The End of the Ends of the World
By Jared Dillian, Mauldin Economics:
We are about a week into the Greek non-crisis, and nothing especially scary has happened. Stocks opened up lower a couple of times, and there was one wild trading day in EURUSD, but everything is essentially unchanged. Which surprised everyone. Including me, a little.
I used to be a plunger. Loved shorting stuff. I had one muscle, and I flexed it constantly. By my rough calculations, I was up about 18% by the time Lehman went bankrupt in 2008. The more turmoil, the better.
I was born in a bear market. Literally, in 1974, and figuratively—I learned to trade in the dot-com bust. Seven years into my trading career, I had experienced two crashes. I know lots of people who got rich buying GE at six bucks. I almost shorted it there.
So the past six years have been tough on me. I’ve made money, but not a lot. Worse, I’ve been conditioned to expect that whenever I spend a bunch of money on S&P puts, I’m going to get sconed and watch them melt to zero while the market rips higher.
The real kick in the nuts was when the market was melting down on Ebola fears in October and St. Louis Fed President Bullard walks out with a “buy” ticket stapled to his forehead.
Here’s another way to look at this: We had two crashes in seven years, and if you go back in history, the market doesn’t crash all that often. Like the ‘50s. Stocks went up, quietly, for a decade. Nothing happened.
But this isn’t the ‘50s. There’s an IPO boom, a VC boom, valuations are stretched, and crap like Fitbit is going public. Shake Shack has a bigger valuation (I am told) than the entire coal industry. We have unicorns and decacorns, and it’s only a matter of time until we have a centicorn. All the kids are going to startups. Talk about risk-taking.
I have seen worse bubbles, but the markets are definitely running hot.
So a developed country is about to default on a couple of hundred billion dollars worth of debt, and the market just shrugs. Worse, it sets a nasty precedent for other, larger economies defaulting on debt. Seems much more contagious than Russia in 1998. And stocks are bulletproof. The only selling going on is in China.
Serious question: Do you give up shorting? Like, throw in the towel?
The thing that gets a lot of people is that they believe the market is engineered by the authorities to go higher. Like Bullard with his rate comments. It’s gotten so bad, there are wide swaths of people who think the Fed is actually buying stocks. ZeroHedge talks about this all the time.
There is a pretty funny Twitter account called 3:30 Ramp Capital, LLC. Plunge Protection Team rumors have been around since the beginning of time, but six years of stocks going straight up have given rise to all kinds of other theories. (For the record, the Fed fully acknowledges its interventions in the bond market, but it has never admitted to trading stocks.)
And it’s true that “the authorities” want the price of financial assets (stocks, bonds) to go up, and the price of hard assets (commodities) to go down… which is exactly what has happened.
So do governments and central banks ever lose?
In the old days, they lost all the time. In one extreme example, an individual hedge fund took out the entire Bank of England. But central banks are currently on a massive winning streak.
So to answer the question, “Will we ever have a crisis,” you need to answer the question, “Will we ever be allowed to have one?”
I’m not just some crazy guy asking these questions. Market professionals I talk to, hedge fund managers, mutual fund managers, will freely discuss the widespread distortions in the market. They feel like they can’t ply their trade. What I mean is, you can’t buy stuff cheap and sell it dear. Everything is dear, and it keeps going up, and you have to participate or get left behind.
That’s not the way it was in the ‘50s. There was all kinds of value to be found. That was how Warren Buffett made his money.
Today, I realized that, outside of some biotech stuff, I haven’t written about an individual stock in months. There’s just nothing interesting to buy, and you certainly can’t short anything. You’ll get your head blown off.
At one point in my career, I was really good at market timing. Calling tops and bottoms. You just can’t do it anymore. Tops never happen, and bottoms don’t get deep enough to find value. We haven’t had a 10% correction in how long?
Honestly, it’s so hard to invest in this environment, I’ve made nearly all my money in the last two years trading FX. It’s the only thing that makes sense.
