Juggling Dynamite

Ms. Park was the guest Portfolio Manager on BNN Market Lookahead, Thurs July 24, at 9:20 am. The clip will be available for a limited time afterwards on the BNN web site here.

Free market forces are routinely given great credit as wise and omnipotent. That is, so long as asset prices are rising. Once the inevitable price corrections begin however, there is typically outrage and demands for government intervention to step in and save us. This common pattern was evidenced last week as the SEC announced vague new emergency restrictions against short-selling. This initially prompted a short-covering rally in stocks that is likely to fade out again over the coming days and weeks.
As Spencer Jakab points out for the Dow Jones Newswire today in The mother of all short squeezes may end badly:
“The fact that the initial results were spectacular, particularly for financial stocks, shouldn't be too encouraging. Consider what happened in April 1932, at the depth of the worst-ever bear market. Upon the announcement of a cumbersome new rule that required written permission from each shareholder before a broker lent out his stock, the Dow Jones Industrials rallied 3.51%. By the time the rules were instituted weeks later, the short covering was over and the slump had resumed…
An extreme example comes from Pakistan where the local SEC responded to a stock slump last month by banning short selling and limiting daily price declines to 1% while allowing them to rise by 10%. The initial reaction was a massive 8.6% one day rally followed by 15 straight days of slumping prices amid extremely low turnover, the worst such period for that market in several years. As rioting investors stormed the Karachi Stock Exchange last week, the rules were rescinded.”
As I have said before, things are not bad or dangerous today because I say so. Things are bad because 'we' have made them so through years of systemic abuse and poor planning.
As Jim Grant wrote in the Wall Street Journal this past weekend in “Why no outrage?”:
“Today's bear market in financial assets is as nothing compared to the preceding crash in human judgment. Never was a disaster better advertised than the one now washing over us. House prices stopped going up in 2005, and cracks in mortgage credit started appearing in 2006. Yet the big, ostensibly sophisticated banks only pushed harder.”
Wall Street and big banks have not made billions over the past few years because they are smart and nice; they have done so because they are largely sociopathic and greedy to the point of self-destruction. Unfortunately through wanton collusion, they, and the masses, have now engineered our economic downfall– again.

This story from the Pakistan Daily Times caught my eye this morning. Panic continues to build as this bear market grinds on around the world. I am reminded of the angry employees and investors who were storming Bear Stearns offices when I was in New York in May. Now investors in Pakistan are taking to the streets in frustration and anger to protest recent stock market losses:
“Thousands of angry investors, enraged by the persistent decline in share prices, protested on the floors of stock exchanges in Karachi, Lahore and Islamabad on Thursday, demanding a temporary closure of the markets.
A slump in investor confidence accelerated as stocks fell over four percent and the rupee dropped by 1.3 percent around midday due to fears of political uncertainty and dire economic challenges, including a double-digit inflation rate.
Small investors gathered at the trading hall of the Karachi Stock Exchange (KSE) around 11am and began shouting slogans, while some protestors broke windowpanes and furniture at the trading hall. Edhi sources said at least three people were injured in scuffles with the police officers deployed to handle the situation…
Investors demanded that trading at the KSE be halted for a few days in view of the continuous decline in share values.”
See: Investors enraged as stocks plunge
This story exemplifies a common element of capital markets. Most investors understand so little about how markets actually work or the often dangerous and speculative forces that drive them. Most people are happy and complacent when things are going up but when the inevitable corrections take hold, few are prepared, and many are hurt and most are angry after the fact at the institutions for their losses.
Methodically controlling our individual exposure to capital market cycles is the only hope for retaining gains and avoiding big losses. This takes a proactive, self-disciplined, management style, focused on preserving and protecting our capital before it can be trampled by the masses. As people all around the world are learning once again, buy and hope is not a wise strategy. And it is often a recipe for great human trauma.