Now Suddenly Everyone Wants to Slow it Down
May 06, 2010
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Our equity markets are broken, and in need of urgent repair.
This evening, at least, that's the consensus.
Everyone on the tube is spewing as though this was some kind of one-day revelation that showed no prior warnings whatsoever. The lack of intelligence pervading Wall Street and the media that covers it is truly astonishing. Cramer thinks the 900-point decline is "fake", and therefore "doesn't count".
Common sense dictates that nanosecond-trading supercomputers have long presented a systemic risk to capital markets due to their inherent impossibility for human oversight. Common sense also dictates that these same supercomputers render the equity markets an entirely unfair playing field for the retail investor that lacks these multi-billion-dollar systems and their complex trading algorithms. When I pointed out these inherent problems last July, I was amazed by the sheer number of even my fellow Fools who came to the defense of the status quo with statements like "I think it is a stretch to say that the use of supercomputers qualifies as market manipulation".
I responded:
"Think, Fools ... is it healthy for the (few remaining) major brokerages and/or their hedge fund kin to possess a trading advantage not shared by any of the non-beneficiary human beings participating in said market. Given what we've seen results when these houses were granted excessive freedom to act in their best interest, irrespective of consequences, I remain shocked by the level of unquestioning tolerance for the pre-collapse status-quo with which this story is being received."
portefeuille tossed out this glib response:
"No idea why tmfsinchiruna is so outraged that many are not as outraged. I don't know how old he is but his outrage is probably at least a decade too late ... "
In retrospect, porte, do you now feel that my outrage was a decade too late?
I responded at the time:
It's about recognizing that the events of the past 15 months revealed layers of corporate malfeasance and roullette games played with your future and mine that have a direct impact upon our quality of life and our pursuit of happiness. To not question the procedures they employed to play their high-stakes games is lunacy in the context of the destruction they caused. I know high-speed trading platforms have been around for a long time, and I know this particular example is of greater interest to those poor Fools relying upon short-term trading, but it's yet another glaring example of a market rigged against the fair access of the common investor ... and whether it's been going on for ten minutes or ten years does not impact the injustice of it.
I am not outraged ... I am astonished at the apathy and the acceptance of many of those commenting here for the status quo in the investing world despite all that has come to light recently. I have known the Goldman Sachs of the world possessed unfair advantages and unfettered access to their ill-begotten fortunes for decades ... it is not new to me. Those who presumed everything was as it should be right up until the Bear Stearns collapse ... those are the folks whom I would expect to be expressing some outrage.
It looks like everyone's ready to go right back to the way things were before Bear Stearns ... that sense of apathy troubles me.
Today, one of the world's most legendary living commodity traders, Mark Fisher (now of MBF Clearing), himself proposed slowing down the very hyper-fast trading platforms that he himself utilizes to make his fortunes. He characterized today as being "right out of The Matrix", and said as he saw the tape unfold he thought maybe a nuclear bomb had gone off. This is a guy with decades of experience, and a true expert in his field. He is right that today showed little more than that this same phenomenon can easily happen again with perhaps even more dire consequences if the sheer pace of automated trading is not reigned in to reflect a more himan time-scale. The days of hedgies and investment houses creating massive market volume on trades isued at a rate of 20,000 orders per secondare numbered, and we can only hope that reforms are enacted before another event like today triggers the ultimate domino effect.
Here's another painfully ironic hoot:
Suddenly today for the first time I saw the very same guys (the "Fast Money" crew) who exhibited complete ignorance about the nature of gold over the past several years expressing their reluctant bullishness towards it. Guy Adami said something rather poignant (there's always a first): [paraphrasing] "We've heard a lot of talk about gold as a currency, and perhaps today for the first time we saw gold finally performing as a currency". Well, Guy, I have news for you, gold never ceased to be a currency just because you failed to understand it as such. The only thing that changed for gold today was Guy Adami's perception of it, which resulted from a continued disconnect between the action on gold and the USDX due to the extreme relative near-term weakness of the Euro.
Kudlow actually just gave a mention to gold as "the new reserve currency of choice". When you have the wrong people uttering the right words, you know you have awatershed moment.
Indeed, gold was up today. Because I am heavily invested in gold, my portfolio gained today, but today was merely an iconic nanosecond on the long trajectory of strength ahead for precious metals as the European and U.S. economies and their respective currencies continue to degrade into a systemic delevering of this still-untenable financial system built atop an insurmountable mountain of toxic and overly-leveraged derivatives.
My long-held macroeconomic perspectives are being vindicated left and right lately, but I derive no personal satisfaction from it. I have always tried to make it clear that I continue to hope that my broad economic perspective would be proven completely incorrect, as I would rather lose every cent I've invested than witness the events that will ultimately unfold if my economic worldview is correct. If I am correct, then ever-increasing sums of money will continue to be printed and tossed at this insatiable debt and derivatives monster in a hopeless attempt to rescusitate a deceased economic paradigm based upon failed Keynesian principles. Trust me, you don't want me to be right about that, but I fear that I am. The implications for the world's major paper currencies are very serious, as once the strategy is in play the sums of money employed in that strategy will know no boundaries. I made this argument back in October of 2008:
http://www.fool.com/investing/general/2008/10/09/700-billion-was-a-drop-in-the-bucket.aspx
"The indications from Washington that dollars will be hurled at this crisis in totally unprecedented quantities raises legitimate concerns about the future purchasing power of the dollars in your wallet, your CDs, Treasury bonds, or other dollar-denominated instruments. Occurring in a vacuum, a deleveraging event like this one would be decidedly deflationary. In the context of these outlays, however, I believe stagflation and hyperinflation will instead be among the words used by historians to describe this period."