This is a lot of me whining. And I’m secretly hoping that this letter means there will be a return to rationality soon. But probably not. Stupid usually gets stupider. By Jared Dillian. The article The 10th Man: The End of the Ends of the World was originally published at mauldineconomics.com.
This morning, a desperate message from our analyst in Beijing. Read… China Is Just Another Front in the Zombie War
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I’m sure you noticed that China outlawed short selling and most selling to put a floor under their market. We closed an exchange to do the same thing. The markets will do what “they” want or else. Does that answer your question.
BTW, I was around in the 70’s during the long downturn, it wasn’t this bad. People could still get jobs. Everybody had gotten burned in the stock market in the 60’s and were actively avoiding it. Then all of a sudden, we got junk bonds, merger mania, IRAs, 401Ks and runaway inflation. Looking back it all seems manufactured.
Petunia,
I remember when the 401(K) was being lobbied for and it was in no way meant to be a primary retirement vehicle. It was meant to give middle class workers with defined benefit pensions an option to supplement their primary pension. I am not a conspiracy guy. And the markets are not engineered. They are just plain fixed. And we are nothing more than financial cannon fodder.
You want a crisis? Maybe just hack into the 4 biggest HFT systems and make some minor configuration changes?
You’ll probably want an appropriate stringed musical instrument too.
I feel for the money managers that HAVE to participate in this ‘market’. To be or not to be…is the question (it sounds better in the original Klingon).
To participate or not to participate? If you get your living this way, in order to get out you need to learn a new trade. This gets harder the older one gets, as inertia has accumulated like barnacles. And there are few trades left unless one wants to be the best damn over educated barrista at Starbucks.
boo hoo. Financial leach cannot make money on the casino. I dont feel sorry for you. I feel sorrry for seniors on a fixed income.
I feel sorry for them too, Michael. All they are guilty of is nothing more than believing in the system that has now changed. The markets used to trade value for value, based on fundamentals. If you tried to trade without due diligence the market, based in reality, would punish you. No longer. The crooks have hijacked the system and now the unthinking gamblers are rewarded and the savers and producers are punished. But if you can’t differentiate and just label everyone a leach, I feel sorry for you too. Everyone has a skillset in a free market, and this division of labor has made this the greatest nation in history. The pursuit of happiness is not a guarantee that one will achieve it, but the freedom to try, and succeed to the best of one’s ability. “Blood, whips, and guns – or dollars – take your choice. But your time is running out.” -Ayn Rand
There’s an old saying: “High prices are their own natural remedy”.
So far it has held true for everything bar financial markets but I have been wondering for a few weeks how long will the situation last.
To prop up their own financial markets, both the European Central Bank (ECB) and the Bank Of Japan (BOJ) are running the printing presses at full speed: true money supply growth growth in the eurozone shot over 13% just this week.
In 2012 or so, this would have ensured a boom in stocks and bonds: now they are only managing to have them stay where they are or, at most, inch their way forward.
That’s called the law of diminishing returns, which holds true everywhere: in engineering, in farming, in pharmaceutics and even financial markets.
To get more growth out of financial markets where they are right now, more money will have to be injected into them and at a faster pace. And this will have consequences.
First is even manufacturing firms are becoming more and more reliant on financial engineering. I’ve heard rumors Apple may be on the verge of a half trillion dollar stock buyback and crazed M&A deals are the norm. Microsoft grossly overpaid for Nokia: US 6.2 billions for a company four billions in the red and with no revolutionary technology in the pipelines and a tarnished image is not exactly the deal of the century. Financial engineering is great for bonuses and dividends on a per stock basis but the resources going towards it have to come from somewhere. The slowing pace of innovation (as documented by the ever slowing pace at which patents are filed worldwide) is just part of the price.
