Thursday, December 2, 2010

"Traders Die Broke"

I will always remember these words from "the credit trader".  I bet you all have friends that are getting killed trying to trade this disaster.  Why wouldn't it?  The market zigs when it fundamentally should zag.  You can thank the robots for this price action.  Unless you own one of these little black boxes you are the "fish" at the trading "poker table".

If you are a new reader my friend is a 50 year Wall St veteran who has seen it all.  "Traders die broke" is an old Wall St adage. 

He explained to me that only a few percent of people have the intuition/instinct to trade successfully on a consistent basis.  A select privileged few are beating the system on Wall St today because they are able to cheat via inside info and sophisticated robots that sit on the trading floor and front run your trades. 

Anyone not on the inside is an instant "fish" for these sharks so consider yourself warned:)

I wanted to talk about why now is not the right time to invest.  I have discussed this in deep detail with my Wall St friend.  I have also discussed the topic with many of his co-workers.

Each of their answers vary to some degree but the take home message is essentially the same:  In extrordinary times like these it's all about preservation of capital versus return on capital. 

Each of them goes on to explain that there will be several "investment opportunities of a lifetime" when we eventually see the massive default/restructuring of our economy that cannot be avoided at this point(I will discuss where later on in this piece). 

Let me emphasize what I said above:  We WILL see massive defaults.  The money simply isn't there to keep this credit bubble hidden for much longer.   The pain can be delayed but it can't be avoided.

Everyone on Wall St with half a brain understands that this whole economic mess is a slow motion train wreck.  They will deny it to the very end of course as they attempt to keep "the game" going.  I mean why wouldn't they?  The staus quo is just fine with them because they all live like kings.

The Ultimate Ponzi Scheme

The Fed has now created the ultimate Ponzi scheme by lowering rates to zero and quantitative easing.  This environment is forcing everyone into risky assets in an attempt to find yield.   The "free money" from the Fed via QE is exacerbating the pumping of these risk assets because the banks have extra cash to play with as the Fed buys their treasuries off of them. 

The herd eventually catches onto this and before you know it just about everyone starts hopping into the market.  The fund managers are then forced to hop on the Ponzi bus because their performance starts to seriously lag the market. 

The DOW starts to scream higher as a result.  The way I see it:  The Fed has basically poured lighter fluid on all risky assets and then lit a match using QE and zero rates.   We are now witnessing a raging fire that I believe is either going to start burning out of control or simply burn itself out.

Nonetheless, this Ponzi scheme looks very tempting as it morph into a euphoric mania .  It's human nature to feel this way.  At times I am sure some of you have thought about going "all in" on stocks in your 401k as you see the DOW rise on an almost daily basis.  

The problem with Ponzi schemes is by the time they are identified, the train has already left the station.  This is not a place where you want your capital to be.

Jumping into a Ponzi scheme late in the game is basically a recipe for disaster.  Ask any investor that was buying tech stocks hand over fist when the NASDAQ was at 5000 and they will share their horror stories.

I'll admit that I got caught up in the craze.  It was hard not to.  Looking back, I am glad it happened to me because I learned a lot from it.  I am also thankful it occurred early in my investment career when I didn't have much capital invested.

It's important to remember that any good investor learns from their mistakes, and the lessons I learned from that debacle helped me avoid the 2008 fiasco.  My speculating days were over after the tech bubble as a result of learning my lesson in a very painful manner.

What made swallowing my tech bibble mistakes even tougher was the fact that I was warned to not to get involved repeatedly.   "The credit trader" was warning me all the way up that it didn't make sense to him but I didn't listen.  I was convinced that I was going to make a killing in tech stocks.  I proceeded to then ate a big fat piece of humble pie a few years later as I watched my triple digit stocks drop to $4 a share.

Like all Ponzi schemes, the only real winners among the suckers are the ones who get in early and then sell out before it bursts.  The creators of the scheme make out like bandits as they piss away your "investment" dollars knowing that they have no intentions of ever giving you your money back. 

The problem with Ponzi schemes is when the music stops almost everyone is left holding the bag because greed is a very powerful emotion.  When the game is working greed tends to overtake you.  It blinds you from the fundamentals and keeps you in the game.  

The Bottom Line

Let me preface the rest of this article by saying that this is not investment advice. 

