Posted by Mish March 4, When it comes to investing, who or what can we trust, is the market rigged, and why does it matter?

For those that say the system is rigged, I concur. This is at the very core of central banks efforts to entice investors to take risks, as risk taking is key to making an economy grow.

In practice, central banks have foremost pushed up financial assets, but have largely disappointed in generating real investments. As a result, those holding financial assets have disproportionally benefited.

Pardon the pun, I believe investors completely underappreciate hidden risks in the markets, notably the risk of liquidity evaporating. Exchanges are providing incentives to these market makers; ever look at those exchange fees on your trade ticket? Each ETF has a so-called lead market maker that, by arrangement, gets a better deal than the other market makers.

Rigged System: Fake Risk, Fake Return | MishTalk

Through that, all the other market makers know they can always offload their risk to the lead market maker. Everyone is happy, including the investor. Except when the lead market maker has a glitch. Suddenly, just about everyone withdraws liquidity because something appears wrong. In addition, Dodd Frank discourages traditional market makers to provide liquidity.

Flash crashes can then occur when investors place market orders in the wrong belief that the system will take care of them. As a result, in our opinion, the current design of the system makes the periodic flash crash a near certainty.

In the past, I have compared central bank efforts to suppress risk akin to putting a lid on a pressure cooker. It should come as no surprise that taking the lid off might cause a spike a volatility, e. We talk to a lot of investors who go along for the ride as the market is rising, but are rather concerned the party could come to an end.

Instead of rebalancing their portfolios or taking chips off the table, however, they are looking for ways to have their cake and eat it too by buying insurance.

One way to buy insurance on equities is to buy put options on equities. Another is to buy volatility, i.

Through ETFs, such strategies are available to retail investors. As with anything else in this analysis, we are observing what we see in the market, we not making an investment recommendation.

The idea is that so long as volatility stays low, one collects the equivalent of an insurance premium; when volatility surges, one loses money, those writing insurance might believe that those surges and associated losses are always temporary buy the dips, remember! Amongst others, a single mutual fund pursuing a strategy building on that concept had amassed over four billion in assets.

After all, what could possibly go wrong? What has gone wrong is that a few weeks ago, the fund experienced substantial loses in the absence of a surge in volatility.

What appears to have happened is that a too-good-to-be-true strategy became victim of its own success. In our analysis, the fund encountered a particular constellation where their derivatives position was inherently difficult to manage, with difficulties exacerbated because of their size. Differently said, they were cornered.

Above, we discuss a mutual fund being cornered. While the fund management brushed off that they would impact the market as a whole, our internal analysis suggests otherwise. As the fund is liquidating its position, the net effect on the market that we have observed is upward pressure on equities and downward pressure on volatility this is due to how market makers hedge their books as they mitigate their own risk of helping the fund to unwind its position. While one can observe the stress in the market in characteristics of specific options, the casual observer might think everything is normal.

The management of the fund indicated its troubles are over, but as of this writing, our assessment suggests they continue to be cornered as they liquidate positions to cater to redemptions.

We believe it is plausible that much of the upward pressure in equity markets on the backdrop of low volatility may well be due to the unwinding of some of these strategies. If much of the feel-good-rally in the markets is due to internal market technicalities, is it possible that the Fed is being fooled? We have long argued that the Fed will raise rates if the market allows it to, meaning that they would love to have higher rates, but are most concerned about causing asset prices to deflate.

If, however, asset prices floating higher is actually an expression of stress due to exotic strategies being unwound, the Fed might well be emboldened to hike rates more aggressively. The logical next question is whether investors are being fooled.

If higher asset prices are more due to a short-squeeze than fundamentals, and if on top of that, the Fed is more aggressive, are we setting ourselves up for trouble? The stock market crash of comes to mind. Does that mean investors should liquidate their positions? Does it mean investors should buy insurance? If you know the market is going to crash tomorrow, by all means, seek protection.

That said, we have been cautious on the markets for some time and we have to be aware of the risk that our concern is misplaced.

When the smartest strategy is to buy the index, bright minds are leaving the industry. What you get is an obsession with indexing. The average active manager is failing to beat the index. But does that mean investors should stop thinking? When markets are in a panic, the pundits tell us to buy the dips. As proof, they show the recovery we had from the market bottom in the financial crisis; or any other dip we have had since. With due respect, that too is the wrong way to look at the issue.

