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The Stock Market Is Like A Fish Tank

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Now that the majority is tightly packed into a market devoid of yield/alpha, this concentration sets up the inevitable collapse of valuations perfectly.

I recently had the pleasure of visiting a state fish hatchery. Those of you who fish know that the hatcheries are responsible for raising sports fishing species such as trout and salmon and then releasing them in lakes and rivers to bolster native stocks.

The fish are kept in large concrete tanks where the water temperature and feeding are carefully monitored and controlled. In this particular hatchery, the public is invited to buy a small handful of food pellets (25 cents) to feed the fish when they reach a certain stage of maturity. (Proceeds go to maintaining native fisheries.)

The fish are milling about semi-randomly, seeking whatever food might appear. In the stock market, investors and punters are also milling about semi-randomly, seeking yield and above-average returns (alpha).

When a few food pellets are randomly tossed into the tank, the first fish in the vicinity to respond to the splash get the pellets. In the stock market, the pellets are yield and alpha.

The fish milling around in the tank are highly attuned to the actions of their mates, and those nearest the first fish quickly follow them to the source of the food. This makes good sense, as the food (yield/alpha) might be plentiful and the second wave of fish would be well-rewarded for being second.

These fish attract the attention of virtually every other fish in the area, and within a few seconds the water where the few pellets landed is boiling with fish seeking pellets (yield/alpha).

This pattern can be repeated until one runs out of pellets: toss a few food pellets in a sparsely populated area of the tank, and watch how quickly the majority of the fish rush to the spot where the food has already been consumed.

The few fish wandering around the edges who did not join the majority speeding to the place where the food (yield/alpha) has been exhausted are the likeliest to be closest to the next semi-randomly tossed pellets.

In effect, those who join the majority thrashing around the spot where the food has been consumed are guaranteed to go hungry. I submit that the stock market is like a fish tank, and the majority are thrashing around precisely where the yield/alpha has been consumed and the risk of starving (losing money) is greatest.

The same can be said of the residential rental market, and every other asset class where the majority of participants and betting capital that the food pellets are limitless, when the reality is the yield/alpha in the market has already been consumed by those who got there first and second--those who responded first when no other participants noticed the splash of opportunity.

Now that the majority is tightly packed into a market devoid of yield/alpha, this concentration sets up the inevitable collapse of valuations perfectly.

 

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Tue, 06/10/2014 - 10:57 | 4840545 Seasmoke
Seasmoke's picture

Yes. But when ?????

Tue, 06/10/2014 - 11:15 | 4840549 whatsinaname
whatsinaname's picture

Ever watch a tank with a few fish in there. Inevitably, they feed on each other. You know why ? Because no matter how hard the tank owner tries, the balance of food required to keep them all well fed and happy can never be achieved. Good analogy here. The Fed is going to have to be the fish tank owner soon and try to maintain a calm in there.

Tue, 06/10/2014 - 11:20 | 4840628 icanhasbailout
icanhasbailout's picture

you only need to fatten them up...

Tue, 06/10/2014 - 10:59 | 4840551 FinalEvent
FinalEvent's picture

When the hindenburg omen topic has arrived

Tue, 06/10/2014 - 11:54 | 4840781 Lewshine
Lewshine's picture

These ridiculous, highly protected down days in US equities are as fraudulent as any up day pump. It's like they allow a 30 point drop in the Dow, only to be rescued by days end, so as to say: "See, what manipulation???" Complete theatre!!

Tue, 06/10/2014 - 16:28 | 4841853 Mesquite
Mesquite's picture

Insider's club...

Tue, 06/10/2014 - 11:47 | 4840751 JJdog
JJdog's picture

No way there are the same, fish tank is real, stock market is not!

Tue, 06/10/2014 - 10:57 | 4840546 youngman
youngman's picture

I got pellets

Tue, 06/10/2014 - 11:02 | 4840564 Relentless101
Relentless101's picture

I remember the first time I got pellets. Now that was a crazy weekend! Wait... are we talking about the same thing?

Tue, 06/10/2014 - 10:59 | 4840550 yogibear
yogibear's picture

William Dudley of the NY Federal Reserve keeps throwing premium fish food into the tanks while stealing it away from savers.

Borrow all you can, buy PMs, and default. You have the hard assets and the banks are stuck with non-performing loans.

Tue, 06/10/2014 - 10:59 | 4840552 bookwurm
bookwurm's picture

Hahahaha, How appropropriate, seeing how i just finished feeding teh kittehfishez...

Tue, 06/10/2014 - 11:02 | 4840562 Kaiser Sousa
Kaiser Sousa's picture

i been wathcing this for months...

notice how in the last hour of trading in London, especailly on days where significant losses r being registered the indexes shoot up exactly around 10am est. to erases most if not all losses...and thats not just on tuesday's...

just sayin....

