Nouriel Roubini: Stock Market is a Ticking Time Bomb
Dr. Doom himself is getting more and more alarmed at the state of the market, and again warning anyone who will listen that what is coming is going to be bad.
Very, very bad.
Many casual investors look around and think: Well, all that quantitative easing was not so bad. Things seem to be running fairly normally. I can still get gas, groceries, the things I need. I still have a job. We don’t seem to be the worse for wear, really.
And so they continue to doggedly put their hard-earned savings in stocks and bonds, expecting it all to be there for them when they retire, plus a healthy return. They figure all the doomsdayers have been proven wrong after all.
Not so fast, says Roubini, economics professor at NYU. It’s just that the overhang of all this newly created liquidity hasn’t hit us yet. It is hiding away on bank balance sheets and inflating the prices of all the stocks you buy. It is a ticking time bomb just waiting to blow up the economy. All of the damage is still building up as central banks continue to create even more liquidity in an illiquid world.
The market is in an unprecedented place right now with massive stores of liquidity on balance sheets coupled with extreme aspects of illiquidity. In short, the market is broken. It should be a place where businesses and investors go for opportunities for increased productivity, where capital is created and exchanged, where fundamentals determine wise investments. Instead, what we have today is very different. What we have today is more akin to a giant casino than a true capital market.
I want to hone in on one aspect of this dysfunction Roubini mentioned that is rarely discussed: High Frequency Trading (HFT).
HFTers actually play a major part in the brokenness of the market. Rarely is the effect discussed, but they are the next generation of day traders. Operating with complex algorithms that make high volume trades automatically, they tend to operate as a herd, or a flash mob, if you will.
HFTs represent a lot of dollars sloshing around rapidly, collectively, with not a lot of thought behind the purely reactive buying and selling. Roubini points out that they tend to be much more active at the beginning and end of the trading day, and thus, that’s when the market sees the most action. The rest of the day, the market is relatively illiquid, at a standstill. Thus, they are one example of the dichotomy between liquid and illiquid that we see in the market today.
The high volume of these trades means a few pennies or even fractions of pennies difference in price which means huge micro-short term profits. They might buy a volume of shares at $10 and sell at $10.01 a literal second later and make a tidy profit. But how is this “investment” in the true sense of the word? Think about it. It is just playing with stock prices and manipulating the market.
Yet High Frequency Trading makes up about 50% of the market, down from 70% or so in 2009. In May of 2010 it is argued that HFTs created a “flash crash” of the market, and the market is very vulnerable to the volatility that they have introduced.
In a sense, the market is a victim of its own advancing technology where high frequency trading is concerned. The better the technology, the faster the trades can be made, and indeed, HFTs compete ruthlessly with each other by trading faster than the rest, down to the millisecond.
So between irresponsible central banks creating oceans of cash, and market volatility exacerbated by these distortive technological “investment” tools, is your entire portfolio really safe in today’s stock market? Nouriel Roubini and many other noted economists are warning that this market will come crashing down – AGAIN -- eventually. Will it take your entire net worth with it? Or will you hedge against that danger with the solid, time tested value of gold and precious metals? In 8,000 years of human history, gold has never been worth nothing. Eventually, all stocks may be. Companies and blue chips come and go. Gold is forever. Call us today to get started.