The market runs too fast anyway
With trades now measured in nanoseconds, Wall Street is out of control. A couple of days off like we had this week -- without the accompanying hurricane, of course -- wouldn't hurt. Also: 5 years off the highs.
So much for a scary October. While the major indices gave up some ground this month, for the most part they were fairly stable in the face of a couple of nasty sell-offs and fears of an October stock collapse.
Even Hurricane Sandy, which, as we all know, hammered a huge chunk of the East Coast, didn't do any lasting damage to the stock market, despite the two-day closure.
As the market goes digital, sound quality declines
I don't know about anyone else, but I for one enjoyed the two-day market shutdown. We would probably all be better off if it was open less often, without an accompanying natural disaster, since so much of what happens on a daily basis is noise. And the noise seems to be getting worse.
Much of said noise is precipitated by computers, which I believe may now have become sophisticated enough to not only read press releases but also listen to conference calls. I recently learned that a few years ago Renaissance Capital, home of more than 40 Ph.D.'s, and one of the biggest (and most successful) algorithmic/quantitative trading outfits there is, had hired a handful of Ph.D.'s who specialize in speech recognition.
In my opinion, the only reason to do that would be to listen to conference calls and trade on what they "recognized."
For those who may have missed it, in September a company called RavenPack announced a new product for quantitative trading firms that would essentially read and analyze press releases and news headlines. For me, that only reinforced the fact that computers are everywhere and trading on everything at all times, which, at the very least, generates tremendous amounts of static and, at worst, contributes to increased instability of large chunks of the financial system.
That is not to say that none of the trades that computers execute make sense. Obviously some of them do, and certainly the Renaissance Capital fund that manages its employees' assets has an extraordinary track record. So the subset of programs in charge of that wealth, whatever it does, makes mountains of money.
Nonetheless, as we have seen with the flash crash (Search on Bing: What was the flash crash?) and the implosion of Knight Capital, relying on computers to make money can also cost you a great deal, as machines sometimes make decisions that not even an investment novice would consider wise.
The milestone around its neck
Now I would like to turn to the subject of the Federal Reserve, though my primary focus is not to discuss its incompetence, which I have done ad nauseam for more than 15 years, but rather to note the potency of money printing.
One of the reasons I shut down my short-selling fund in early 2009 was that I knew what the Fed's response to the burst housing bubble would be, i.e., to print giant amounts of money. Of course, I never dreamed it would print as much as it has, but I also can't say that I am surprised.
I learned my lesson about just how irresponsible the Fed can be and the power of money printing during the tech-stock mania, and that helped me survive the even bigger mania of the housing bubble. Thus, I thought it would be very difficult to be short during a period when I knew the Fed would do "whatever it takes" to attempt to improve the economy.
Folks may not realize it, but October was the five-year anniversary of the all-time high in the Dow ($INDU) and S&P ($INX). (The Nasdaq ($COMPX), on the other hand, is unlikely to better its March 2000 high for God knows how long.) Of course, the reason stocks were able to make an all-time high seven years after the bursting of the equity bubble was because of the power of the money printed by the Federal Reserve, aided by the insanity of gargantuan amounts of leverage used by banks and brokerage firms, not to mention individuals. (Of course, that unlimited leverage was part of the deregulation championed by former Fed Chairman Alan Greenspan, in addition to his reckless money printing.)
A friend, who recently noted that anniversary, suggested that I post an excerpt from the Nov. 1, 2007, column on my subscription site, FleckensteinCapital.com, as it coincided nicely with the top of the equity market and, more important, highlighted not just the direct poor policy decisions that Greenspan made, but the knock-on effects:
"Of course, we know why the Fed eased -- because it's worried about problems in the financial system. But nothing better illuminates the Fed's position -- i.e., between a rock and a hard place -- than what it did yesterday. The Fed cannot fight inflation. It cannot provide for a decent currency. Its policy is: print money, print money, and print more money. That's what Greenspan did for nearly 20 years. He bailed out every problem that came along, so we never had a small forest fire. Now, we're getting set to have a giant forest fire.
