As algos now focus exclusively on gaming the EURJPY and other funding currency pairs, the stock market is completely dead and trades purely as a correlation and hedging pair. With under two hours into the trading day, we are already at 40% below average volume: don't be surprised to see a 5%, 15% or 50% market up move if we drop to below 50% of cumulative.
In other news, the LA Times reports that Americans, for the most part, have now officially said goodbye to stocks. With a broken market such as what is evident every single day, who can blame them. Bernanke has officially failed to lead the lemmings into a risky asset reflation, as primary dealers, HFT algos and mutual funds will need to take profits occasionally, and every time this happens we will see another, ever flashier crash.
The amount Americans have in basic savings accounts at banks and thrifts rose to a record $5.06 trillion at the end of May, a jump of $209 billion since the start of the year.
But even as bond portfolios now hold a record $2.4 trillion, individuals and institutions still sit with $2.8 trillion in money market mutual funds that pay next to nothing. The average annualized fund yield is a barely detectable 0.04%.
The world's richest people, too, are hoarding cash. You might imagine that they got wealthy by taking risks, not by playing it safe with their money. But they're playing it safe now: The annual Boston Consulting Group report on the world's millionaires, issued this week, estimated that those households (there are 11.2 million of them) overall hold 48% of their financial assets in cash accounts, up from 44% in 2007.
We all know where to affix the blame for this state of affairs. In the wake of the world's worst financial crisis since the Great Depression, and the devastation it wrought on stocks and real estate values, fear has triumphed over greed. For many investors, capital preservation now trumps all else.
Some large portion of the population that was comfortable in 2007 having, say 60% of their money in stocks, 30% in bonds and 10% in cash now has significantly lowered the amount allocated to stocks. Watching the market drop 50% in six months left a lot of people, particularly older folks, with a new attitude toward risk — as in, "I want to take a lot less of it."
Even as share prices rebounded over the last year, many individual investors refused to buy in, preferring instead to shift more money to bonds and to bank savings. And just as some investors began to show renewed interest in stock mutual funds this spring, they were blindsided by the May sell-off and its accompanying wild volatility, including the absurd "flash crash" of May 6.
Over the last six weeks anyone looking for excuses to be more cautious with their money has seen the list grow ever longer: Europe's government-debt mess, the Gulf of Mexico oil spill, the threat of war between North and South Korea, and the much-weaker-than-expected gain in U.S. private-sector jobs last month, which raised fresh doubts about the economic recovery.
To have a shot at earning any kind of decent return on your money you'll have to move into stocks, bonds, real estate or something else more complicated and, obviously, riskier. Think of it in that light and the cash hoard seems incredibly bullish for the markets.
There's another possibility: Cash accounts will mushroom further because we'll find that, rather than being irrationally worried about the future, many people playing it ultra-safe have called it correctly — foreseeing an economy that sinks again, taking most riskier investments with it.
As such, whether Atari raises the market to 10000, 36000 or 36,000,000, it won't matter one bit: with nobody believing in the sham that is the market, companies will be unable to raise equity capital at ludicrous valuations, and volatility will hit unprecedented levels as implied correlations across all assets soon reach 100%. Very soon the market will no longer exist, except for being a computerized ping pong game proxy, in which a few computers just leech the liquidity rebates off whatever public exchange remains in a few years.