Investors ought to invest according to how much risk they can stomach. If they had properly rebalanced, they would have taken chips off the table ahead of the financial crisis and then had the resources to deploy cash at the bottom.

Yes, in that case, absolutely, buy when prices are cheap. Many investors go along for the ride during the good times, and are over-exposed to risk assets. Then, when the market plunges, they lose a great deal of their net worth. Are you telling me that the appropriate way to react in that situation is to double down and put a now disproportionally larger portion of your net worth at risk?

If you cannot stomach the risk of an investment, stay away from it. When you lose money, you can afford to take less risk, not more risk.

Stock market rigging is no longer a ‘conspiracy theory’ | New York Post

Any pundit suggesting otherwise is, in my opinion, irresponsible. The most reliable valuation measures are beyond highs. Hussman hussmanjp March 1, Hussman hussmanjp February 26, I long for the days when Warren Buffett actually spoke like Warren Buffett. Value investors never ignore how expected cash flows are priced. Hussman hussmanjp February 25, The content on this site is provided as general information only and should not be taken as investment advice.

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March 4, I am long ropes, and that is a solid investment. March 5, 2: March 5, 7: Perhaps we can discuss a merger. I am heavily invested in production and eventual distribution of world class, space age Guillotines.

March 4, 1: There will be huge capital flows to the dollar from Europe and Japan , which will lead to a further rising stock market.

Bull markets die on euphoria, not pessimism. And there are many sources that will show you that valuation is a terrible instrument to predict future returns. Thus, expect a Nikkei-like melt-up of the Dow Jones, that might catapult it to 30, or even higher. Like Liked by 1 person. March 4, 2: Victor Adam Smith said: March 4, 4: The only thing I would add is there always has been manipulations within the trend for profit, but the trend cannot be manipulated.

As Socialism and debt collapses, where else is the big money supposed to park? You understand the situation: Only short term movements. It is clear that the public sector is the problem. Therefore you need private assets. The majority is still in bond, bond funds and cash. March 4, 3: That said, without evidence of giant short positions by smart money like the ones predating the and crashes , the rally certainly can continue until the valuation overtakes the extreme. Between demographics and declining long term productivity growth, and the current profound level of overvaluation, the manipulators know the stakes and hope to keep us afloat as long as possible.

When they kill the golden goose, they can no longer capitalize on the eggs! March 5, As soon as they do, everyone following them buys as well. This has worked for the last 8 years. My opinion is that the challenge is growing, as something like Italy leaving the EU will start a domino effect, where the manipulation works in reverse. Whoever holds a lot of Italian bonds, say, will become the target, and all assets in their portfolio will drop precipitously as the remaining players force fire sale prices to pick up the soon-to-be-dead players stuff for cheap.

They remember the Nasdaq Bubble and what happened when it burst. Corporations and central banks, directly or through proxies have been buying stocks hand over fist. You are looking in the wrong place to not see a bubble. Bernie Madoff was a market maker. I am not kidding. Famous speculator Jesse Livermore described various crooked stock market techniques in detail. I got out of the market some time ago figuring year market cycles never happened , my stocks bought way back in had gotten to a times earning and looking forward, we seemed to be due a good size correction, so I got out like i always do and other than the August event, and the month of January downturn, we never had the correction i was looking for.

Stop listening to talking heads and so-called experts, the vast majority of which cannot even beat the indexes because they are US-centric and pray their metrics apply in a world they have never experienced. When was the last time they traded in a world where one of the major currencies and trading blocks was collapsing? What becomes the safe-haven when Socialism collapses — govt debt back by nothing, or stocks backed by real assets?

Stocks will indeed be the safe heaven, now government debt is the real problem. Ask yourself, what do you want to hold: No one understands this bull market, it is the most hated bull market in history and the majority of the people and the pundits is still pessimistic. That means we are going a lot higher. What happened to GM? Remember, the housing crash was supposed to have been confined to subprime.

Nothing happens in a vacuum. Caterpillar was just raided, another blue chip company. So what is really safe? I imagine they are not the only one. I forget the details, but the other day there was a news story about someone who had invested in a painting to protect the value of his money. The painting apparently had a huge drop in value. March 4, 5: How can anyone use a totally manipulated rate of 2. Based on interest rates, it does look cheap.