Tue, 06/10/2014 - 11:03 | 4840573 JustObserving
JustObserving's picture

In the US stock market, the big fish are told where the biggest profit pellets will land.  Buffet knew that Goldman was being bailed out when he invested in it during the financial crisis.  He made a killing.

In other news, NSA claims that its systems are too complex to obey the law.  Wall Street has been getting away with similar excuses for decades.

http://yro.slashdot.org/story/14/06/10/1426228/nsas-novel-claim-our-syst...

Tue, 06/10/2014 - 11:07 | 4840586 Ban KKiller
Ban KKiller's picture

No one cleans the tanks anymore...the water is stale...too hot also. 

Bullish!

Tue, 06/10/2014 - 11:16 | 4840609 SanfordandSon
SanfordandSon's picture

As a life long contrarian I couldn't agree more.  Several things though I find very interesting/perplexing in the stock market.

As an example - last week I purchased NRP, average price 13.21 and within a week the stock is 15.54 and now that it has moved through its 50DMA it will be interesting to see if the robots pick it up.  With 40 years of trading experience, this times are uniquely in opportunity at times but mostly uniquely dangerous, in my opinion. 

Tue, 06/10/2014 - 11:19 | 4840624 Sick
Sick's picture

Seems like they are throwing in slow acting poison pellets.

Tue, 06/10/2014 - 11:24 | 4840644 buzzsaw99
buzzsaw99's picture

it's moar like shooting fish in a barrel for the billionaires

Tue, 06/10/2014 - 11:25 | 4840649 q99x2
q99x2's picture

The FED which is pretty much the TBTF banks have software that is attached to the printing press. They use the markets to bribe the politicians and to pay to be able to use the military as mercenaries. The world will go poof before the market collapses. BTFD

Tue, 06/10/2014 - 11:26 | 4840651 teslaberry
teslaberry's picture

The few fish wandering around the edges who did not join the majority speeding to the place where the food (yield/alpha) has been exhausted are the likeliest to be closest to the next semi-randomly tossed pellets.

 

" NO, THIS IS CALLED THE GAMBLER'S FALLACY AND IS JUST FUCKING WRONG . GO BACK TO FUCKING READING BASIC RHETORICAL FALLACIES. "

 

charles hugh smith, mr know it all socialist full of shitbagger.

Tue, 06/10/2014 - 11:45 | 4840739 Zerozen
Zerozen's picture

The pellets haven't landed in this part of the tank all day, so they must be due to land here soon, right? Right?!?

- Some Fish

Tue, 06/10/2014 - 11:31 | 4840679 Itchy and Scratchy
Itchy and Scratchy's picture

Had an old girlfriend that smelled like one ...but that is totally another story!

Tue, 06/10/2014 - 11:36 | 4840705 kurt
kurt's picture

More like waiting Pirahana and you ain't their kind.

 

Tue, 06/10/2014 - 12:22 | 4840884 Hubbs
Hubbs's picture

I really like this novel explanation for the markets.  It keeps  human aspect of investing  on a basic biological (behavioral ) level, where after all the books and theories, graphs and charts, correlations and computations have been exhausted  leads right back to this basic explanation.

 

But to be cynical, I think if we unleashed a billion monkeys (economists) to construct a model of investing, one of them would eventually have dreamed up this one. But wait, there will be more.

Tue, 06/10/2014 - 12:29 | 4840906 Hubbs
Hubbs's picture

On second thought, what really determines which fish get the food is the person who is throwing the pellets. That would be the bankers/FED.

 

 

Tue, 06/10/2014 - 12:28 | 4840902 Squid Viscous
Squid Viscous's picture

there are alot of guys on goldman's prop desk that look exactly like fish, without the gills of course... is that ironical or what?

Tue, 06/10/2014 - 13:16 | 4841105 Yen Cross
Yen Cross's picture

   I can't believe the DAX is over 10K with all the shitty macro numbers that have been coming out of Europe and Germany.

 

  DAX 10,028.80 +20.17 +0.20%  

 I'm keeping my powder dry...This sucker(market) reminds me of the 'Yellowstone caldera'...I don't know when it's going to blow, but when it does it's going to be quite the generational event.

Tue, 06/10/2014 - 14:00 | 4841298 U4 eee aaa
U4 eee aaa's picture

....and the investment banks are like the cat

Tue, 06/10/2014 - 16:37 | 4841858 Kirk2NCC1701
Kirk2NCC1701's picture

First... Big Fish eat little fish.

Darwinism is a more useful model than the self-evident "Be Nice"* from Scripture.  Even though "Be Nice" is a subset (part of) Darwinism, because of the "mutual interest" principles.

* The Golden Rule of treating others the way you want them to treat you.

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