Friday, May 07, 2010

I have maintained, for quite some time, that the stock market is just legalized gambling.

If you know what you are doing, there are opportunities there for you to make a killing. There are also opportunities for you to lose your life’s savings, even if you do know what you are doing. I remember one person at work was very offended when I said that during a discussion. "No, it's not!" It was like I had insulted his mother. That was the depth of his reaction. But I think I have been proven to be correct. The stock market is just one big roll of the dice, in my mind.

May 6, 2010 is a case in point. Getting near the end of the trading day, The Dow Jones Industrial dropped almost 1000 points. It was in total freefall. Brokers were panicking, CNBC “analysts” were panicking, and certainly those people heavily invested in the stock market that set up their Blackberries to get programmed alerts if certain things happen were panicking.

From HuffPo:

At this point no one knows why. Some say it was sudden burst of worries about Greece's debt and the increasing possibility of a default that might cause a run by global investors. Others point to a "trading error." Giant high-speed computers generate millions of trades based on instructions embedded in computer programs designed to move fast enough to beat everyone else. So when there's a glitch in one of them it can immediately spread to all the other programs designed to move just as fast. Some say it was an erroneous trade entered by someone at a big Wall Street bank who mistyped an order to sell a large block of stock, and that the big drop in that stock's price (Procter & Gamble?) triggered "sell" orders across the market.

Regardless of why it happened, it's further evidence that the nation's and the world's capital markets have become a vast out-of-control casino in which fortunes can be made or lost in an instant -- which would be fine except for the fact that most of us have put our life savings there. Pension funds, mutual funds, school endowments -- the value of all of this depends on a mechanism that can lose a trillion dollars in minutes without anyone having a clear idea why. So much of the market now depends on computer programs and mathematical models that no one fully understands, so much trading is in the hands of a few people whose fat thumbs or momentary carelessness might sink the economy, so much of global wealth now depends on who can move their money quickest at the slightest provocation -- that we are toying with financial disaster every day. The luck or foolishness of a few traders, and inside knowledge and information that some possess and others don't, combined with ultra high-speed computers, put us all at the whim of a system whose risk is way out of proportion to any public benefits.

The stock market now is just one more out-of-control element in our out-of-control society, and this event, if there was still a doubt after the the Big Meltdown of 2008, should give absolute proof for anyone willing to actually see. That’s the problem, though. There are very few people who are willing to actually see what is going on and to take action. There are too many vested interests that want to maintain things exactly the way they are.

This is just such an obvious indication (to me, anyway) that we have lost control of the beast who once served us so well. If this article is true and no one really knows what happened, or if they do know for certain that it was some sort of “error” on a big trade that triggered all sorts of computer programs to automatically kick in with their sell orders, then we have big trouble on our hands. This is Frankenstein’s Monster. We will never know when it will turn on its “Masters.”

The stock market is a very strange thing, in my mind. It’s original intent was to provide industry the working capital it needed to invest in itself. Money has to come from somewhere in order to expand. Therefore, stocks and stockholders were invented as a way for the company to obtain the capital it needed and for the stockholders to have an investment in that company. I wasn’t around back then, of course, but my understanding of the early Twentieth Century mindset is that stocks were regarded as long-term investments. They were something to be held on to, rather like U.S. Savings Bonds are today. The stock market was not really invented for people and corporations to make a quick buck or huge fortunes by manipulating their holdings on a daily basis. But that’s what it has become, and everyone has gotten in on the game.

I haven’t trusted the stock market in a long time. I have had almost 100% of my holdings (mostly two 401K accounts) in bonds and stable growth funds. Yes, I know that is terribly, terribly conservative. Financially, that’s who I am. If I don’t understand something, I don’t get involved. And I certainly didn’t understand what was going on in the late 90’s and early “aughts.” As a result, I wasn’t pulling down 15 to 20% a year on my investments, like everyone else in this country seemed to think was some sort of God-given right. If they weren’t making that much, there was something terribly wrong and they were going to go find somewhere else to put their money. I have talked to those kinds of people, so I know that mindset existed. However, all these mutual funds and other types of investments that were packaged such that people thought their investments were diversified all collapsed pretty much at the same time, for the same reason. Many people lost 50% or more of their investments, which they had regarded as safe. My investments, on the other hand, kept plugging away at their usual very slow growth, without a single drop in value through this period. Who knows? Maybe I would have come out about the same if I would have been making all sorts of money on my investments and then lost it back. I might be just about in the same place as I am now. But I know that I didn’t really want to experiment with what I see as my retirement. That is not a place for me to be playing around in something I know that I don’t understand. But yet, I seem to be one of the few people in the country who thought like that. Even now, people and companies are still trying to find a way back to those heady days of 20% return on investments. Maybe so. Maybe those days will return eventually. But I know one thing. Until I can be convinced that our financial system isn’t some sort of out-of-control monster that will turn around and devour its “master” without warning, I know that I am going to remain a very conservative investor.

UPDATE: Via Attaturk.

Reports from CNBC and our own sources suggest that it was a Citigroup (C) trader that accidentally entered a sell BILLION-size sell trade, when they meant to do million.

Since the market came back and only ended down over 3%, all the focus now is on what happened. There's going to be an investigation into Proctor & Gamble (PG) trading, Accenture (ACN) and the market as a whole.

O.K., this pretty much makes my point. Any time we can experience an almost instantaneous meltdown of the Dow Jones due to a single keystroke error, then this system is really screwed and we are f*cked. I don't care if the market recovered pretty quickly. This is a screwed up system. One more thing in our society that no one really understands, but is yet entirely of our making.

UPDATE II: It appears that people who should know still have no idea of what caused this instantaneous crash and almost as instantaneous recovery. People, human beings, are going through a huge number of trades to try to figure out what happened. They don't know. I am very intrigued by several reports that a number of trades were "obviously in error" and were being cancelled. Really? Now, just how do people know that? We couldn't tell with the Florida ballots in 2000. What makes for an "erroneous trade"? And how do you "cancel" them without screwing over someone else? Maybe it was because some huge corporations lost lots of money, and that is what made their trades "erroneous?" I wonder if the little guy is getting as good attention.

This all reminds me of that old movie "War Games", where a computer sort of takes over and mixes reality and a test exercise to the possible elimination of the human species. Rather silly movie, if nothing more than the presence of Matthew Broderick. However, the part about the computer taking over and causing vast destruction, without the slightest comprehension by the people who designed the computer and without a hope in hell of heading off the catastrophe? That seems really plausible right now.

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