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Guest Post: A Couple of Things You Should Know About The Stock Market
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
If feedback from the real world is suppressed, then decisions will necessarily be bad.
You've probably heard this stock market truism: what everyone knows has no value. This has several components:
1. If you're basing your trading decisions on the same contexts and conclusions as everyone else, it's difficult to develop much of an edge.
2. Unless it's completely manipulated, the market generally doesn't reward "what everyone knows," i.e. the consensus, for long.
3. "What everyone knows" often includes trends and targets. For example, everyone now knows gold is in a bear market and the next technical target is $1,250 - $1,300. As a result, everyone's on one side of the boat: those recommending buying gold at $1,480 are few and far between.
Legendary traders like Jesse Livermore viewed the market as a mechanism for taking as much money from the consensus as possible: taking as few traders as possible along on bullish runs higher and punishing as many traders as possible on bearish declines.
This raises two questions:
1. What does everyone not know that might have value?
2. Is there some contrarian value in what everyone knows?
We all know the Federal Reserve is manipulating the stock market. It does so in two ways:
1. Financial repression: lowering the yield on "safe" assets such as Treasury bonds to negative rates (adjusted for inflation, you're paying the government to park your capital in its bonds), which drives capital into so-called risk assets that offer a yield, for example dividend-paying stocks and rental housing.
2. POMO and bulk purchases of futures contracts on the S&P 500 before the market opens. Studies have found that the majority of gains in the stock market occur on POMO (one of the Fed's quantitative easing programs) days and on days when large lots of E-Mini futures contracts are purchased, pushing the markets higher at the open.
Everyone knows markets in the U.S. and Japan are levitating higher as money is created and pushed (via currency devaluation and financial repression) into stocks.
What nobody knows is the eventual consequence of all this manipulation. Right now the consensus is "don't fight the Fed," meaning stay invested in stocks because they're going higher.
In less-manipulated markets, we would expect the consensus to eventually be punished, simply because the market rarely rewards the majority for long. But in central-planning manipulated markets, the feedback that is the foundation of open markets has been suppressed.
Feedback is another way of saying information from the real world is allowed to enter a transparent exchange. We know the exchange is no longer transparent, what with dark pools and high-frequency trading machines. We also know signals from the real economy are not the dominant market-moving forces.
What we know, but cannot say out loud lest the charade lose power, is that the Fed is manipulating the stock market higher because it has lost the ability to manipulate the real economy. Our political and financial Elites would prefer to extend their neofeudal dominance by expanding the traditional foundations of debt-based "prosperity": increasing household income so households can spend more and service more debt.
With household incomes for the bottom 90% in structural decline, they've failed, for reasons they either can't understand or dare not discuss.
Their only control is the lever pushing stocks higher. Publicly, Fed chairman Bernanke has justified goosing the stock market and housing higher as the only available way to trigger the wealth effect, an inner state of consumerist bliss in which the owner of assets sees his assets gain in value. Feeling wealthier, he goes out and buys a bunch of junk he doesn't need with debt, boosting demand and bank profits.
As for the fact his real income is declining--sorry, Bucko, we can only boost your assets and herd you into risky bets and more debt. The 90% of you with no meaningful exposure to the stock market--well, don't you feel things are picking up when you see those "Dow hits new high" headlines? Of course you do; that's the propaganda value of goosing markets higher.
When the causal connection between risk and consequence has been severed, we call it moral hazard. When banks get to keep their gambling profits and taxpayers cover the banks' losses, this is moral hazard writ large.
In effect, the Fed is extending moral hazard to the entire stock and housing markets. What the Fed is implicitly promising is this: "Go ahead and sink your wealth and income into risky stocks and housing, because we have your back--we'll never let stocks or housing go down again."
Do we know if this campaign of extending moral hazard into every market is sustainable over the long term? No. It is an unprecedented experiment, just like the Krugman Cargo Cult Fantasy being played out by the authorities in Japan.
One thing to keep in mind is the size of the markets the Fed is manipulating. The Fed is injecting $85 billion a month into the stock market ($15 trillion) and the housing market ($17.6 trillion). It also manages the purchases of S&P 500 futures contracts via proxies, but these are in the billions of dollars, not hundreds of billions.
