It was while under the influence of LSD
that a childhood friend of ours decided to end a promising career as a
commodity trader. He was buying and selling pork belly contracts at the time
but dropped acid one day hoping to gain valuable insights into the markets
— insights that presumably lay beyond the grasp of rational thinking.
Chuck had insights all right, but not the kind he’d expected. Instead
of having potentially profitable spreads, combos, strips and straddles leap
out at him from his trading monitor, his febrile mind was overwhelmed by
images of the slaughterhouse — of 400-pound sows dripping blood from a
conveyor belt. The experience was cathartic enough that his next job,
announcing professional basketball games, was as far from the feedlots and
butcheries as he could get.
We mention this because market-watching
has become all-too-abstracted for us lately as well. Ponder the whys and
wherefores of the stock market for too long and you begin to believe that
investors are being led, one rally at a time, to the slaughterhouse. Or so it
would seem. Europe’s bailout, for one, is a hoax that can only end
badly for us all. And the torrent of lies that have
kept the U.S. out of statistical recession are so egregious that a bust of
1929 proportions could occur literally overnight and at any time. As we know,
the mindless herd can have epiphanies just like individuals. Except that they
are called panics. And yet, stocks continue to ratchet higher most of the
time, pausing only long enough to allow sector rotation and the orderly flow
of money in and out of the flavor-of-the-week asset class.
We’ve Had Our Warning
Someone in the Rick’s Picks
forum described this yesterday as musical chairs, and we would agree. The
remark was in response to a post by a regular poster who evidently believes
he’ll know when it’s time to exit the stock market. Although he
had asserted that there have always been warning signs in the past, we
don’t recall any such signs prior to the May 2010 Flash Crash. Some
traders we know have bragged that they saw the October 1987 crash taking
shape that summer, like dark cumulus clouds on the horizon. But did they
really? We doubt it. In point of fact, crashes occur because few have noticed
or heeded whatever warnings signs were there to be observed.
To those who may be looking for the next
warning sign, we would say: The May 6 2010 crash was your warning.
That infamous event saw the Dow Industrials plunge 1000 points, or nine
percent, only to recover the entire loss minutes later. Much as we’d
like to believe that someone flipped the wrong switch, a crash of that kind
could have occurred only because the electronic trading network itself had
gone HAL-9000 wacky. And so it is with, not just the stock market, but the
entire global financial system. It has been hard-wired to panic at
ten-thousand times the speed of humans. And it therefore will, eventually.
Any trader or investor who is counting
on beating HAL to the exit, or on a do-over once The Powers That Be have
sorted things out, richly deserves to reap the whirlwind.