I love a good tech story, but this one is downright scary.

For some reason I went down a bit of a rabbit-hole with high-frequency trading and robo stock traders this week.

I thought I’d share a bit of that with you here, not to make the point that the stock market is rigged (you knew that already), but just because the way it is rigged and the way the robot traders work, is just kind of mind blowing.

So yeah, money and tech. Two of my favourite things.

Ok, so I’ll admit I had no idea how robo-traders worked. When I first heard about them, I imagined a robot like Dexter from perfect match, going through stock-picking newsletters and picking the ones it liked.

But I then learnt it had something to do with algorithms, which again I thought was about mathematical ways to pick stocks, or pick market momentum – technical analysis on steroids.

But the truth is much scarier.

And we have a Hedge Fund guy named Brad Katsuyama to thank for that truth.

He noticed that his capacity to execute trades was falling. That is, on the computer systems traders use, they have something on their screen that tells them the stock price, and how many stocks are being offered at that price.

So say, Westpac, WBC at $2 a share, with 100,000 shares on offer.

In 2006, if Brad saw there was 100,000 stocks on offer, and he wanted to buy them all, he’d get them.

But in 2007, if there was 100K on offer, he’d be lucky to get 80K.

In 2008 it was down to 70K. And by 2009 it was down to 45K.

The screens would tell him that there were 100K, on offer but if he tried to buy them, he’d get less than half of what he wanted.

That was a problem.

At first he thought it was just the market moving at the same time as he was trading. But even in slow moving stocks, where trade was thin, he’d get the same problem. He realised some sort of event was shifting the market, and he was that event.

So he went digging. He discovered a few very interesting things.

The first is that that 100,000 shares was not housed at a single exchange, but was rather distributed across 13 different exchanges. (This is America we’re talking about).

And when you executed a trade, you didn’t put your order in with an exchange, you sent it to a ‘Smart Order Router’. The router would then split it up and send your trade on to the relevant exchanges to complete the trade.

Thing was though, the trades didn’t arrive at all of the exchanges at the same time. The further away the exchanges were, the longer it took.

(I ripped these images from a talk he did recently).

This created a window of opportunity for the robo-traders.

When Brad looked into it he found that there was about 2 milliseconds between when the trade arrived at the first exchange and the last exchange.

He thought, wow. That’s pretty quick. It takes 300 milliseconds to blink your eye, so 2 milliseconds (0.002 seconds) was fast, right?

Actually no. When he looked into it, the robo-traders could get their trades to the exchanges in 476 micro seconds. A micro second is a millionth of a second. So that’s like, 0.000476 seconds.

That’s insane right?

How does time even make sense at that level? It is beyond human comprehension.

But the robots got it. And the robots were using their speed to their advantage.

What they would do is ‘front run’ Brad’s trade.

So when he says, buy 100K WBC and hit go, the robots get in front of his trade. They would withdraw their sell offers and buy up WBC for themselves to sell on to him at a profit.

And so while there’s 100K on offer when he hits his button, by the time the robots have run ahead of him and done their thing, he’s lucky if he gets half of what he wants.

He calls this latency arbitrage – using the time lag between servers to your advantage.

I still find it mind blowing. This is how lots of people make money these days. By getting super fast robots to run ahead of people’s legitimate trades and mess them up.

And I mean a lot. On some days, 75% of trading volume is done by robots.

Madness.

It gets worse. Brad reckons that stock exchanges don’t make money on helping people execute trades any more. (They actually offer billions of dollars in ‘rebates’)

Rather they make their money by selling super-fast tech and super-fast data to the robot masters.

That is, they are enabling latency arbitrage. They are creating a class of people who have more info than others, and who then use it to their advantage.

Stock exchanges are enabling insider trading.

Just balls-out madness.

Seriously. Why would you?

Until a robot shows up to auction one day, I think I’ll stick to property.

The Liberal party is in serious trouble, but I think investors have something to look forward to.

So seems Labor’s landslide victory in Victoria caught everyone off guard.

I’m still amazed that this can happen. Facebook and Google know what kind of aftershave I use, but we still can’t get a good handle on voting intentions? Seems a bit buggy to me.