"In addition, the deregulation that Greenspan routinely championed is part of the current predicament, as it allowed folks to push problems down the road for a long time. Well, down the road just might be here. There's no way this will end in anything other than catastrophe. The only question is, when does that reality start to sink in? As to the answer: perhaps today."
Have you heard about our new layaway plan?
The other consequence, in addition to the direct effects of easy money and the overemphasis on deregulation and -- by extension -- abdication of responsibility by so many in positions of authority who didn't even enforce the rules that existed, was the fact that the stock and housing bubbles lasted so long that cities, counties or states failed to do a proper amount of planning for such things as future health care costs and pension benefits.
No one even considered that the promises wouldn't be honored, because people assumed that the bubble-inspired economy of the mid-1990s through the mid-2000s would somehow magically provide enough funds. The reality is that now, the biggest problems that many governments face are unfunded liabilities.
So, let us mark this anniversary by noting that, while Fed money printing is indeed powerful, it has regrettably led to nothing short of catastrophe, which was completely knowable in advance, as I have pointed out many times over the years.
Halloween leftovers: It's like a horror movie for smart people
Lastly, on the subject of the Fed, there is a new full-length exposé, "Money for Nothing," that is currently in final production. Last week I met the producer and saw the movie's "trailer," and would like to make folks aware of his cause (I have no financial interest). Go to Kickstarter.com for more information about the project, and you can also contribute money and get one of the great financial T-shirts of all time; it says "The Fed bailed out the entire global financial system and all I got was this lousy T-shirt."
Run, don't walk, to get yours.
I have read and enjoyed your articles for amost a decade now. Your three game scenario has played out like a Baseball Clinic. Just wonderding if there will actually be a forth game no one wants to even think about. It is the game in which all hard-working Americans in their 30-50's reach retirement and like you stated above about unfunded liabilities, their pensions, 401Ks, and other retirement investments must be recognized and paid. Only the numbers on their statements are bogus and there is no money to speak of. Just a thought.
Wall Street is out of control.
god you're a slow learner......just coming around to that pearl of wisdom??
I'll agree with you there. If a collapse came I can hunt, fish, make jerky, live in the woods(comfortably), make moonshine, and grow and preserve crops. If someone wanted to trade with me I might take some gold to hedge the future, but if you want to trade you better have something damn good like toilet paper , tobacco, coffee etc.
If you can't afford good farm ground, buty seed. It has a long shelf life and there's no telling when your own little garden will keep you alive.
Of course, you probably would have to line the perimniter of the garden with Claymore mines.
lostshep, that is the EXACT reason why you need to own some physical gold. The fed printing money is about the only thing Bill has talked about more than the need to own precious metals. Gold is the only money out there that has no liabilities attached to it.
Ol' Bill Curlylocks might learn the difference between a Milestone around our necks and a Millstone -- while he's holding forth like an expert.
"One of the reasons I shut down my short-selling fund in 2009" say what? How can you make any money short-selling when the stock market has reached rock-bottom and has nowhere to go but up up up? Isn't holding gold right now the same as short-selling since every new positive jobs report means gold goes down? Once a short-seller always a short-seller Bill !!!!!!
IF you got Bill alone and asked him hombre to hombre, he would tell you the global marketplace is improving and the next HUGE catalyst higher will be green technology. Building new subdivision homes off-the-grid, better cars with double the mileage, plug-in hybrid or all-electric, solar everywhere we can adapt it, etc... This market will slowly improve and slowly go up as we have more disposable income to spend because of green energy changes. If you are broke every month, lose the high insurance-low mileage pickup and get a Smart car or Prius. I am looking forward to the next few years of amazing technological change that will happen because of the departure of the do-nothing GOP who relegated us to religious subjects taxed to the max instead of citizens in a modern democracy. Now we can move forward because the victor on election day is Obama.
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ABOUT BILL FLECKENSTEIN
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
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