapse.

Prior to Fukushima, nuclear industry engineers said nuclear was safe.

Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.

His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.

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Having read “Gold and Silver Stocks”, the Financial Times decided to follow the trend with “Investors Bet Miners Will Follow Gold’s Gain.” (September 20, 2011) The article discusses efforts of gold miners to distinguish themselves from Gold ETFs: “[G]old miners are beginning to respond to their share-price underperformance. The most popular response is to raise dividends, offering investors one thing an ETF cannot: a yield.” (See “Gold and Silver Stocks” for the same discussion.) The Financial Times continues, discussing two companies that are increasing dividend payouts, Newmont Mining and Gold Resource Corporation.

These are the same two miners discussed in “Gold and Silver Stocks.” The Financial Times relays Newmont Mining’s Monday announcement (September 19, 2011) that it will pay out an additional 10 cent dividend for every $100 above $2,000 an ounce. The FT discussed a novel dividend payout being considered by Gold Resource Corporation. The miner “might start paying dividends in physical gold.”

This is fine but the FT story may cause confusion. The reason for owning gold is easily misunderstood. This ambiguity will continue to be the greatest problem for potential and current owners of precious metals. Gold will be bought and sold at the wrong times by many of the misinformed. (Note: what follows only fleetingly addresses an important consideration – prices and cash flow should rise.)

A lack of precision may lead to a misunderstanding just as a truth may stumble into a half-truth. A half-truth is often more dangerous than a lie.

Quoting from the FT: “Investors increasingly buy gold as a form of insurance against further economic turbulence. Mining companies – which can miss production targets, suffer strikes, accidents and higher taxes, or see their profits eroded by cost inflation – appear to offer less protection against this scenario.”

The sequence is correct. It runs from (first sentence) gold to (second sentence) gold stocks. Gold stocks derive their price from gold, but they are stocks. The second sentence is a good synopsis of why the derivatives (gold stocks) have performed so poorly in comparison to the metal. Their attraction lies with the probability that these shortcomings have been excessively discounted.

The FT describes gold as being bought as a “form of insurance against further economic turbulence.” That is true but not the whole truth. One might interpret this to mean “I should own some gold as a hedge against further volatility [my stocks might go down 30%]. I don’t care about volatility because I read Stocks for the Long-Run, so I don’t need to buy gold”

Quoting from “Gold and Silver Stocks”: “The real story is that gold is money but only speaks up when the credibility of states and their currencies deteriorate.”

The great minds at the central banks, by manipulating every market under the sun, have lost control of the world’s financial system that, they apparently thought was a chalkboard theory. Official interference has failed. Last week, the great minds showered European banks with dollars, because some European banks are having great difficulty borrowing dollars. This massive flood has not regenerated trust. Siemens disclosed that it withdrew more than 500 million euros from French commercial banks and deposited them at the European Central Bank. (The ECB, itself, is extraordinarily leveraged. This should not simply be dismissed as a “boys will be boys” curiosity.)

From Reuters: 9/19/11:LARGE CHINESE BANK STOPS TRADING WITH SEVERAL EUROPEAN BANKS DUE TO FEARS REGARDING EUROPEAN DEBT CRISIS – Sources say the unidentified Chinese bank has stopped all swaps and foreign-exchange forward trading with Societe General (GLE.FP), Credit Agricole (ACA.FP), and BNP Paribas (BNP.FP). The bank has also stopped trading with UBS (UBSN.VX) due to worries about UBS’s loss from the new rogue trading affair. (Remember the hastily planted rumor, just last week, and for the 63^rd time, that China was buying Europe’s debt?)

We are witnessing the insolvency of the fractional-reserve banking system, at the highest level. (At the lowest level, local banks and small insurance companies should be buying precious metals. Tell the regulators to scram.) It would be a mistake for the average investor to buy and sell gold and gold shares depending on one’s view of market volatility over the next month or year. Gold, silver and other inanimate objects are assets without liabilities. Unlike dollars, these…things, do not bear the government’s Lewis Carroll promise: “This note is legal tender for all debts, public and private.” The dollar’s value is a derivative of the loony professors who run the country. Choose your weapon.

