Stock Market Then and Now

No doubt you saw the volatility in the stock market last week. I was reading the editorial in the WSJ on The Bernanke Correction and started thinking about it. My accounts didn’t come through unscathed.  A hedge fund I am invested in got killed.  I heard about another fund that blew out.  Fortunately for me there is still money left over and I will still be able to retire, someday.

I am of the opinion that the Fed let rates linger at 0% for far too long.  In this highly politicized and cynical age, it is entirely possible to think that the Fed did it because Obama was President and they didn’t want anything adverse to affect him.  Tim Knight at Slope of Hope certainly has that sentiment.  Economist John Taylor has called for rate hikes over the past several years.  It’s not just us in the peanut gallery there are some real high powered academics on our side.

Of course, there is the possibility that Fed governors believe so strongly in neo-Keynesian economics they ignored all data and were just ideologues with blinders on.   It’s not as if we haven’t seen the same phenomena in other areas of government.  Credentialed elites tend to be that way.  Cough, cough.  The stock market rallied because of cheap money and the opportunity costs between return on risky assets versus return on US Treasuries.  I was against the continuous quantitative easing that the Fed pursued as well.  Once was enough.

If the Fed decides to get more active with rate hikes, and with daily actions like matched sales, look for the stock market to be in a bull market but less parabolic. As I said above, the Fed should raise rates.  If they would have raised the rate .25% at the last meeting, we wouldn’t have had the volatile week we had.

Operationally, the stock market is far different than it was even as near back as 2008.  Today it has no human interaction in it for the most part.  It’s all machines.  Machines are programmed by humans.  Algo’s don’t “think” as much as they react to signals.  It’s highly likely that a lot of the participants in the market are pursuing similar strategies.

In the old human days of the market, it moved a lot slower and actually traded tick by tick through a range of prices.  Today, it doesn’t actually trade because there is less in the trading book. Prices jump from point to point.  That increases the underlying volatility and risk.

In real market crashes post 1987, circuit breakers kicked in.  Breaks seemed a lot more orderly than the one we just had.  However, it could be my own confirmation bias kicking in because I witnessed it last week and your memory dulls on other markets over time.  I do know that I haven’t seen anything like 1987 since 1987.  2008 was different because it took place over an extended period of time.  You might even say it started in August of 2007.  The 1987 break was not only the Monday, but the prior week before.

In low volatility markets, variance tightens up.  The market gets extremely efficient.  Hence, over the past few years you heard people moaning about low volatility and if they continued to short vol, they got burned.

As a fiscal conservative, I see the writing on the wall.  The new Fed chairman has been dealt a tough poker hand to play.  Fortunately for him, he got a tax cut to take the sting out of higher rates.  If the Congress were doing it’s job, it would hold spending exactly steady or even cut some discretionary spending.  Unfortunately, they passed a one of the stupidest fiscal budgets in US History in the Senate.  A fiscally conservative budget would give the private sector room to breathe and create confidence in bond markets that fiscally America could grow out of it’s debt crisis.  Where are the cries of the “socially liberal fiscally conservative people” and the “socially conservative fiscally conservative” people?  It’s time to shout.  Here is an issue you can agree on.

I don’t think this is going to be a “stock pickers” market all of a sudden because of increased volatility.  It’s a perfect time to pick your spots with cash and add on to indexed positions.  I do think the economy is going to rip over the next several years due to tax and regulatory reduction.  I don’t think anyone can predict with any certainty where the rip will be.

I think things will settle down by the end of the week. Turn off the television and ignore the breathlessness of the commentators.  All they want you to do is watch, and be scared.