Sunday, June 8, 2014

Stock Markets and Girls Gone Wild!

What do stock markets around the world have in common with "girls gone wild" the video of college girls on spring break? The answer is both are crazy out of control. We have grown very complacent as money around the world has continued to flow into intangibles and promises. Currently the market is all a twitter and locked in a "greed and stupidity loop." The loop can be explained as follows, stocks are rising so why get out, not getting out is causing the stocks to rise. When stocks do pullback it is a buying opportunity. Yes, we are indeed experiencing a double down and let it ride mentality. I don't have to explain the greed part.
CRAZY OUT OF CONTROL!

This market while appearing nowhere over the top when compared to bubbles such as the infamous "tulip bulb mania of 1637" it sports one major difference and that is the element of manipulation. Generally bubbles form organically but this one appears to be the result of an unholy alliance of the Federal Reserve, governments, and the too big to fail. For the big boys insider information and computer trading that exploits where stops are placed improves their ability to wash weak bears out of their positions. The Federal Reserve has made the manipulated and distorted stock market ground zero in the war to convince us all is well. The idea is that a soaring market will bolster pension funds, support housing prices, and generate a wealth effect is flawed, instead it only creates a bubble.

Fact is if QE or the massive government deficit spending that props up our economy is removed it will collapse. The low interest rates of today come at a price, in the long run the benefits they bring will be outweighed by the distortions they cause. The higher market prices mask many of the weaknesses we have created in the system, while keeping intact pension funds and large banks higher prices have addressed none of the real problems, but merely set us up for a bigger fall. The entitlements and promises that have piled up have become overwhelming and the numbers going forward simply do not work. Most people are delusional or too focused on the nearby and fail to look out to 2017 and beyond. That is when the numbers really go to hell.

 I'm reminded of a quote on macroeconomic stabilization and crisis from Nassim Taleb (author of The Black Swan);

"Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite."
This quote suggest an analogy with ideas about what happens when in forest management natural fires are suppressed. If random fires do not periodically clear away forest underbrush, we see a build-up of flammable material sufficient to power a massive conflagration. I certainly think an equivalent truth applies to financial markets. The longer it has been since a painful collapse, the greater the willingness to pile on leverage and complexity, such that the next crisis becomes unmanageably awful. The "Too Big To Fail" and other policies implemented since 2008 have laid the groundwork for "The Big One", or what we will someday look back on as the mother of all sell-offs.

By not taking steps to correct many of our ills in many ways we are making things much worse. We have not made the structural changes necessary for our economy to become sustainable. We have put band-aid upon band-aid, upon band-aid while what was necessary was the amputation of a diseased limb. After all the threats that this market has avoided, and sidestepped, it is possible that many now think of it as invincible. This market has overcome the death of the euro, the financial cliff, and the end of Greece as we knew it. My studies in micro-economics, and observations in the current real-estate market, both as a owner and hands on landlord in middle America allows me to predict, we ain't seen nothing yet!

If you think markets today are distorted, you are right. Distorted by artificially low interest, easy money, currency games, and more. A word to the wise, we have seen in the market a total disconnect from Main Street. At some point the same people who are driving stock prices higher will find that risk outweighs reward on the high-side and that they can make far more crashing the markets. All the highly leveraged financial instruments lurking in the back of the closet and available only to the big boys like derivatives, options, futures, and such have the potential to explode into massive profits and a gigantic transfer of wealth.

This gigantic transfer of wealth has the potential to wreck the system and be our downfall. What I like about numbers is that when they are not jockeyed, jerked around and falsified they tend to tell the truth. Again I repeat, looking down the road the numbers do not work. The bottom-line is that the higher the market goes the more vulnerable it becomes to a major collapse and sudden downward move. Lately we are seeing some large quantities of money flowing across borders and  into crazy investments. With each new rally I feel a bit of deja vu, we have seen this all before. Way back in 2007 we saw all stocks moving in unison, always upward, often ignoring both the news and reality, note, it is happening again. This is a reason for caution! When this market heads south the fall may be a doozy.




3 comments:

  1. One big factor is the "Cheshire" multiple that results from the way the markets are run and accounted for. That is, as buying proceeds with higher prices, the delta is spread across all stocks (hence, on the other side, diminishing values accelerate really quickly).

    So, as an example, if there are 10,000 units, at $10, the total is $100,000. Then, a transaction of 1,000 at $11 (or $1,000 increase, presumably from new money, but, given the gaming, most likely some fictitious source (wish, or downright priming the pump) provides the basis for the buy action) raises the other 9,000, too (floats the boats). So, we now get an increase of $10,000 to $110,000, with all of this coming from a mere bit of $1,000.

    And so, it just spins and spins (with more and more wishes); meanwhile, saliva spitting heads tell us maniacal stories all day.

    Somehow, this (leveraging, multiplying) part of the chimera is never really addressed.

    Does it have to be that way? No, I would argue that each stock can be traced, via computer, through its whole history. Then, valuation would be forced each day (back to daily close and processing). Too costly? No, only in the eyes of those who make profits off of the game. Actually, such is necessary to rid the financial world of its reliance on something from nothing (as in, those types really thinking that they can build a perpetual motion device - sure, with fictional money as the basis). The trouble is that these times of heedless rushing after the prize hurts the moms and pops who are now being lured in.

    I went to three banks last week to do some transactions. Each went into their spiel about talking to one of their advisers.

    http://fed-aerated.blogspot.com/2014/03/cheshire-multiple.html


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