Persuasion is clearly a sort of demonstration,
since we are most fully persuaded when we
consider a thing to have been demonstrated

Of the modes of persuasion furnished
by the spoken word there are three kinds.

Ethos: Persuasion is achieved by the speaker’s personal character
when the speech is so spoken as to make us think him credible.

Pathos: Secondly, persuasion may come through the hearers,
when the speech stirs their emotions.

Logos: Thirdly, persuasion is effected through the speech itself
when we have proved a truth or an apparent truth by means
of the persuasive arguments suitable to the case in question. (Logic)

-ARISTOTLE, “Rhetoric“, 350 BCE

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It has been several 1000 years since Aristotle wrote those words about Rhetoric and the Art of Persuasion. The debate about whether Social Security is a Ponzi scheme reminded me that the internet has not advanced the art of persuasion very much, and indeed, may be setting it back.

Why is this? Regardless of whether you studied Epistemology in college or not, Words have meaning. When we misuse the specific meaning of words to to argue for or against something, we are engaging in the form of rhetoric Aristotle termed “Pathos” — appeals to base emotion.

For example, demonizing Social Security as a Ponzi scheme is a form of Pathos. It is not an appeal to higher or better nature, nor is it an appeal to logic and reasoning. Rather, it is designed to generate a negative, unthinking emotion.  So too, is calling that form of argument “demonizing,” but at least I am demonizing ideas, and not people, as is so commonly done online.

If I disagree with someone, that does not make them a criminal or a Nazi or a racist or homosexual or a slave-owner. But those terms are commonly bandied about in internet debate, substituting for what otherwise should be intelligent discourse. It is a rhetorical technique used to demonize opponents. In my opinion, it is intellectually lazy, often reflecting a weak argument.

Which brings me to our debate:

What is a Ponzi scheme? It is a fraudulent criminal enterprise designed to scam unsuspecting and naive suckers out of their money.

Is that what Social Security is? Hardly.

In my book, that form of rhetoric is weak. It reflects an intellectual laziness and lack of gravity. It appeals to the emotions. Lastly, it betrays the weakness of the argument.

Once again I find myself shaking my head. America, we can do better . . .

John Roque observes:

“For every year from 2002 to 2010 gold has, at least, corrected to its 40-week moving average and been down,peak to trough on average 15.6% (see table).”

Gold bottomed in 2001, and John’s table makes it clear that every year since “it has worked through consolidation phases.”

So far, this looks like the recent sell off is just another such a consolidation phase.

As of Friday’s close, Gold is down 12% from its early September highs, which was 3 standard deviations above its prior 200 day moving average.

John adds “So far gold is down 12% from its early September high (please recall that in late August we noted that gold was +3 standard deviations above its 40-week moving average, for all data back to 1987 and that a correction was likely).  Support @ 1600 looks ok to us.”

I (BR) will add the following: When a trend channel has an parabolic breakout to the upside, the prudent thing to do is peel off 10 or 20%. This sort of vertical spike works itself off by falling back to at least the prior channel . . .

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Amusing NSFW songs from Katie Goodman of Broad Comedy

I Didn’t Fuck It Up

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G Spot (Live)

Read the rest of this entry »

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My Sunday Business Washington Post column is out. This morning, we look at the question of who the real rogue is, the eejit trader, or the bank that allows massive losses to occur?

My answer is captured in the headline: There are no rogue traders, there are only rogue banks.

Here’s an excerpt from the column:

“Thus, firms that highly leverage their capital to put it into the hands of a few thousand employee speculators have a crucial job: They must ensure that capital is being precisely and properly managed. They must make sure that risk levels are tolerable, that proper controls are in place, that their IT systems and internal technology can track what is happening, in as near to real time as possible.

This is not easy. It is a complex set of processes that requires constant vigilance. It must be reflected in the corporate culture from the top down. And it becomes more and more complex as the size of the organization grows. The assumption must be that every employee is a potential rogue trader.

Banks are supposed to have expertise in preserving capital and managing risk. If they cannot discharge those simple duties, then perhaps they should not be in the business of finance. Most of all, they should not be engaging in behavior that puts taxpayer money at risk.

Anyone who runs a shop that has a proprietary trading desk is obligated to do everything in his power to prevent that single employee from bringing down the company. It’s not too hard to see that anyone who earns a bonus by risking the firm’s capital is a potential disaster.”