Anyway, the results are in. The Labor Love Fest is off the charts. Biggest win in a generation. I’ll explain what I think it means for wealth strategy in a sec, but first I wanted to step back and look at the bigger picture.

Now, no shortage of ink is being wasted on the Liberal Party autopsy and a good chunk of that is pointing the finger at the shenanigans in Canberra, especially the knifing of Malcolm Turnbull.

But I actually think there are some broader structural issues at work, and I worry that the Liberal party is about to get blindsided into oblivion.

Seriously, they might be toast.

First, I think they’re underestimating where the average voter sits on a lot of issues, and in states like Victoria, the average voter is a lot more ‘progressive’ than I think they realise.

How do I know this?

Daniel Andrews told me so.

“Progressive” is a relatively new term in the Australian political vocabulary, and it’s never really featured much in political branding. And you wouldn’t use it much anyway. It’s like ‘conservative’. Conservative might describe your base, but you’re trying to win votes in the political centre, so you use language that speaks to that.

But Daniel Andrews is using “progressive” and using it a lot.

In his short victory speech he said, “Friends, we are the most progressive government in the nation. We are the most progressive state in the nation.”

And it’s not new. Remember when the Gay Marriage issue was decided:

The most progressive government in the most progressive capital in the most progressive state…

This isn’t an accident. This is deliberate language use, and the Labor party must know it’s polling well. Which means that it’s a term that now sells to the political centre in Victoria.

To the Liberals, and their infamous conservative faction, this is very bad news.

They must have known they were taking a gamble. In knifing Turnbull, they were saying they were willing to risk some inner city seats to save some marginal seats in Queensland. But then they f-ed it up royally, when, rather than making Dutton leader – the only person who could save those seats in Queensland – they gave us Morrison, who is just a bit yeah, nah with everybody.

So they sacrificed Victoria and achieved nothing.

But there’s something else Andrews is doing here. He’s not just speaking to the centre; he’s creating a Victorian political identity. He’s saying Victoria votes for progressive parties just because it is Victoria.

If he can succeed in getting people to associate “progressive” with “Victorian” – to see them as one and the same – then he will have locked Labor in for a generation.

It’s like the blue state / red state phenomenon in America. States like California are locked in blue states (Democrat), and proudly so. It becomes a badge of pride.

Victoria is Australia’s first blue state (or red state really).

This is clever. Very clever.

And I don’t know the Liberal party has a counter-play. To do something similar, it has to go against the tide of history. They could try to take Queensland, but it’s hard to imagine a Queensland Premier running a campaign around “the most conservative government in the most conservative state.” It’s a promise to be backward looking. It doesn’t have the same ring to it.

And to do so, they’d need to abandon a large chunk of their voter base – the voters that don’t really resonate with the term ‘conservative’.

Voters like me.

I’ve voted Liberal most of my life. I did on the weekend. But I don’t identify as “conservative”. I don’t look back at the past and think we need more of that. I’m forward looking. I’m excited about change. I’m excited about the future.

I’m much more Malcolm Turnbull than Peter Dutton.

I vote Liberal because I believe individual freedom should be society’s primary goal. I vote Liberal because I believe enterprise and endeavour are the cornerstones of a successful society. I vote Liberal because I believe that our soft hearts need to be guided by sensible, hard heads.

It’s never been about whether there’s enough flags or bibles in our schools.

So the Liberal party is in trouble. Unless they can figure out a way to build a tent large enough to hold both their progressive and conservative voters, it will tear itself apart.

… if that hasn’t begun already.

That’s my thoughts.

And so, I promised I would look at what I think it means for wealth strategy too.

I think the Victorian election showed us we’re on the verge of a Labor nation. I think the Coalition is in trouble Federally and in most states.

If they get the mandate I expect, like they did in Victoria, then expect some pain. Expect a tough response to the Royal Commission. Expect no mercy on the interest only to principal reset. Expect negative gearing to go.

That might freak some people out. Amateurs might bail out of the market at that stage.

But I think Labor will be smart enough to try and spend their way through the pain. Expect a spending spree based around ‘fairness’ – first home owner grants to low income earners, an increase in the dole, more money for schools, hospitals and infrastructure in general. Stuff like that.

