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.

By Bill_Fleckenstein Nov 2, 2012 2:00PM

Male Stock trader © Flying Colours Ltd, Digital Vision, Getty ImagesSo 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.

 

28Comments
Nov 2, 2012 5:08PM
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Bill,

 

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.

Nov 4, 2012 7:59AM
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If we could just get this 16-trillion dollar monkey off of our backs and then work on the other unfunded mandates of indebtedness......
Nov 3, 2012 12:05PM
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when collapse comes  why do you think gold will have all this value, can't eat it drink it or keep warm. who would trade gold trinkets for life sustaining goods? when disaster strikes people don't line up outside of gold stores. I've never saw a line out side of jewelry store. Gas station lines, food store, and Apple stores yes. When food runs low those Indians will flood the market with gold for a scrap of food. 
Nov 3, 2012 3:07PM
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Actually, the market needed good economic news, which it didn't get.
Nov 3, 2012 11:47AM
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Wall Street is out of control.

 

 

god you're a slow learner......just coming around to that pearl of wisdom??

Nov 4, 2012 8:53PM
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Mark7fun,
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.

Nov 4, 2012 8:05PM
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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.

Nov 4, 2012 12:57PM
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I have a simple suggestion to slightly re-level the playing field for common investors. If you, or a software program, buys stock it cannot be resold for a defined period of time. It wouldn't have to be that long, say 1 second, but it would eliminate the high frequency software based trading. Personally I would suggest at least 10 minutes. It's hard to argue you are investing when you don't even hold the stock for more than a few milliseconds. You are simply acting in the middle taking advantage of the everyday investor who can't possibly have access to the same options.
Nov 4, 2012 8:22AM
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The fear of another four years will continue to drive the market down.
Nov 3, 2012 12:38AM
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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.

Nov 3, 2012 9:22PM
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If Obama goes away, there will be opportunities to maximize the possibilities from these and other recommended investments, especially those Dividend Players, including lending for housing.  Elect Mitt Romney, and a Republican Congress, and we will soon see quantum leaps in the growth of the Markets and Commodities.  A quantum leap means Jobs.  Onward and upward to DOW 20,000.  Let's eliminate Obama our  major ego "Commander and Chief" in his leather jacket...so qualified and experienced Leadership can emerge!
Nov 3, 2012 12:47AM
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In 2009 you heeded the old saying, "Don't fight the Fed."
Nov 5, 2012 10:28AM
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Bill, I have enjoyed your articles forever. Do you have any updated photos of yourself you might use for your site?
Nov 4, 2012 6:58PM
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Computor trading lacks the most important part of its program and that is common sense!! the sock market has always been manipulated by big money. They are not fooling the invester. Its a con game. Right now till the end of the year the markets are not going to react or listen to any good news because it is in take away gain mode and nothing a invester can do will change the outcome. All Wall street has to do any year is beat a CD to keep money in stocks so they are not going to give the invester any more than that!! Buy farm ground!!!
Nov 29, 2012 5:30PM
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Ol' Bill Curlylocks might learn the difference between a Milestone around our necks and a  Millstone -- while he's holding forth like an expert. 

 

 

 

Nov 5, 2012 1:14PM
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What you have to consider-- always-- is the Law of Capacities... when there are too many capable of investing in the same thing, it exceeds the capacity of the vessel by sheer dynamic. We are engaged in many of them right now . When you can earn a fortune without any effort, there is a lack of capacity wherever real effort is. When real effort is rendered incapable (like it is right now), then we have incredible collapse. You refer to the 30-50 age group. Never in my life or my vast reading of history have I encountered a group more inclined to do itself in! You won't retire because you have yet to actually invest in it. What good is having a zillion paper or electronic dollars if the trust and backing of those dollars is destroyed? Get your butts out of those office buildings and start some indigenous enterprises... or you are toast!!!! No publicly traded American platform in business today will be in business 10 years from now. It's an impossibility. If they are, you won't... because we have no middle. Either we have public economy or business that rules the nation. why do you think every big business supports Romney? He represents a tipping point that favors them forever. Disagree? Put your i-Phone down, grow your dinner, walk to your own business and live in the wild. Laugh but if you can't do any of those things and some business can... who controls who? 
Nov 4, 2012 10:26AM
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A breather is more than a hundred point free fall? Sounds to me like more market manipulation to take millions from peoples 401K. Fleckstein is an idiot.
Nov 4, 2012 1:31AM
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"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.

Nov 4, 2012 1:12AM
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Is this article a Republican writer's angst at the success of the Federal Reserve Banking System and President Obama in saving us from the Bush abyss? If so, I wish the short-sellers would stay away from Wall Street for a few more weeks so I can make some money again in the market. Like you Bill!! Take an early break before the do-nothing Congress breaks on December 14th. Maybe when you come back I will be a little richer and your short-selling sins will be a little clearer. VOTE OBAMA!!!
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ABOUT BILL FLECKENSTEIN

Image: Bill Fleckenstein, MSN money

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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