I am pleased I am able to get this into a mainstream paper like the Post, especially considering who their readership is . . .

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click for ginormous version of print edition

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One minor correction: Somehow in the editing process, my slam on Ace Greenberg, the paperclip recycling CEO of Bear Stearns had his name changed to Hank Greenberg, the CEO of AIG. I’ll have that corrected in the online edition, but the print version is already out there.

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Source:
There are no rogue traders, there are only rogue banks
Barry Ritholtz
Washington Post, September 25 2011
http://www.washingtonpost.com/business/there-are-no-rogue-traders-there-are-only-rogue-banks/2011/09/20/gIQA3sCxtK_story.html

Washington Post Sunday, Todays September 25, 2011 page G6 (PDF)

In the Think Tank today, John Mauldin writes about Social Security, calling it a “Catastrophic Success.”

John believes SS is a Ponzi scheme, and we disagree. He comes from a different country than I do — John lives in Texas, while I live on a small island off the East Coast of America — two completely different regions only technically existing on the same planet. And since this meme comes from John’s governor, Rick Perry, he seems compelled to want to defend Perry’s view, regardless.

A Ponzi scheme is an illegal and deliberate attempt at scamming people out of their money. Social Security is a national insurance plan created to address the issue of Seniors living in poverty. Hence, my view is that Perry’s Social Security chatter is unvarnished nonsense.

At present, Social Security is financially stable. As I told John earlier this week, it starts to run into increasing deficits over the next 3 decades, and the adults (assuming any still exist) in the political classes will be forced to respond by raising the Retirement Age, raising the cap on FICA contributions far above the $106k of today, and then instituting Means Testing so people like me won’t qualify. If we were adults in this nation, we would be discussing Medicare/Medicaid and the absurd costs of Health Care in the USA, but that is a different issue entirely.

I suggest you read John’s post, Catastrophic Success and comment there.

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See also:

“Saving” Social Security (June 17th, 2010)

SSA.gov:  Ponzi Schemes vs. Social Security (2009)

Catastrophic Success
By John Mauldin
September 24, 2011

400 Billion Yellow Aspirins
The US Government Is in the “No-Money-Down” Mortgage Business
Crash Alert?
Is Social Security a Ponzi?
Catastrophic Success
Europe, and Breaking the Light-Speed Barrier

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Breathes there a man with brain so dead
Who never to himself hath said,
“Social Security looks like a Ponzi Scheme?”

- With apologies to Sir Walter Scott

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Today we look at Social Security. In the US, Texas Governor Perry touched the third rail of Social Security and called it a Ponzi scheme, which of course immediately made him the leading candidate in the “shoot the messenger” category. Behind the rhetoric, we look at some actual numbers. No, not the unfunded liabilities, that’s too easy. Let’s look at what a heartless, uncompassionate man President Roosevelt was when he started Social Security (and that’s what many will call me after reading this!). Behind the tongue in cheek, there are some very real issues that do not get addressed when we talk about Social Security, but that need to be part of the discussion. And of course, we must start off with the results of the FOMC meeting, which has me feeling not at all amused. What are they thinking? Apparently, they are seeing the results from another, alternative universe. There is a lot to cover as I head off to London, where I will finish this letter.

But first a very important announcement. I am very excited to be able to introduce my readers to a new mutual fund offered by my friends Altegris Investments. This fund is a blend of five commodity trading advisors or CTAs. Normally, to access a CTA you be to be an accredited investor, with all the net-worth requirements and limited liquidity. But Altegris has figured out how to wrap a mutual fund around CTAs and create a fund of commodity traders with all the usual aspects of a mutual fund (daily pricing, liquidity, etc.).

I have long been involved in the commodity-trading advisor space (some 20 years) and am a proponent of CTAs as a way to diversify portfolio risk. I have written a detailed report on this fascinating sector in relation to the fund, and it is available for free at http://www.altegrismutualfunds.com/landing/mauldinreports1.aspx, along with more information on the fund (including the offering memorandum and important risk disclosures, which are also included at the end of this letter).