In the medium term, that will give the economy a boost. There’ll be more for everyone (so long as commodity prices continue to support the budget bottom line).

So keep your eye on this. Don’t bail too early. Look for serious reform and strong but sustainable spending.

There might be some short term pain, but it will pay off in the medium term.

And watch for that term ‘progressive’. See if the media picks it up and runs with it.

We should be terrified. But no, we’re throwing money around all over the place.

This week I became genuinely scared for capitalism, democracy and freedom. And I’m not sure people really get how serious this is.

I’m talking about Amazon, and specifically Amazon’s announcement of their second American headquarters – HQ2.

They decided to split HQ2 into three actually – two major headquarters in New York and another in Virginia, and then a third auxiliary headquarters in Texas.

The thing was though that Amazon effectively created a bidding war for cities across America to try and woo them to their town. The literally travelled the country, like some tech version of the Olympics Hosting Committee.

And some cities were going to incredible lengths to try and land their headquarters (and seriously, if it can be split in three, it’s not a “headquarters” right? It’s a glorified office building.)

And this is the thing. The seductive package New York city and New York state ended up offering Amazon will cost tax-payers $3 billion dollars.

$3 billion fricking dollars.

Now the liberals are whining that this is money that should have been spent on schools and orang-utans or whatever, and they’re kind of right, but it’s also missing the point.

Think about what’s happening here. Amazon is effectively monster stomping through retail right now. Pretty much anyone who sells anything is feeling the hot breath of Amazon on their neck.

Marketing guru Scott Gallaway says he goes to 50 Board meetings a year, and right now, there’s only one question in every company he goes to – “what do we do about Amazon?”

Last week Roger David, which has been putting men into underpants for 70 years, announced it was going to close by Christmas. 500 jobs lost. Not the first and not the last.

So remember the Amazon phenomenon is a zero-sum game. For every job Amazon creates, it destroys at least one in the broader economy (and probably the ratio is higher than one because “efficiency”).

So this $3 billion dollars Amazon is getting is not about seeding new economic activity. It’s about transferring economic activity from traditional retail over to Amazon.

It’s about giving Godzilla a handout and a massive competitive advantage while the villagers are screaming and heading for the hills.

Why isn’t Roger David getting $3bn?

And don’t get me wrong. I’m not against the emergence of online. I’m worried about the emergence and total domination of just one company. That’s not good for competition, and it’s not good for capitalism.

Can I make this story worse?

Well, why did Amazon pick Virginia? Word is because it’s a short hop to Washington.

Amazon already has 77 full-time lobbyists and a $100m dollar budget.

Excuse me?!? I’m trained in the art of persuasion. Do you know what carnage I could wreak if I was working full-time on it, with 76 full time staff? Seriously? What the hell do they do all day? Oh, and give me a $100m dollar budget..? Forget it.

There’s also grumblings that a recent tender for American’s defence communications system (the Joint Enterprise Defence Infrastructure cloud, or JEDI – nup, really not making it up), was tailored made for Amazon to win it. Like, they were literally the only company who could fulfil all the criteria.

So yep, the biggest company in America now has control of Defence communications.

What could go wrong?

And this is the thing. Amazon started as a book store, then it moved into retail, now cloud services and tech…

Where does it stop?

It doesn’t.

Amazon’s aim is simple. To control commerce. To control trade. It’s not about the products. It’s about the trade itself. It sells the water but it wants to own the pipes.

All of them.

Fully realised, the economy will never have known another monopoly like it. It makes OPEC look like amateur hour.

Do you see it?

But maybe you think it can’t happen here? Maybe you think the fortifications around the Coles and Woolies duopoly are just too solid…

Here’s a scenario. Amazon gets $3bn from the government (because they’re idiots), Bezos himself tips in another $3bn, because to him its chicken feed. Then they go to the venture capital guys and say, we’re going to take over Aussie retail, because we can. They chip into a war chest of $50bn because everyone loves the smell of money, but they barely need to touch it. Amazon just sets up a rewards program so that for every $100 of groceries you buy, you get $10 worth of Amazonians (their patented crypto currency) to spend on literally anything on the planet.

Coles and Woolies are in receivership in six months.