I write this post as a warning to anyone involved in this market.  Stocks currently have huge tailwinds, but they are not the type of tailwinds you want when you are investing.

The tailwinds seen today are artificially being created by the Fed via low rates and QE.  Stocks are being bought based on speculation and desperation instead of the fundamentals.  The desperate investors are the ones who must find yield in order to survive financially.  Retirees anyone?  The speculators are the guys that own little black boxes.

The reality of it all is the market is not being bought based on any solid fundamentals.  It's being bought based on artificial stimulation thanks to the Fed.  The problem with buying stocks in such an environment is the carpet could be pulled right from underneath you if the Fed is forced to raise rates or stop spending.

At some point this is going to happen because inflation and/or a fiscal default will eventually make the music stop.

When it does is when you want to put your capital to work.  Fortunes were made in the early 1980's when people were able to buy Treasuries that yielded 20%.

No one will want to own stocks after the bubble bursts because of the destruction so great companies will be forced to raise their dividends in order attract investors. 

Credit bubble burstings also create incredible buying opportunities on assets like houses which will sell for a fraction of what they cost today.

Don't think for a second that the banks and the rest of Wall St don't see this coming.  Why do you think the banks are not lending and buying treasuries?

They are building capital for the same reason you are if you are sitting on the sidelines.   Always remember that every financial destruction creates incredible investment opportunities.  The key is to have the money available to take advantage of it.

I can't tell you when this will happen.  Timing the market is a fools game.  What I can say is restructuring is a virtual certainty at this point IMO..

The key right now is to just be patient and watch the fireworks.  You will be handsomely rewarded if you have te ability to sit back and wait.


getyourselfconnected said...

Right on Jeff!

I lost 10% of my net worth on crap tech stocks circa 1999-2001 and vowed never again! Of course back then I had very little but not the point!
I have a piece up showing KKD action, it's just a game. In 10 years the S&P is even, TEN YEARS!

I get that people can trade in and out, but not anyone with a real life and job and responsibilities.

What cracks me up to all get out is most people I work with (you know the type) have zero idea their 401k lost 60% and got back 70% of that (still a loss) because they just don't get it and don't look at it. Too funny. Some wealth effect.

I gave away 1 ounce silver bars at Christmas in 2007 to my coworkers and asked everyone I worked with to get a bit into silver. No one took me up. What can you do.

Jeff said...



I will have to hop over and check it out. Nice to see you back posting.

Couldn't agree more. People that got out of the DOW at 14k at the peak are still 30% ahead of the buy and holders!

ManHands said...

Each of them goes on to explain that there will be several "investment opportunities of a lifetime

I sure hope so Jeff. However, I get the feeling that the "opportunity of a lifetime" was Dow 6600 in early March 2009 during which we all sat idly by assuming much more was to come.

Cest la vie!!!

Jeff said...


Who knows. Perhaps that low will hold. Perhaps we are entering a new high tech age where the market is controlled by trading robots.

I am starting to wonder if it even matters what the stock market does.

If they trash the currency by bailing out everyone those stocks priced in dollars won't be worth anything anyway.

I swear sometimes I feel like building a bunker and starting a garden to feed myself.

I used to laugh off ideas like this thinking that people were nuts for even thinking of such a thing.

Now I am not so sure and I know others in finance that worry about the same things.

dis737 said...

Completely agree on your big picture, but the fly in the ointment for me has been the corp. earnings recovery. S&P earnings are essentially back to the 2006 peak and continue to crush expectations quarter after quarter.

It's hard to reconcile the economic malaise with the astounding rebound in corporate earnings, it's like the whole recession has been erased?

HeatherH said...

That s exactly how I feel sometimes these days. When I just looks at the growing debts and no concern for long term sustainable growth, I have a desire to buy a ranch or something. No wonder gold prices keep rising! People seek value that will last...not very successfully I am afraid. I hope the world won t end up owing US tons of worthless bonds.

Jeff said...


I know I am dumfounded by it as well.

A lot of it is cost cutting via job cuts and inventory control.

Nonetheless it's still amazing how much profits have turned around.

I noticed a lot of the momo names like Netflix are starting tro slump.

We also haven't seen a lot of topline growth. Cat is back near its highs yet revenus are 30% lower.

How do u explain that? QE magic is my only explanation there.

Jeff said...


You and me both!

Hopefully we find away but I am losing faith daily.

Bonds looked ugly today!

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