The fund has been very well received since its launch and has grown rapidly to over $1 billion. There has been very active interest in the professional community, as advisors and brokers are looking for simple and realistic ways to diversify their clients’ portfolio risk, as well as a way that is truly noncorrelated to typical stock funds and many other asset classes. Whether you are a professional or individual, you really should take the time to research what I think is a very solid fund. My partners at Altegris have decades of experience in the CTA space, with the largest database of CTAs and long-term relationships with many of the managers (I actually started my investment career in the commodity fund space, so have more than a passing knowledge of the arena). Given the potential for volatility in the global markets, I think it makes sense to have some exposure to funds that can go both long and short (depending on their models). I urge you to read my report.

http://www.altegrismutualfunds.com/landing/mauldinreports1.aspx

400 Billion Yellow Aspirins

My mother used to tell me, “John, if you can’t say something nice, then don’t say anything at all.” So let’s see if I can find something to nice to say about the FOMC announcement. How about: “At least they didn’t cause TOO much damage”? As Rich Yamarone tweeted immediately after, they announced they would buy 400 billion white aspirins and sell 400 billion yellow aspirins. This was not something that should have been done, but thankfully they only did some $400 billion and not a few trillion, which could have really screwed (a technical economics term) things up.

With Operation Twist as part of their new mix, they announced they would sell short-dated and buy long-dated treasuries. This sent the ten-year yield down to 1.72% (yields were already dropping), although as I write it is back up to 1.79%, which without the recent action would be the all-time low. The 30-year is below 3%, at 2.85%, which makes those of us who have been predicting such an event for many years finally right. I think I will just savor the moment and not make any more predictions for a week or so. It was a long time coming. It would have gotten there anyway, even without this Fed action. Which makes what they did impotent and pointless. More below.

Read the rest of this entry »

Conservatives and Liberals Agree: Unparalleled Levels of Inequality Is Killing Our Economy and Society

Leading economists agree that rampant inequality leads to unstable economies and depressions, and makes the middle and lower classes poorer.

While the stereotype is that liberals care about inequality and conservatives don’t, that is actually a myth.

As Canada’s conservative National Post – Canada’s 9th biggest newspaper – noted Wednesday:

According to the voice of Canada’s business establishment: “High inequality can diminish economic growth if it means that the country is not fully using the skills and capabilities of all its citizens or if it undermines social cohesion, leading to increased social tensions. .

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A mounting body of research shows that, left unchecked, a growing income gap affects the rich, the poor and everyone in between.

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No matter your political leanings, most people understand that endless concentration of income, wealth and power is bad for the economy. After all, businesses rely on rising purchasing power of the many, not the few, to deliver growth and profits.

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No one knows the tipping point, but lock enough people out of the promise of gains and at some point, instead of stability and growth, you get social unrest.

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History has shown us, time and again: When too much is controlled by too few, something has to give. Continuously rising inequality is unsustainable.

Everyone has a stake in fixing this. And the fix has no political colour.

(The Post is correct about the potential for social unrest.)

Moreover, IMF economists have demonstrated that inequality increases a nation’s debt. Because conservatives are passionate about reducing debt, reducing inequality is a conservative value.

And as I noted in February:

Renowned behavioral economist Dan Ariely (Duke University) and Michael I. Norton (Harvard Business School) recently demonstrated that everyone – including conservatives – thinks there should be more equality.

Their study found:

Respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Most important from a policy perspective, we observed a surprising level of consensus: all demographic groups—even those not usually associated with wealth redistribution such as Republicans and the wealthy—desired a more equal distribution of wealth than the status quo.

Ariely comments:

Taken as a whole, the results suggest to us that there is much more agreement than disagreement about wealth inequality. Across differences in wealth, income, education, political affiliation and fiscal conservatism, the vast majority of people (89%) preferred distributions of wealth significantly more equal than the current wealth spread in the United States. In fact, only 12 people out of 849 favored the US distribution. The media portrays huge policy divisions about redistribution and inequality – no doubt differences in ideology exist, but we think there may be more of a consensus on what’s fair than people realize.

How could the media portrayal regarding this issue be so wrong?

Well, for one thing, as a study the Pew Research Center found, the corporate media tends to take Wall Street’s view on economics. Indeed, the media is largely set up to spout propaganda which supports the view of the powers-that-be. The financial sector has been by far the biggest beneficiary of government policies over the past 10 years or so. So the media tends to defer to Wall Street’s own arguments against equality.