At that point, it’s done and dusted. Everything bought and sold anywhere on the planet will be done through Amazon.

Amazon determines the price. Amazon determines the access. Amazon determines the range.

And there won’t be diddly squat we can do about it then. In the modern world, trade is life.

And Amazon will control it all.

So everyone’s worrying about totalitarian tendencies in Russia and China, but that’s not what we should be scared of.

We should be scared of Amazon.

But no, instead, we’re throwing money at them like it’s nobody’s business.

Madness.

China and America are squaring off. We really don’t want to get caught in the middle.

People are talking a lot about the brewing economic war between the US and China.

Australia should be worried. Very worried.

There has definitely been a change in stance in Washington. I guess a few people were wondering if it was just Trump’s style of random policy making, but it is now clear that it is much deeper, wider and more thought out than that.

The key indicator was a speech by Vice-President Mike Pence a couple of weeks ago. In it he outlined ‘the administration’s approach to China’ and made it clear things will be going in a very different direction from here.

It builds on a slew of American policy documents such as the National Security Strategy of December 2017, the unclassified summary of the 2018 National Defence Strategy, and White House and Pentagon statements on Chinese theft of American intellectual property. This coordination goes to prove that despite the carnival antics of the President, serious policy work is still getting done.

And Pence made a big deal about the theft of intellectual property. Until now, the world has been focused on the trade imbalance between the two giants, but Pence made it clear that Washington is pissed about “industrial scale” IP theft.

And it’s not small bickies either. The White House Office of Trade and Manufacturing Policy said that ‘estimates of the cost of trade secret theft alone range between $180 billion and $540 billion annually’—that is between 1% and 3% of US gross domestic product.

That’s massive.

And to Pence, it amounts to a flagrant economic act of war. As he said, “the Chinese Communist Party is turning plowshares into swords on a massive scale.”

Biblical.

He also said that China was trying to influence US politics, and desperately wanted the US to have another – any other – President.

This is an idea that Trump himself has been building, so I don’t know how much credibility is has. But it is also hard to imagine that China is not meddling in US politics, since every nation does to some degree or the other.

And China certainly has the motive.

But at any rate, the thrust of the argument is clear – China is America’s biggest concern right now. It’s almost on the verge of being labelled a ‘rogue state’.

I wonder if Aussies really get the implications of this.

America and China is a rock and hard place that we don’t really want to get caught between.

China is now far and away our biggest export market – for just about pretty much everything we produce, from commodities to tourism.

The US is our biggest investor, and still the cornerstone of our defence and security position in the region.

What would happen if we were forced to choose between the two?

It’s not hard to imagine. The US is already starting to demand more from their allies. The recently renegotiated North American Free Trade Agreement (NAFTA) effectively gives the US veto rights over any trade agreements Canada and Mexico want to sign with China.

Or what happens if America decides to push for multi-lateral trade sanctions, like they did against Iran?

Are we really in a position where we could say, ‘Yeah, nah, we’re not going to follow your lead on that one. We just like the money so much.’

And we’re certainly not in a position where we’re going to rip up 60 years worth of ANZUS treaties and go and run for cover under China’s skirts.

So I’m not sure our politicians or anyone is taking this seriously enough.

If we get caught between this rock and a hard place, Australia is going to get hammered.

It could require some very fancy footwork indeed.

Trump is making people crazy. Literally. But I’m not sure it’s actually Trump’s fault.

So it seems that Trump is stopping people having sex.

There’s a lot of ink been wasted on how crazy Trump is. Not it seems he’s making other people crazy too. From Politico:

CNN before love-making is not his idea of a turn-on.

But she can hardly turn it off—engrossed as she is in the latest unnerving gyrations of Washington.

Who else to blame but Donald Trump? A president who excites hot feelings in many quarters has cooled them considerably in the bedroom of a Philadelphia couple, who sought counselling in part because the agitated state of American politics was causing strain in their marriage.

The couple’s story was relayed to POLITICO by their therapist on condition of the couple’s anonymity. But their travails, according to national surveys and interviews with mental health professionals, are not as anomalous as one might suppose. Even when symptoms are not sexual in nature, there is abundant evidence that Trump and his daily uproars are galloping into the inner life of millions of Americans.

