How should I make investment decisions in uncertainty? Not like the guy that cornered me at a party in mid-December: “Washington’s gonna fix the Cliff, the Fed’s gonna inflate the hell out of the dollar, and stocks will go up big for six months,” he declares. “You might be right,” I say, slipping adroitly out of his grasp, pretending to make for the shrimp dip.
Later, it comes to me. The dude is bullish because social mood is bullish, so he is long the market (he owns stocks). Needing something rational to hang his hat on, he tunes into CNBC so that Kudlow, or Cramer, or some other blowhard can reassure him with some facile bullshit about that which nobody knows, namely, what’s gonna happen down the road.
At least he’s succinct. The brokerage firms where I keep my cash send me twenty, thirty page glossy reports with imaginative chart projections that say the same thing. Sucker bets, all of them. It’s the agency problem: the guys rendering the “advice” have no skin in the game. TV talking heads make tons of money shilling for brokers. Brokers and bankers make tons of money “advising” suckers to buy stocks. Either way, there’s no skin in the game.
To be a non-sucker, I will look at what is, not what might be. Here’s what is: In the futures markets, The Commitment of Traders Report is out, showing that Large speculators have record long positions in stock index futures (they own ’em). Small speculators are similarly positioned. On the other hand, commercials (Wall Street insiders) have huge, huge short positions, representing a bet exactly opposite to speculators.
Positions on both sides are extreme. When a condition like this emerges, the winners are going to be the commercials. Do commercials know what they’re doing? Hell yes! The futures market is elemental capitalism–a zero sum game in which those that know the game (commercials) take all the money from those that think they know the future.
At some point, the extremely well capitalized commercials will wade in, shorting hundreds of thousands of new futures contracts, slamming the market down, forcing the specs out at big losses while the big guys cover their shorts at huge profits. “I got your future, suckers,” the commercials will holler as they gleefully rip the faces off the speculators.
Weakness in stock futures immediately spills over into the stock market, where traders are heavily long on margin debt that is closing in on the all time records. They’ll be next to be forced to sell to meet margin calls, further depressing the market. Eventually, forty-seven million 401k investors will give up on stocks, probably after their accounts have been halved by the preceding bloodletting. We’ll be approaching the end, but, given the size and extent of this mania, nothing less than a full liquidation by all participants will be required for the washout.
I hold cash because risk bets need to be made with asymmetric payoffs. That is, the upside has to be more, a lot more than the downside. At the moment, the stock market has it the other way around. When it changes, I will change.
No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.