QE and ZIRP have become the opium for the markets.

Thus if this is the new normal, then stocks are cheap. But the problem is it is unstable and thus the wariness and no euphoria and when not IF will it come unhinged is the only question waiting to be answered. It may be soon or years or decades though it appears very unlikely.

I like to call it as markets in suspended animation! It is all a circus now with the central bankers as ring masters. The smartest guys are the ones who have the gumption to participate and take money regularly off the table. Conscience of a Conservative said: The system was clearly rigged to suppress investments in risk free return instruments treasuries and aaa government bonds but that is beginning to change.

Positive yielding sovereign debt is ITSELF part of the rigged system since it constitutes welfare proportional to wealth, not need. Stock market has a duration risk of some 40 years seem to recall. Until rates rise to 4. Bond funds will catch huge hits in this scenario. Your view is the view of the majority and the majority is always wrong. It is the public sector that is in trouble. Therefore assets in the private sector are for choice. The suppression of volatility is real.

I doubt that will happen under Trump. I hear that stocks are being manipulated and that that the Federal Reserve itself has a huge portfolio of stocks. Of course a devastating terrorist attack or something that causes a loss of confidence in the worldwide banking system could be the catalyst for a crash.

Or something that happens to the bond market or the dollar could crash the markets. So I do believe the pessimists will be right eventually and it will be caused by the total loss of confidence in risk assets as liquidity is lost when leveraged derivatives explode as debt can no longer be forever extended.

March 5, 1: The majority of the people is still in bonds, bond funds and cash. And the majority is ALWAYS wrong. How does rebalancing help?

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It is itself a form of market timing and can take you out of stocks or sectors that have room left to run and replacing them with a stock that may be about to fall. March 4, 7: The underlying metric is debt supported by collateral.

Either debt must come down or collateral must be repriced. Paper assets like stocks, bonds, mortgage debt, and corporate paper must be repriced downward or debt must be paid back or defaulted. I suspect some of both will occur. Large federal deficits will provide for debt to be paid down shrinking bank balance sheets and so opposed by them. Paper asset price reduction will hurt consumption by reverse wealth effect so will be last choice of central bankers.

Some debt default is unavoidable especially student debt.

The fed will purchase and eat this. All of this will create volatility. March 4, 8: Only thing left for the alchemists to do is go cashless. The circle will be complete, and liquidity will never again be a problem. Livings standards might suffer for the prols, but the elite will be hedged. The FED rigs the FED rate. FED governors open their mouth to manipulate the stock market.

London daily gold fix was rigged. JP Morgan trading desk had 2 losing days in two years. Mathematically not possible unless something is being rigged. HFT servers sit next to the exchange floor, front running order flow. Banks trade their own stock in dark pools. Rigging takes many forms and enriches a select group of people. March 6, 4: There is no way Buffett is buying at the bottom. In the market crash, banks tried to support the market by buying stocks.

They failed, and so will Buffett. You are commenting using your WordPress. You are commenting using your Twitter account. You are commenting using your Facebook account.

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Don't Miss an Article. Is the system rigged? If so, is this the end of volatility? Axel Merk explores those questions in this guest post. Fake Risk, Fake Return? The system is rigged For those that say the system is rigged, I concur. Risk is Merely Masked In the past, I have compared central bank efforts to suppress risk akin to putting a lid on a pressure cooker.

Investors Desperate for Insurance? Buying the Dips Can be Irresponsible When markets are in a panic, the pundits tell us to buy the dips. Here is a handfull of pertinent Tweets from John Hussman. About Mish Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. That was not a reply to the previous post, and I have to learn how to post.

Maximus Minimus — Perhaps we can discuss a merger. Like Liked by 1 person Reply. Berra Like Like Reply. CoC Positive yielding sovereign debt is ITSELF part of the rigged system since it constitutes welfare proportional to wealth, not need. People always crack me up when they talk out their ass about volatility. I prefer Las Vegas to gambling with stocks. That IS the plan. Go back to sleep now, counting your stock market profits like little sheeple. A group of elitists meet in Davos every year.

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