During normal times, therapists say, their sessions deal with familiar themes: relationships, self-esteem, everyday coping. Current events don’t usually invade. But numerous counselors said Trump and his convulsive effect on America’s national conversation are giving politics a prominence on the psychologist’s couch not seen since the months after 9/11—another moment in which events were frightening in a way that had widespread emotional consequences.

Empirical data bolster the anecdotal reports from practitioners. The American Psychiatric Association in a May survey found that 39 percent of people said their anxiety level had risen over the previous year—and 56 percent were either “extremely anxious” or “somewhat anxious about “the impact of politics on daily life.” A 2017 study found two-thirds of Americans’ see the nation’s future as a “very or somewhat significant source of stress.”

… Jennifer Panning, a psychologist from Evanston, Illinois, calls the phenomenon “Trump Anxiety Disorder.” She wrote a chapter on it in a collection by mental health experts called “The Dangerous Case of Donald Trump.” In an interview, she said the disorder is marked by such symptoms as “increased worry, obsessive thought patterns, muscle tension and obsessive preoccupation with the news.”

Yeah, nah, I’m not buying it.

I mean sure. I think people probably do genuinely think that Donald Trump is screwing up the entire world, and that makes them incredibly worried.

Poor buggers.

But I’m not pinning this on Trump.

I’m pinning it on the media.

I don’t think people realise just how quickly the media landscape has changed.

The Fairfax and Murdoch dailies have been the cornerstones of Australian media for generations, but these days they are hanging on for dear life. The internet knocked their business models right out from under them.

But ‘online’ was just phase one.

Phase two was the creation of a ‘thought bubble’ industry. Partly driven by economics, partly driven by social media algorithms that feed you more of what you like, almost all of us now live in thought bubbles – where we’re soaked in the things we agree with already, and shielded from the things we don’t.

And since we believe ourselves to be fair and balanced, we didn’t notice our media institutions pivoting to particular niches. You didn’t think you were part of a market, you just stopped reading ‘The Age’ because ‘The Australian’ just had a better grip on the issues, and more columnists you liked.

Or you didn’t realise you were part of the push by The Guardian to eat into the progressive fringe of The Age’s turf. You were just relieved to finally see a paper in Australia ‘tell it like it is.’

And so in America, just like in Australia, people live in self-reinforcing thought bubbles. As a result half of Americans think Trump is doing a good job, because that’s what they see in their media – because they believe it already.

The other half think Trump is a monster, because their media tells them he’s a monster… again, because they believe it already.

I don’t know what the actual truth is. Right now, it doesn’t matter.

All that matters right now is that people’s hunger for the shock and horror of Trump is being served with stories of how shocking and horrible Trump is, and as a result, people are feeling shocked and horrified…

… to the point of dysfunction.

These are very strange days. But right now, the health of your mindset depends on this:

Don’t let your thought bubble drive you crazy.

See the game for what it is. Protect yourself. Inoculate yourself.

And if you won’t do it in the name of success and happiness…

… do it for your sex life.

The penny has dropped for Bill Gates. The economy is not real. Now what does that mean for property?

Bill Gates is going into statesman mode.

More and more I’m seeing him out there having a ramble about economics or philosophy or politics or whatever.

And some of it’s not actually bad.

Like this piece I stumbled on the other day, where he talking about the rise of the intangible economy.

As he remembers, when he first tried to explain Microsoft’s business model to investors, they didn’t get it. They’d never seen anything like it. It was a company built entirely on intellectual capital – on ideas.

That’s literally all they had.

Fast forward twenty years, and this has become the foundation of the global economy. It’s a big change in a very short time.

By the second semester of my freshman year at Harvard, I had started going to classes I wasn’t signed up for, and had pretty much stopped going to any of the classes I was signed up for—except for an introduction to economics class called “Ec 10.” I was fascinated by the subject, and the professor was excellent. One of the first things he taught us was the supply and demand diagram. At the time I was in college (which was longer ago than I like to admit), this was basically how the global economy worked:

… The second assumption this chart makes is that the total cost of production increases as supply increases. Imagine Ford releasing a new model of car. The first car costs a bit more to create, because you have to spend money designing and testing it. But each vehicle after that requires a certain amount of materials and labor. The tenth car you build costs the same to make as the 1000th car. The same is true for the other things that dominated the world’s economy for most of the 20th century, including agricultural products and property.