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Everyone agrees that a system which uses the power of the state to reward the fraud and gambling of the largest banks and biggest corporations through socialism for the rich and capitalism for everyone else is not free market capitalism, and is downright anti-American.

As I noted last November:

Conservatives tend to view big government with suspicion, and think that government should be held accountable and reined in.

Liberals tend to view big corporations with suspicion, and think that they should be held accountable and reined in.

Irreconcilable difference?

Not really.

Specifically, a Rassmussen poll conducted in February found:

70% [of all voters] believe that the government and big business typically work together in ways that hurt consumers and investors.

(and see this).

Remember that the government helped and encouraged the giant banks to get even bigger, and then has hidden their insolvency and shielded them from the free market, and helped them grow even during the severe downturn.

In return, the big banks and giant corporations have literally bought and paid for the politicians.

Conservatives might call it “socialism” and liberals might call it “fascism” – they are the same thing economically.

But all Americans – conservatives and liberals alike – can agree that it is not capitalism, and it is not American.

As I pointed out in December:

Conservatives hate big unfettered government and liberals hate big unchecked corporations, so both hate legislation which encourages the federal government to reward big corporations at the expense of small businesses.

As an example, both liberals and conservatives are angry that the feds are propping up the giant banks – while letting small banks fail by the hundreds – even though that is horrible for the economy and Main Street.

The Dodd-Frank financial legislation … enshrines big government propping up the big banks … more ore less permanently.

Many liberals and conservatives look at the government’s approach to the financial crisis as socialism for the rich and free market capitalism for the little guy. No wonder both liberals and conservatives hate it.

And it’s not just the big banks. Americans are angry that the federal government under both Bush and Obama have handed giant defense contractors like Blackwater and Halliburton no-bid contracts. They are mad that – instead of cracking down on BP – the government has acted like BP’s p.r. spokesman-in-chief and sugar daddy.

They are peeved that companies like Monsanto are able to sell genetically modified foods without any disclosure, and that small farmers are getting sued when Monsanto crops drift onto their fields.

They are mad that Obama promised “change” – i.e. standing up to Wall Street and the other powers-that-be – but is just delivering more of the same.

They are furious that there is no separation between government and a handful of favored giant corporations. In other words, Americans are angry that we’ve gone from capitalism to oligarchy.

So if both liberals and conservatives hate something, it doesn’t necessarily mean it’s a compromise. It may mean that they feel disenfranchised from a government that is of the powerful and for the powerful.

In other words, while many conservatives are against raising taxes on the wealthy, they are overwhelmingly for stopping the use of the power of the state to increase inequality. See this, this and this.

This is an area of agreement between people of good faith on the left and on the right. As Robert Shiller said in 2009:

And it’s not like we want to level income. I’m not saying spread the wealth around, which got Obama in trouble. But I think, I would hope that this would be a time for a national consideration about policies that would focus on restraining any possible further increases in inequality.

If we stop bailing out the fraudsters and financial gamblers, the big banks would focus more on traditional lending and less on speculative plays which only make the rich richer and the poor poorer, and which guarantee future economic crises (which hurt the poor more than the rich).

Indeed, if we break up the big banks, it will increase the ability of smaller banks to make loans to Main Street, which will level the playing field.

Moreover, both conservatives and liberals agree that we need to prosecute financial fraud. As I’ve previously noted, fraud disproportionally benefits the big players, makes boom-bust cycles more severe, and otherwise harms the economy – all of which increase inequality and warp the market.

And as I noted last April, prosecutors could claw back ill-gotten gains from the criminals and use that money to help the economy:

The government could use existing laws to force ill-gotten gains to be disgorged (see this and this) [and] fraudulent transfers to be voided …

The bottom line – as conservative blogger Michael Rivero writes – is that too much inequality kills the market:

For an economic system to be a system, money must flow freely at all levels and in all corners. When those in charge of the system decide to so order the mechanisms of the financial sector to drive the money into a single huge pile, the system cease to be a system and a crash becomes inevitable. One might as well force all the blood in your body to stay in the brain. The end result is the same; death for the body.

He’s right.