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Feb 20, 2003 to Feb 6, 2013

Stock Market Volatility and The Little Guy


About six weeks ago, even those of us who are barely paying attention started to hear ominous reports out of China. The stock markets in the world's second largest economy had taken a turn for the worse and were shedding value to an alarming degree – 7% one day, 8% another, to the tune of a whopping 35% by the time Black Tuesday rolled around. This occurred despite continual action on the part of the Chinese government since May to shore them back up or at least stop the bleeding. Market turbulence had set in and the central banks of that country seemed powerless to stop it. Watching all this from half a world away, the big question on everyone's mind became: when is this going to hit us? On August 21, 2015, it did. The Dow plunged over 500 points that Friday and another 500+ the following Monday. The race was on. How low can it go?

In China, the cause of market problems seems to have been rampant speculation, often on borrowed money, leading to a bubble that was ripe for pricking. As the Chinese markets relentlessly fell, their Central bankers did what any central bankers would do in that situation – they intervened, cutting rates, introducing trading limits, devaluing the yuan, and even banning negative remarks by pundits. It didn't help. Chinese markets kept dropping and by the time August rolled around, world markets were dropping with them.

Here in the US, our own central bankers have not been idle. As the great unraveling stretched into a third day, Federal Reserve vice chair Fischer suggested that a September rate hike (the great bugaboo of this latest financial crisis) was perhaps not as likely. Markets rallied briefly, then dropped again, on news out of Jackson Hole, where the big wigs of the Fed happened to be meeting that week, that a rate hike was still on the table for this month. Meanwhile, non-mainstream commentators joked about the Plunge Protection Team engineering early morning rallies only to see them fizzle later in the day (Plunge Protection Teams of the world, unite! read one headline).

As of this writing, US and other world markets are still “volatile,” despite bullish pronouncements from Morgan Stanley and others that imply that the bottom has been reached. We can only hope so, as the various indices have dropped precipitously since their latest high on July 20. The S&P is down 207 points since that date (9.7%), the Dow 1998 points (11%) and the Nasdaq 535 points (10%). This is what they call correction territory, and it happened fast.

If it was just Wall Street traders and big money players who are affected by this volatility, it wouldn't seem like such a big deal. We could watch placidly from the sidelines while the billionaires and their minions battle it out. But since the 1980s, the US stock market has not been the province of the high rollers alone. Regular Americans, including most current and future retirees, have been in there too, watching the values of their portfolios dropping by the day. Dependence on equities, usually in the form of mutual funds, has been exacerbated by Fed policies that have kept interest rates at near zero for almost seven years. When the average 60 month CD earns less than 2.5%, many smaller investors see equities as the only way to grow their portfolios.

And that's when this all starts to seem kind of cruel. The government and the banking industry have all but forced people into the game, despite the fact that the cards are hopelessly stacked against them. How can a mutual fund investor make money when computer algorithms and sophisticated players are controlling most of the trading? For the last year, many mutual funds have barely broken even, and now this... What options remain for the little guy?

There was a time when most retirees and savers alike kept their money in long term savings certificates, and although the return could be modest, at least they saw some growth in their savings. Now, many mutual fund investors in “safe” plans are lucky if their holdings even retain their value. Compounding their misery, the advice of money managers as late as last week was “Ride it out,” based on the assumption that what goes down must eventually come back up. The question is, how long is eventually?

Gambling with your retirement savings seems like a bad bet, unless you have the stomach (and the time, depending on your age) to wait out a protracted downturn. My guess is that most of the smart retiree money is already parked in money markets, waiting it out. Alas for the rest of the herd who are now stuck waiting for their portfolios to recover, however long that takes. They are, as one pundit described them, the proverbial “bag-holders.”

In a global economy, rife with market manipulation, state-sponsored currency wars, and other forms of financial skullduggery, the stock markets are no place for sober-minded investors who just want to have comfortable (i.e, not impoverished) golden years. As for the central bankers' response, it appears that we're now in a tight corner as raising rates is likely to strengthen the already mighty US dollar causing further pain in emerging and emerged economies around the world (thus increasing the risk of knock on negative effects here), while leaving rates at zero only continues the small investors' dependence on equities with all their attendant risk.

The US economy may be strong, as many inside and out of the government insist, but in the globalized economy of today, there may be no way to insulate small investors from world economic trends. Therein lies the rub, and it's a conundrum that could leave small investors with no place to turn.

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Stock Market

Sadly Lise, WE are the minions. We give our money to the mutual funds because it IS the only game in town that gives you a hope of a decent retirement. By doing that we are held in the sways of people that bet for the market and against the market. Our only hope is that when we need the money , it isn't at a low point. There is smart money making money every day in the market because they have courage and a big bankroll to do it. There are many stocks which have gone up substantially in the last year if you can pick them right. The minions just give there money to others because they don't have the time, knowledge, or courage go it alone. I am one of the minions. I get swept along by the ups and downs of the market and don't worry much about the volatility. I know history has indicated in the past that the market will rebound and go even higher, eventually. Such is life in a minions world. I don't know how much "smart" money is in money markets as inflation and taxes erode most of the little gains one gets.

