Investing in the stock market is the easiest and most common investment in the world. Creating an E-Trade account and investing on margin (taking a loan from a brokerage to invest) takes around five minutes and a signature. Part of this is perpetuated by CNBC’s ability to spin stories and produce “educational” programs, designed to encourage new investors to gamble their money in this rigged casino.
I talk very little about the stock market and its technical analysis for one reason: I believe these numbers and analysis are somewhat invaluable without considering the extremely large “X Factor” of widespread manipulation in markets.
Several years ago, I used to watch CNBC religiously. All day, everyday. I would be amazed by the traders that have records like Jim Cramer who averaged a 24% annual return over 14 years before he retired. I still watch CNBC everyday, but I feel like my understanding of the way this stock market game is set up makes me much less impressed by these numbers. First of all, there are a lot investors that claim to have similar returns year after year, and many of them have their investments backed by real property. Second, there are hundreds of these hedge fund guys that had an awesome run and got completely wiped out during the ‘08 crash. What has come to light in the public eye since the 08′ crash is that the stock market is unreliable at best.
With the recent headlines involving hedge fund manager Raj Rajaratnam’s insider trading, the public is becoming more aware that if you are not on the inside of the stock game, you better watch your ass.
This insider game and the uncertainty in the market is continuing the bull Gold and Silver run that, over the last five years, has left GLD up 113% and SLV up 155%. During this run, many on CNBC said GOLD would stop at 1,000 an oz, then 1,200 then 1,300, then 1,400 and they were WRONG, WRONG, WRONG, WRONG. Even if GOLD is overpriced based on historical means, when do you see investor confidence flooding to the stock market? (Aside from every time Bernanke launches another Quantitative Easing, or Economic Weapon of Mass Destruction as I like to call it.)
Having said all that, manipulation, even government manipulation, can only have effects in the short term. Eventually, stock prices will find valuations that make more sense than the current B.S. rally that we have seen in the ‘10 – ‘11.
The stock market has seen a massive recovery since the lows reached in 2008, and many people look to this as a sign of our strong economy. If you have read any of my prior posts, you know that I do not share this sentiment.
Even with the recent crises that are taking place, in both Libya and Japan, the S&P 500 has experienced an unprecedented 90% gain since the ‘08 lows. This “recovery” is not based on the historical price to earnings ratios, but rather due directly to the Federal Reserve pumping billions into investment banks that have used this opportunity to speculate in the stock market casino. As you can see, comparatively, to other similar bubble busts, we have a long way to fall.
All of these other crashes have similarities and differences, but one point that is clear on all big bubble busts is that the recovery is a lengthy proposition. Unlike what the media is trying to portray, this bubble bust can not be fixed by simply dumping dollars into banks.
This next chart exemplifies the rareness of our current debt to GDP ratio. Notice the only time in U.S. history when the current ratio was greater…
During WWII, the national debt was 123% of GDP, making it the highest in history. The U.S. current deficit is heading this direction. However, it is crucial to understand the difference between these two times in U.S. history. In 1945, the U.S. was at war with the greatest military machine the world had ever seen, and WON. Not only this, the U.S. had positioned itself to, quite literally, take over the world. Compare this to the situation in which the U.S. is currently. Instead of being poised to become a super power, we are in a position to outsource jobs, lose our monetary supply’s position as the global currency, and China is poised to take over as the strongest economic power.
The stock market game is going to be up real soon. As these debt levels begin to put an extreme amount of pressure on the economy, Bernanke won’t be able to keep interest rates so low. When interest rates begin to creep up, as they mathematically are certain to, fear will again take hold of the market. It will not be surprising to me if we see another stock drop off in the coming months. In fact, I would be surprised if we didn’t see another dip accompanied by the continuation of the bull run in GLD and SLV.
- Hunter Thompson
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You have hit a home run with this post! Your thinking and mine is in tandem on this topic.
Posted by Thomas Morningstar | March 25, 2011, 7:05 pmI have been around the markets for more time that I do care to remember and I have seen some really “incredible games” played by market makers, brokers, traders and many other individuals and or various groups!
In fact the “big players” have been charged and paid huge fines many times for stock market manipulation, so please don’t delude yourself into thinking that everything that goes on in the markets is what it really looks like!
Stock Market Game
Posted by suzena | June 16, 2011, 11:31 pmI can’t decide what your most disgusted with the actual stock market and its uncertainties, which are a part of any business investment, or the way mass media depicts how different markets function and trade on the open exchange market. Its true that most individuals don’t properly investigate their investments in the stock market, for a slew of reasons I won’t get into here, but that doesn’t make the market different from any other game in business. Life itself is a game we play everyday, a gamble when we wake up and try to predict the outcome of every move we make: can I make the yellow, can I trust my employees will perform their duties as planned, if I do X, Y, and Z will the outcome I predict come to fruition. At the end of each day everyone of us is looking to control as many aspects of our lives as we can, while most of us fail at many of those aspects during the day.
The reason most of us fail at our daily tasks is because we live in a world with other human beings, who we can’t always control. The market is fundamentally dictated by people and the people who run the businesses we invest in, which is why controlling every aspect is futile. To succeed in any investment one needs a long-term strategy, short-term goals, proper fundamental research, and emotional sensitivity.
Unfortunately, the media doesn’t market to the long-term strategist rather it looks to entice the short-term gain. News outlets look for the headlines, and when you watch CNBC or read the WSJ that what you get. The current market volatility is largely due to number of critical events than can be tied together through a number of CNBC headlines that as you have stated manipulate the natural “ebb and flow” of business markets. However, as much as headlines can manipulate the ULTIMATE gain or loss someone receives in the market–a gain or a loss on a long-term investment strategy is largely controlled by the investors fundamental reasons for investing aligning with the company’s fundamental business structure, organization, growth strategy, current valuation, and a little bit of luck in the form of how other markets evolve around the company’s evolving growth strategy.
To enter the market “game” without understanding how the game works is the problem. Worrying about the current manipulation is an easy way to fail and find distrust in the market, but I think one can be successful in the market if they approach their investments like solitary business investment vehicles–where the goal is to pick a fundamentally sound company, do the proper valuation, understand how mass media can control business growth (bad news can harm any business’s productivity, just like bad news from CNBC can influence a stock price), understand the weight of the investment so as to be less impulsive and more goal oriented, and most importantly understand that a little bit of luck is a part of every aspect of our lives.
Please respond to this comment if I have been vague and you would like me to extrapolate more on any opinions I have made about the stock market.
Posted by Ro | August 4, 2011, 11:13 pmRo,
Thank you for your well thought out post. I took some time to answer through another post which can be found here… http://thecashflowisking.com/2011/08/18/stock-market-volatility-are-we-having-fun-yet/
Basically, the point is simple. Life is volatile, but money simply doesn’t have to be. It is possible to get reliable returns without being exposed to ridiculous political or economic issues like the debt ceiling, the upcoming election, or the S&P 500 downgrading the US debt.
All it takes is to think outside of the box when it comes to investing.
Posted by huntert545 | August 18, 2011, 12:45 pm