Posts tagged: Federal Reserve

The “type” of money has changed from those who invest in “things” – be they long term value investors like Warren Buffet and Peter Lynch, to those who chase income and dividends and to those who like to follow trends and industries. These investors, different in their own methods and goals had one thing in common – they invested in companies they felt had a future, or in the case of short-sellers (as legitimate as buyers) who thought it didn’t. The few hedge funds that were around four or five decades ago did what the name of the type of fund said – it “hedged” positions and gave up some potential upside in order to cushion losses when markets went south. That changed sometime at the end of the last century when George Soros nearly ended the United Kingdom by mercilessly shorting the Pound.

We are being very general of course and have not spoken about those who invested in bonds of “fixed income” products, corporate, federal or municipal as well as the basic speculator in all sorts of investment products. Nor have we spoken of the crooks who populate any era. We don’t want to give the impression that all was wonderful “then” – this is not a nostalgic look at the recent past but an attempt to understand what people were doing and how they did it, and how things have changed.

We are seeing now a sea change in the way the markets are responding to news and the way money is being invested. We still have the value and income investors; we have the large and small investors doing their best to pick the right stocks and bonds, and some of these investors also use options and futures to enhance and hedge their investments. Investing has become more sophisticated- read more mathematical – and the “basic” investor, large or small has been able to use this sophistication. However, the current hedge fund environment is based on much more than picking the right stocks or bonds and all that goes with it. The current hedge fund system is a group of funds, many of multiple hundreds of millions or even billions of dollars that don’t make investments per se as they try to beat their competitors by the microsecond in order to profit a very small amount on a a large but extremely short term investment (we will speak of the money of unfree countries, below).

As an example, there are dozens of hedge funds who work their “algos” to respond to market news and announcements only to get out of the position within minutes or even seconds. Each algo basically says the same thing – if X happens then buy and if Y happens, sell. The only difference is who will buy or sell quicker and then reverse what they have done. There have always been those with fingers on the button ready to buy or sell but the amounts were smaller and the effect less. Today, the reaction time is so quick that the large firms have their servers in the stock exchange buildings, close to the exchange computers so that they will get their orders in first. Remember, these are electronic so they are going at the speed of light. The difference between 100 feet way and 100 miles should not matter – but it does. We are talking the difference between 0.0000001 seconds for 100 feet and 0.000537 seconds for 100 miles – a time difference that people cannot discern.

This of course is not necessarily a bad thing if the algos themselves were correct for the long or even medium term (or what used to be called the short term – a quarter of a year). But they are programmed for the shortest of short term – what will happen over the next 30 or 40 seconds or maybe a day or two or a week. We see incredible volatility and panic where we should find none. A good or bad jobs report, inflation release or even a Federal Reserve rate cut or hike might have long term consequences but these trades that cause this radical volatility are not concerned with that. The market dropping two or three percent in a matter of minutes does not provide the comfort that investors usually seek. People jump on the bandwagon fearing the worst –when it was just the algos responses to the news rather than intelligent judgement on the news that drove the prices.

We will stop with the details and summarize – a large part of the uncertainty of the markets is structural as technology and the sheer amount of money being traded has surpassed what the markets, as currently structured can stand. As an example, as an employee of the Nasdaq Stock Market in the early 1990’s we were told to prepare for a 1 billion share day. During those days, there were very few shares that traded above $100 as the companies wanted more investors and there were many stock splits (more rare these days). The 1 billion share day in 1995 would have totaled around $40 billion. Today, daily trading activity has passed 15 billion shares and the total money is above $1 trillion.

It is not clear what structural changes need to be made in order to take all of this into consideration, but we do have some ideas (which we won’t bore you with now).

The second major issue that is the cause of the volatility and uncertainty in the markets has to do with what news is “good” and what news is “bad”. Not in the moral sense but in the economic and geo-political sense. What we mean by this is that there does not seem to be a unified view in the Western world where it should be going and because of this, it is not clear what news is in fact good and what is not. Economically it might be easier to figure out but even that has been hard since so many major American cities and so many young people are voting socialist and so much foreign money from non-free countries is flooding the market. News may say one thing for a free market economy and something entirely else for a planned socialist economy. It might mean one thing for investors in New York or Cleveland and something entirely different in China or Qatar.

Therefore, geo-politically the uncertainty is confusing. During the cold war of course we basically understood what moves were positive and which were negative. That is not to say there were no policy arguments but for the most part, the ends were agreed upon. Selling grain to the Soviets may or may not have bettered the Western world but both those like Henry Kissinger who supported it and Senator Scoop Jackson who opposed it argued based on the same goal – what was better for the free world.

This goes beyond who is considered the “enemies of the West” to what is considered the West – or even if it exists! We have always tried to write here from the perspective of what is good for free countries even if many free countries seem to think that Israel, for example, is not a member of that community. The same goes for those who doubt the cause that Ukraine is fighting for, as they support the Putin tyranny in the name of balance or alleged Christian values or whatnot. Interestingly, both sides – the right in the Russia-Ukraine war (and the Tuckeronian Right regarding Israel, too) and the left in the Israel-Islamist war – are willing to forgo freedom for some amorphous, form of justice or truth.

Iran is the perfect example. In every measure of Western values since WWII the Islamic Republic of Iran is an evil country. It denies freedom to its citizens, massacres them, executes women for immodesty and homosexuals for being homosexual. We don’t have to go on regarding the evils of the Islamic Republic of Iran but even with that, there are those in the West who support it. We are not talking about the legitimate policy debate regarding a war with Iran – morally as well as politically – but rather the fact that many just don’t consider that Iran is on the wrong side. Israel as we said is another example, but we can go on and on. Venezuela, Cuba and even China come to mind.

True enough, there were always people in the West that thought the Soviet Union or Maoist China was morally “better” than the United States or Europe, but never did they influence the politics, culture and businesses as the current naysayers do. The markets “understood’ that the Soviet Union was bad and reacted accordingly. The geo-political goals were mostly in sync.

The global markets reflect the geo-politics of the day and “vote” on it in a daily basis. The fact that there is a vast sum of money that influences the markets that are actively opposed to the freedom project – China, Qatar and Russia come to mind – does not help the situation. It is not the “foreign” money that disturbs the markets but rather which foreign money. There is a difference between an investor who is looking for the good company or the safe bond, and one who is looking to use their investment to further a radical Islamist or Chinese Communist agenda. President Trump’s trillion dollars of investments from Qatar and Saudi Arabia and others comes with a price tag he does not usually deal with – the price tag of undermining the market economy that has made him so successful. The proof of “goodwill” in the investments in the United States ought to be shown before that money flows into the economy. They have already contributed to ruining the universities (not that they needed the help) – there is no reason to permit them to ruin America’s great corporations, too.

The markets are crazy due to its structural issues and due to the “uncertainty” that is today’s world. Sadly, that uncertainty is not just uncertainty about what will happen, but uncertainty about what is good or bad (news). This goes beyond unity and “can’t we just get along?” and gets to the heart of why we are living today in the same culture. We say culture instead of country or city since that culture is the one that “got us here” as basketball or football coaches like to say.

The lack of agreement as to what matters most has affected the markets more than we think, and it all has contributed to the depression that so many in the free world are feeling at the moment.