 
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Minions

First off, I want to say that I never meant to insult anyone although the choice of the term "smart money" was probably poor or at least insensitive. I only know one investor personally who moved their money into money markets, out of worries about China, and they did so over a month before the markets here began to fall iin earnest. Everyone else I know -- retirees all -- stayed put. So by smart money, I guess I meant people who read the tea leaves right, which is to say, they got lucky. I'm still not sure that temporarily protecting your money by putting it somewhere where it won't lose quite so much so fast is a bad thing though. I'm not much of a gambler, and for the record, I'm even less than a minion having no money to invest in anything at the moment. Overall, I have nothing but sympathy for the predicament of the average middle class investor. Like I said above, there used to be alternatives. For the sake of all of us, I wish there still were.

 
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Minion

I wasn't offended by anything you wrote. Your definition of smart money is spot on. The average middle class person has had their wages stagnant for 40 years and low interest rates for many years keep them behind the eight ball. I remember in the 80's when banks were paying 15 % on accounts. I refinanced at 14% and was happy.

 
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Diamond Jim

This all comes at an interesting time for me. I'm reading about Brattleboro's wealthy son, Jim Fisk, Jr.

What a guy. Reading this bio has opened my eyes to the conniving, backstabbing, manipulative, gambling that was par for the course just over a century ago. I'm sure the robber-baron DNA is alive and well in the world markets today.

Here are a just few things that he and Jay Gould were inclined to do to make money:

- Suddenly issue quantities of stock in the Erie railroad and either dump them on the market to crush a competitor, or trick others into buying.

- when the stock market wrote rules forbid hijinks, and shouldn't sell untrustworthy Erie stock anymore, they rented a place across the street and started their own stock exchange

- they made deals and bought off politicians, lawyers, judges, thugs, and such - so that anyone suing them would end up losing

- they'd sue others and serve them with papers, from their own courts and judges, enjoining their competitors from taking any action, thereby tying them up in courts and jails.

- when papers were to be served on them in NY, they fled to NJ and set up shop there instead, carrying close to $8 million in a bag - all of the Erie's holdings.

- while in Albany, Fish learned that papers were going to be served on him, and they were coming up from NY by train. He shut down all train traffic to prevent the papers from reaching him and being served.

- they had insider information, with friends at the top levels of government ready to tip them off about changes from the Treasury, so they'd have advance notice and could act before others.

- Fisk wanted to make some cash off of selling southern currency to London during the civil war. He realized that he had a 10 day advantage, news-wise. he and some friends sent a guy with a fast boat far up the east coats and installed a telegraph line specifically to give him a secret command. When Fisk knew that the South was surrendering, he wired the guy, who set off in his boat to London with orders to sell them as much southern currency as possible. He did, they bought it, and within a few days they learned it was all worthless.

- they would make agreements with Vanderbilt and others to make deals, but they'd backstab one another, and get into wars of legal proceedings, then settle them with payments of money, stock, or legislation pleasing to both sides.

- he bought and fitted up an opera house for the offices of the Erie, then bought up the 9 surrounding blocks. Here he was actually a bit nice… he told a local cop to send any widows or struggling families to him, and gave them assistance, such as coal or flour.

- he tricked someone into selling him profitable steamship lines by making it look, in the newspapers, as if he was going to build a competing line.

Much of his trickery was possible due to the slow rate of information moving (relative to today). It took a few hours, or days sometimes, for news to spread. Advance insider info was very profitable.

What it reminds me, again, is that just because we're nice and wouldn't do something doesn't mean someone else wouldn't do it, especially if money is involved.

And also that the insiders and big players know each other, talk to one another, and scheme against the general population for their mutual gain. If my pal at the Fed tells me, off the record, that interest rates will go up next week for certain, that is worth a lot of money, and I can rip off a lot of people by knowing it.

Same with stocks. If I have info that more shares will be put on the market (or bought up) before others do, I can run circles around others who don't yet know this.

Final thought - Bloomberg has a good, short interactive piece about how traders today spoof the market. In under one minute, they place fake buy orders, get others to follow, then dump their order before the minute is over, making a bunch of money.

How to Catch a Spoofer

 
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Robber Barons

I enjoy reading about those guys and their corporate manipulations. I think it is all happening again with a lot of recent mergers with the blessing of the government.When the corporations buy our politicians and actually write bills, the common people are sure to get the short stick. Here's an uninteresting fact, I had a friend who drove all the way to see Fisk's grave from Allentown, Pa and went home the same day.He was really fascinated with him.

 

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