So the Fed is leveraging a relatively modest amount of money to manipulate and control very large markets. This is possible because the percentage of total assets that trade daily is small.
Should the herd that actually owns most of the stocks (mutual funds, pension funds, insurance companies, 401K management firms, etc.) get spooked and decide to book their profits, the Fed's $85 billion bazooka will be revealed as too small to stem the tide.
The keys to the Fed's success are trust and belief. These don't lend themselves to data and charting, though we can measure some aspects of trust/belief via sentiment indicators.
But the whole game really rests on participants' trust/belief that the Fed can continue pushing markets higher and that it will continue to do so.
The problem with cutting the links between risk and consequence and the real economy and the stock market is that a market deprived of feedback from reality is prone to disorderly disruption. Why is this so? Participants make decisions based on the information made available to them. If the information from the real world is suppressed or limited, then the decisions made by participants will necessarily be misinformed, i.e. wrong.
Moral hazard does not lead to positive outcomes. As I explained in my book Why Things Are Falling Apart and What We Can Do About It, this leads to making bigger and riskier bets at the casino, until a loss occurs that bankrupts the house.
What happens when a bet that can't lose does in fact lose? Trust is lost.
I see a lot of long-term charts where technical analysts extend past trends and cycles out 10 and 20 years. Many predict a new Bull Market in stocks starting in 2015 or maybe 2016 and running for 13 to 18 years.
It's easy to project the past onto the future, but what few observers seem to ask is: what happens to the belief system that supports the stock market when trust and credibility are undermined by central-planning manipulation that failed?
If feedback from the real world is suppressed, then decisions will necessarily be bad.
The only choice for participants who have lost faith in central planning's promise of permanently higher markets will be to abandon the manipulated markets entirely.
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Acouple of [INTERESTING] things about the stock market
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Did I miss anything?
After reading this article it is good to know that I am not "Everyone".
YEP!!
YOU'RE AS UNIQUE LIKE EVERYBODY ELSE!!
Participants make decisions based on the information made available to them.
Are computer games "participants"? The entire thing is a computer game. Since reality is severed so severely, price can stay severed too since no real participants exist.
Algo rhythms. Weak CBs (Cyprus) selling to strong CBs (Germany). Expect trend to continue. BTFD accordingly.
No thank you.
No BTFD for me.
I'm one of those who has lost faith and am NOT in the market
Although ... I might buy gold here.
And who programs those smart puters and stuff? Dumb fucking people thats who.
And who programs those smart puters and stuff? Dumb fucking people thats who.
Can't wait to see the look on fucktard Ben's face when his science fair project blows up. Of course we'll all be fucked too
Don't be surprised there is no more reality...
Just look at the crap-spewing MSM and the incompetent boob they put in the White House.
Well..someone seems to have gotten a note about POMO ending. That would explain todays tank in Gold. Time to sell everything
Jesus! Weren't you paying attention, or are you just part of the 'buy high, sell low' crowd!? Now is the time to BUY REAL ASSETS!
No more than 50% of any dry powder in real assets now.
If this is a deflationary collapse, cash is king first, then gold
when it turns to hyperinflation later on.
There will be a fire sale on income producting assets, but not yet
Not to be rude, but FUCK income producing assets. What, am I going to buy real estate to rent it out? No, that bubble is ready to pop. Am I going to buy farmland? No, only an idiot would think he could compete in this market and against Monsanto. Am I going to buy machinery to make some shit for consumption? No, manufacturing is already dead.
I'm looking for a liquid store of value.
BTW, cash is only king until what you want to buy is unavailable ;)
Maybe that's the point? If you can't trust the market, where are you going to go with capital? Invest in businesses, real estate, hard assets (other than the devil's metals Au and Ag) etc etc. Is the Bernanke's Grand Plan to first fill the market coffers to the brim and then set brush fires to drive that money from the market into the actual economy? Cyprus seemed to signal that you can't keep it in a bank; the beatings in commodities will continue until you stop showing up for them, sovereign debt pays nothing, lending is fraught with counterparty risk, that pretty much leaves AAPL, NFLX, and the local ice cream truck franchise.
They say you can lead a horse to water but you can't make him drink. In the Fed's case, it is thought that they can make all kinds of money, but can't control where it goes. Or can they? What if they poison all other drinking troughs but the one they approve of.....?
