“Where is Everybody?”
- Joshua M Brown
- May 7th, 2012
The New York Times dredges up the open secret that no one is in the stock market anymore. Nathaniel Popper plaintively lays out the statistics and then consults a handful of sources to understand what's going on...
Trading in the United States stock market has not only failed to recover since the 2008 financial crisis, it has continued to fall. In April, the average daily trades in American stocks on all exchanges stood at nearly half of its peak in 2008: 6.5 billion compared with 12.1 billion, according to Credit Suisse Trading Strategy.
The decline stands in marked contrast to past economic recoveries, when Americans regained their taste for stock trading within two years of economic shocks in 1987 and 2001.
Allow me to be of assistance as to why there's no recovery in stock trading like there was after past recessions and crashes:
They sold us out. The NYSE and Nasdaq decided to go for-profit under the auspices of raising the money necessary to compete with foreign exchanges and other upstart trading pools. They needed to revamp the machinery of trading and modernize their systems. Apparently, this meant opening the back door to a host of ghouls and goblins who pay extra for the right to co-locate their servers and see the orders of the public in a speed that is somehow faster than real-time. This has enabled them to pick the pockets of mom and pop on every single transaction they make. And they do this under the guise of the dubious "liquidity" their activities are adding to the market. These thieves are the number one revenue source for the NYSE, after the snack bar, the gift shop and whatever concession they can command from the television studios that have set themselves up on the premises to capture all the inaction of the floor and its dwindling trader population. Why the exchanges couldn't just be a public institution serving the well-being of the country I'll never understand. They are now set up as a pimp, selling us and our orders to the most salacious and active johns they can find. This is how a high frequency trading robot based in Kansas, far from regulatory scrutiny, can drive a million "normal investors" away each month.
In addition, the most spectacular stories of investment success this decade, ex-Apple, have all occurred away from the public markets. Facebook is only one example of many. The exchanges and public markets are now used as exit ramps and liquidity dumps once the real money has been made by the well-connected private investors and LBO shops. They use the stock market as a restroom now, the meal itself is consumed elsewhere behind closed doors.
On top of that, active investing has been shown to be essentially a farce - a game show where everyone gets the runner-up "participation trophy" and the managers themselves are the only winners, even when they lose. People are not interested in playing the game anymore. The market has gone nowhere and so have a majority of individual stocks. The public is sitting in passive index ETFs now, no need to trade or to have a broker or mutual fund manager buying and selling things on their behalf.
And how about the disconnection between the economy and the headlines vis a vis market performance? The action in the markets versus the global realities around us has never felt more out of place and jarring. Regular people read the newspaper and then they look at the stock market and the two seem completely irreconcilable. Almost like it's all a giant joke. And it is, the Fed is supplying the punchline. But people aren't laughing.
Also, the junkies have moved on. They've found a less-regulated alley to shoot up in and are now pursuing the higher highs involved with currency trading and forex as well as options and futures. Stocks are like broken-down horse-drawn carriages in this context, the leverage and action of the new markets are significantly more alluring for active traders.
Lastly, we've grown older and grayer. The boomers are no longer in the wealth accumulate phase as we call it in financial [planning - they are now in the preservation of capital and income distribution phase. They are laughably attempting to make it for the next 30-years on nothing but miniscule bond income. It won't work, of course, but let's not ruin it for them. A rudimentary glance at the inflow-outflow data between stocks and bonds each month is a reminder of which way the sheep are being herded.
The population is aging, disgusted, disillusioned, excluded from the best action and tired of the game overall. They are net sellers of $377 billion worth of individual bonds and stocks each year. They will not be coming back until the HFT shit is banished and young companies begin listing early enough so that there's room to make money on their stocks.
They'll not be returning until the next generation gets some investable wealth and shows up unhindered by the ghosts of 2000 to 2008. It's gonna be awhile.
And that's where the volume went.
Paradoxically, this entire dystopian rant actually sums up the bull case for equities and investing rather nicely. There's very little room for things to get any worse and the piling up of negatives is usually what you get at the bottom of a cycle rather than at a top. So smile. It won't always be thus, history teaches us that the darkest hour does, in fact, occur just before the dawn.
It's all in the book, read it:
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.