Second is that real world inflation, like a cat moving in the shadows, has gone forward a lot without most noticing. It would be nice to think that mass of liquidity simply filled the deep canyons of the DAX and Nikkei but in reality it has spilled everywhere since 2009. In 2008 oil was around US $120/barrel. Now it’s around US $55/barrel. Yet gasoline is 25% more and diesel fuel 20% more. The same applies to rice, clothing, beef, books… pretty much everything bar some electronic products, where Chinese overcapacity still drives the prices downward.
Unreported inflation is great for a very simple reason: it drives the cost of labor down. But in the end it’s a self-defeating strategy: in a consumer-oriented economy it means people can get less for their money and, given household leverage is still completely out of control, even consumer credit struggles to work the wonders it worked in countries such as Italy, Portugal and France in 2002-2008.
Now a final thought: China attempted to push ordinary people into stocks for various reasons, one of them being the promise they’d get rich and hence they could go out and buy more apartments and cars.
It’s already over: sure, Beijing will have her 20% recovery and possibly more, but what good will it be if people cannot cash in their chips to enjoy that wealth that was promised to them?
In the West there has never been such a robust attempt to push people into financial markets. Now it’s too late because valuations are so insane the overleveraged little bloke simply cannot afford to get in.
This is reinforcing the idea financial markets are a rich men’s club, basically robbing ordinary folks of their hard earned money. The continuous propaganda about how everything’s going smoothly while people in the streets cannot save money anymore and have to deal with rapidly depreciating wages and increasing taxation is actually making things worse.
This is opening the doors for demagogues who are right about what’s wrong but wrong about what’s right. So far they have been contained by using the age old tricks of ignoring and demonizing them (and if everything else fails, by cobbling together governments made up of former Communists and old Mussolini admirers, like Italy did), but as the discrepancy between paper wealth (how the media report that everything is great because the local stock markets hit a new height this week) and shops closing down daily amid increasing prices and stagnating wages sprinkled with chronic unemployment will bring them in power.
Look out for Spain, Portugal and France over the next two years.
I’m a short seller. I’ve lost around $200K in the last six years. As it now stands, that is only a loss, if these central banks can keep the balloons up. The really sad news is, I’ve lost an estimated $500K in profits. I look at it as did the late Bill Hicks. “It’s just a ride.”
I have an ex-husband who was in the markets since the sixties, no matter how much money he made, he always lost more. He eventually got most of it back playing lotto. No kidding.
I am short, and I keep building a leveraged short every week, well almost every week, sometimes a little sometimes more, but I don’t buy puts or borrow stock, and I am holding for the long term ,, relatively.
As far as I see it it is n investment, I buy SQQQ SPXU SRTY and EPV for europe.
My aim is simple, buy when the markets hit new highs and keep my average cost as close to the lows as possible.
As I buy from current and will only sell when a correction gets underway, to hold the cash in case a rebound and average my cost lower, then the way I see it I can only ever get a bigger position and leveraged almost 3 times when the market finally crashes.
I can never see puts melt away because the only way I can be wiped out is if stocks go to infinity.
I count and chart days and graph them for the number of days each daily close is higher in the past, and that chart of the number of days is now turned over and is trending strongly to the downside, ie the number of days is rising fast .
I think it reaches a critical point, because time is definately a factor, If you haven’t made any progress and time is passing longer and longer and longer before you make a gain then you start to lose faith.
Three times since the 50s the S+P has gone over 1300 trading days before reaching a new high as long as over 1,800 trading days.
The 13 weeks average is now about 14 days and is dropping faster every day an the trend down from a high of 10 days. That’s a 40% increase in the past couple of weeks and every day a new high is not made the 3 month average is increasing.
Looking at previous periods, it is when the three month average of days to previous high reaches about 30 is when the market finally turns over and crashes, and right now the three month average of closes despite the length ot time increasing and accelerating, is still trending higher but leveling off rapidly.
When the FED eventually raises rates it could cause a 10% drop, but I can’t see a serious market correction happening until late 2016. The market movers know the next bear market will be bad.
Really bad.