Try explaining that to Zealots. Can't be done, cause zealots make decisions on emotion and habit. First, last, foremost.
Oh, and zealots don't make the kind of money that hedge fund managers have been making. Did you get the (partial) list of names and earnings on CNBC? From hundreds of millions to $2.2 B. I know, I know... its only "fiat".
that it's completing the largest, most devastating dome top reversal pattern in history?
http://tinyurl.com/ct4l79t
follow the market... and you get burned...
go against the market... and you get burned...
buy silver and gold and just say FUCK IT!! LET THE MARKET RIP!!
So the bubble in lead has a long way to go?
Fisher just prior to the Wall street crash of 1929 claimed that the stock market had reached "a permanently high plateau."
then he comitted suicide- hint to Cramer
um, no. do your homework on fisher
Retard Bob pazzani said last week that the market was searching out some place to plateau in order to reset all these sizziling indicators.
help me ---how do we know Fed Buys spx futures or e-minis
Sell everything!
http://www.youtube.com/watch?v=LyePCRkq620
To ME!
Just called my PM shop... Out of stock, only few unpopular coins left, taking orders for future shipments.
Might stalk desperate sellers before they hit their door step.. buy directly in cash. What a day.
They aren't out of stock they ust don't want to sell for 23 what they bought at 28
The Fed also back interest rate swap and FX swap markets via proxy. The $85bn is nothing as noted above. They're selling puts on interest rates. If and when interest rates go higher, there's an automatic injection of cash. When the dollars rises above the set rate, dollars start flooding in. It's like an unspoken Bretton Woods III.
Fuck me, another wheel just fell off the financial ponzi wagon. The Fed is still dragging this thing behind it at 100 MPH, sparks and all.
Ben's a good guy in my book though, because my dry powder will now quietly buy up as much physical as I can possibly get my hands on. I want to thank ZH for the information over the years that has led me into what can only be described as an opportunity of a lifetime. Thank you.
I am sure there are people who would pay money to assrape him.
The Really Big event I heard about... I'm thinking that China and US made a deal: China throws N. Korea under the Am. bus. In return, the US whacks commodities, esp. PM, allowing PBoC to stack gold.
In the process, ppl flock to Equities, driving up the markets, increasing confidence, lowering unemployment, and eventually leading to interest rates going up .25-.50%. Money floods back in, gold "is so passee", with NK handled and economy finally recovering. That's their plan & hope.
How about China manipulates its charge N. Korea to rattle sabers for a payoff from the US that the US can't afford while seeing what the US will do in this no-win situation--can't afford a war and can't afford to blink and be seen as the sad paper-tiger they are.
Well the US blinked so, that's that.
The push down in PMs is for alot of reasons not the least of which is the coming bombing of Iran. hujel
At the 20 DMA on the SPX, so the algos need to green up.
Great article and succinct analysis. Thanks. hujel
This article told me NOTHING...haha kinda funny when you think about them hammering on "what everyone knows...is useless" HAHA
The only way to win is not to play
"The only choice for participants who have lost faith in central planning's promise of permanently higher markets will be to abandon the manipulated markets entirely."
And where do we all go to hide? Gold and other commodities are not looking very good either.
-- I don't disagree that the market is being artificially pumped up, the question is can the Fed every get it's foot off the gas? The Fed can theoretically inflate away a lot of debt, in which case owning anything is better then sitting on cash. The whole thing just sucks.
Presumably the majority of companies listed on the exchanges have real underlying value and will continue to generate income no matter what the market does. Absent an all out depression, in which case it is still hard to know where to hide. Don't forget during the depression the majority of the population still had jobs ,it was just that 25-30% were getting screwed.
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repeat after me ... "the market is a efficient discovery mechanism of price and as a fairest distributor of capital"
IWM - from near the top of the right shoulder to a broken neckline all in one glorious daily candlestick. Let's hope this is the start of something beautiful.
Isn't this what they want? Either the sheeple follow our plan (POMO) or we bring the markets down and screw you.
So...what's it gonna be ? Buy PMs...haha...we will screw you there as well.
This is Obama Admin's central planning supported by Bernanke's ZIRP, POMO, and TBTF. It is not different this time.