Are The Markets Rigged?

20232305_sLast week John and his very lovely wife Stephanie, from Sandwich, came to my office seeking advice. They have been “do it yourselfer” investors using a big Boston brokerage house for almost twenty years. They said that they were “hurt” in down years such as 2001, 2002, and 2008, but not nearly as much as the average investor who lost about 37% of their portfolio. They hold stocks, bonds and mutual funds and feel that they cannot compete with the institutional or high-frequency traders.
You know something, they are right!
But I explained to John and Stephanie that the real threat to everyday investors, like them and me, is the Federal Reserve. They continue to put short-term interest rates at near zero in order to stimulate the economy. As a result of through the endless quantitative easing, the Fed has forced longer-term interest rates lower than the market naturally would.
Consequently, they have forced investors, many of them pre-retirees and retirees, into higher yielding assets, like stocks, thus creating the bubble we are now seeing peek for the third time. The first time was in 2000, then 2007, and now again in early April. The concern I have for our Cutter Family Finance readers is this . . . when the third bubble pops, what is your strategy to avoid the losses?
So, here is the issue…
When short-term interest rates are so low, hedge funds and traders can lever up at low costs. This means they can trade at 30 to 50 times leverage (or take on more debt) with low risk because the Fed has pretty much guaranteed it won’t let the market or economy go down too much without stepping in with larger stimulus plans.
While Ben Bernanke from the Federal Reserve started the stimulus, his successor, Janet Yellen, is even more dovish than Bernanke. She’s all for stimulus, as long as necessary, to keep the great bubble from bursting. How’s that for a long-term strategy? That is like a guy who is going into bankruptcy who is taking on more debt to cure his debt problems!
Hmmmm . . . this is crazy and someone is going to get hurt.
Unfortunately, the larger traders, beyond those who partake in high frequency trading, do dominate the market, thanks to those Fed policies.
You see, in a normal market, such traders’ activity would only be about 10% or so of the volume of trading, and that’s healthy. It keeps the markets in check over the short-term. But these markets are nowhere near normal. Currently, the big guys make up 50% plus of the market volume with their unprecedented leverage.
I explained to John and Stephanie that their instincts were right, as an everyday investor or trader, you don’t stand a chance against these big guys. They have better information and are closer to the markets. And, they’re almost always one step ahead of you.
Some of that is from high-frequency traders that are one tick ahead of us . . . but most of it is from larger traders and hedge funds that make a living looking at what smaller investors and traders are doing, and then doing the exact opposite.
Think of it as the big guys as the “sharks” who are feeding off the “minnows” like you and me!
They don’t care if the market goes up or down, and more often than not, they don’t follow fundamental trends. They just see markets going up and when they sense that the market has gone up too far, they jump ship, usually when the little guys have gained confidence on the run up.
Then, they buy when you panic on each downturn. This is the threat to you as an individual trader or investor.
I will tell you, Cutter Family Finance readers, the same thing I told John and Stephanie. Rather than trying to beat the sharks, educate yourself and find a trading and investing strategy that works for you, and then stick to that. Whatever you do, do not chase the markets, up or down.
And watch out ahead. This latest bubble will burst and some experts believe it could be this year. Heck, John Bogle, the president of the brokerage house Vanguard and the forefather of the buy and hold strategy, states that we could see 2 more significant market corrections of 50% or more by the end of the decade. Then he says just hang in there. Seriously? In my opinion, that is not an effective strategy. What is your strategy to avoid this potential downturn?
We could potentially see one of the greatest stock and financial asset burst, since 1930 to 1932, just ahead! But that’s the beauty of following the right investment system. It should help you during the ups AND downs. Seek financial strategies that are designed to work in your favor, regardless of the direction of the markets. And do not let your broker or your brokerage house tell you that you must buy and hold; it may cause you financial disaster! Then what? Now is the time for you to take financial responsibility. If you don’t . . . who will?
Be vigilant and stay alert, because you deserve more!