And in February 2009:
http://www.fool.com/investing/general/2009/02/02/the-scariest-balance-sheet-of-all.aspx
However urgent we're told each of the successive expenditures are, I believe that the fundamental unsustainability of this type of spending will result in the declining purchasing power of the U.S. dollar. Whatever your position regarding whether inflation or continued deflation will characterize the road ahead, neither scenario changes the underlying degradation of the dollar as the very perception of the nation's solvency comes into question.
The topic's not fun to consider, but I believe Fools must maintain an unfettered view of the dangers inherent in the present strategy of spending to confront the deleveraging process. Following a historic flight into Treasury bonds by investors worldwide as this crisis unfolded, many perceive a bubble in the making, which prompts the question: What safer haven exists than U.S.-issued debt? Trading at all-time highs against a host of major world currencies, and given recent gains against even the near-term relative strength in the U.S. dollar (compared to the British Pound, for example), I believe many investors are looking more seriously than ever to one time-tested safe haven asset: gold.
I think Charlie Munger is right on the money, unfortunately, as I expressed more recently in February 2010:
http://www.fool.com/investing/general/2010/02/23/charlie-munger-wants-to-scare-you-straight.aspx
"Although the tone of Munger's tale is inescapably morose, and the mere idea that the United States could be driving down a path toward a place that Munger calls "Sorrowland" is a tough pill to swallow, Fools can take solace by safeguarding some portion of their assets from such a scenario. I have been encouraging Fools to limit their exposure to the U.S. dollar for some time now, and regardless of what debt-borne illness may befall the euro, I believe that the deep-seated fiscal imbalance underlying the greenback will make its presence known with equal or greater vigor.
For the past nine years, gold has offered a safe haven amid a precipitous decline in the purchasing power of the dollar. Fund managers like George Soros have gone for the gold with holdings of the SPDR Gold Trust (NYSE: GLD) exchange-traded fund, and China's sovereign wealth fund has ventured into stakes in miners like Freeport-McMoRan Copper & Gold (NYSE: FCX) and Gold Fields (NYSE: GFI). China's central bank has made no secret of its desire to diversify its holdings away from U.S. dollars. I will say it again: I believe that any notion of gold being a bubble is patently false under the circumstances.
I take no delight in saying so because of the implications for the dollar, but I believe gold's likelihood of striking the $2,000 mark has never looked stronger. I believe that silver will surprise many with a run to $50 per ounce or higher before this precious-metals bull market eventually runs its course, which formed part of my rationale for selecting Silver Wheaton (NYSE: SLW) as my top equity pick for 2010."
Here is my perspective in a nutshell: We remain in the beginning stages of an economic depression within the old-guard economies that will be accompanied by rampant inflation as inneffective efforts to stave off the delevering beast with ever-larger sums of debt-based interventions are tossed onto the fire with no lasting effect. I believe that just as in the last great depression, the greater beast lies in the unforeseen consequences of the actions taken in response to the initial stages of contraction. I believe that history will view the recent equity rally in the very same light as it viewed the substantial rally that followed the initial 1929 crash. The pundits are calling for ECB quantitative easing as the solution in Europe, but I believe that few understand the extent to which Europe provides simply an advance glimpse of the next stage of crisis that is set to impact the United States. The dire financial condition of our states and municipalities present the likelihood of further bailouts there, and the GSE's are still standing there with their hands outstretched after the Fed has indicated there will be no upper limit to the aid they will receive. Banks continue to fail across the country at a rate that few investors take note of, and fewer still are aware of the troubling contracts signed directly between the Fed and several regional banks in recent weeks.
I believe we are living through the beginning of the end of the road for American/European economic hegemony, and that the resulting far-reaching structural shifts in the global economy will not likely transpire in a smooth nor orderly fashion. For key currencies, and in particular the reserve currency status of the two main fiat currencies, the future looks especially tenuous. I believe, and this is where my views become incredibly unpopular for understandable reasons, that U.S. and European citizens in general will encounter economic hardships of a scale that few have entertained as existing within the realm of possible scenarios despite all of the warning signs we have observed over recent years. I understand the psychology behind not wanting to believe that such an unfortunate economic fate could possibly befall the grand old-guard economies, but wrong or right, I will continue to prefer objective interpretation of the available evidence over wishful thinking any day.
This is all essentially what I saw coming in December 2007 when I wrote my 3rd-ever CAPS blog post, and indeed in 2004/2005 when I began shifting my investment assets into precious metals in a significant way. The trillions of dollars in interventions have delayed, but in my concerted opinion not prevented any measure of the delevering process. We must delever before we can move on in any semblance of fundamental strength, which is why I have viewed this entire equity rally as nothing more than a mythical semblance of recovery from its very inception. "Let them fail" would have been so very scary, but in the final analyis so very preferable to the steroids-injected end-game of a failed reflationary hail mary pass on two continents.
Once again, I hope I am wrong, but I fear I am right. My sole purpose here on CAPS remains a sincere desire to help my fellow investors to safeguard at least a portion of their hard-earned assets in a way that scenarios like the ones I have identified would briskly erode. I wish you all the very best of luck not matter what events transpire over the remainder of this decade and beyond.
Fool on!
TMFSinchiruna
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