Software doesn’t work like this. Microsoft might spend a lot of money to develop the first unit of a new program, but every unit after that is virtually free to produce. Unlike the goods that powered our economy in the past, software is an intangible asset. And software isn’t the only example: data, insurance, e-books, even movies work in similar ways.

The portion of the world's economy that doesn't fit the old model just keeps getting larger. That has major implications for everything from tax law to economic policy to which cities thrive and which cities fall behind, but in general, the rules that govern the economy haven’t kept up. This is one of the biggest trends in the global economy that isn’t getting enough attention.

I’ve made this point before. The current global economy is a fantasy-land. More and more it lives in abstract space – in our heads.

It’s not real. The money driving it is not real. The rules and laws governing it are not real.

We are practically little bots running around in organic computer simulation.

And for me, this is why I take such an interest in ‘real’ estate. Like, it is literally real.

And as the ‘intangible’ economy expands, the ‘real’ economy becomes relatively more scarce, and therefore, more valuable.

The price goes up.

And everyone talks about the bubbles in the property markets – like somehow pretty much every nation on earth happened to find themselves in a property bubble at the same time.

What a co-inky-dink.

They miss the root and common cause. The empire of fantasyland is expanding.

This, more than anything, is driving the long run explosion in property prices.

And it’s only running in one direction from here.

Elon Musk’s brain fart provides some interesting insights into the challenges of leadership.

I don’t know if you’ve been following the fortunes of the charismatic lead vocalist for Tesla, Elon Musk.

The SEC has just forced him to resign from being Tesla’s chairman for three years, but is allowing him to stay on as CEO… for now.

It’s all part of a settlement, and there’s still a chance he could do some prison time for fraud.

What did he do wrong? This tweet:

That is, he was saying there was a firm offer on the table to buy Tesla at $420 a share.

That’s some big news for a public company.

Only problem was, it wasn’t true. There was no firm offer on the table. It wasn’t even clear if he was actually in talks with anyone. He later reckoned that he was talking to some oil money dudes from Saudi Arabia, but the SEC reckons that phone call only lasted 30 mins, and you really need to have something on paper before you go announcing anything to the market anyway.

The SEC also reckon that Musk just made the price of $420 up. Musk said that he applied the usual 20% premium on current market rates to get to $419, and then just rounded it up a dollar.

The SEC reckons it was an allusion to 4:20 Cannabis Culture (Musk smoked a joint on a recent podcast), and was mostly aimed at amusing his rock-star girlfriend.

(Such a bad boy billionaire).

Anyway, in sum, they reckon, it amounts to making false and misleading statements and market manipulation. Both are punishable with jail time.

We’ll see. The thing I find interesting about this is the double standard that seems to be applied here.

I mean, take Donald Trump. He pulls this kind of business all the time. He’s famous for dropping bombs all over Twitter all the time.

He called the North Korean president, and a potential nuclear enemy, “little rocket man”.

Twitter is made for mouthing off whatever is on your mind. That is literally what it’s designed for. It’s not the place for prosaic, “official” communications.

But then Trump did blur that line. If you wanted to keep up to speed with the POTUS, you needed to follow him on social media.

And Musk must have known it would have a huge impact on Tesla’s share price. He must have known that, which is why it was so monumentally stupid. It really looks like he was high when he wrote it.

You get the sense that Trump (who has never had a drink in his life) is pretty measured and calculating with his Tweeting.

But the other question with this is, what is Tesla without Musk?

Tesla is an aspirational company. It’s got a lot of promise, even if it isn’t making money yet.

But to get to the point where it starts making money, it needs everyone backing it to hold the faith. To keep believing.

In that sense, Musk is the cheer-leader in chief. He is a compelling and fascinating character. He makes Tesla sexy.

And without him, they could become just another tech company or auto-maker.

As I’ve said before, leadership isn’t entirely technical. In large part, it’s about keeping talented and driven people inspired and motivated.

You’ve got to use whatever tools necessary…

… but maybe not Twitter so much.