The damage this week to investor psychology is severe. With each 500 point swing in the market we lose individual investors who feel there is no way to win. Every day more investors view the market as a rigged casino where only those on the inside make money and the rest are pawns.
Given what we have seen in the last two weeks who can blame them.
5 Steps to Save the Market
5 Steps to Save the Market
- Re-establish the Up Tick Rule - Do it as a trial. Eliminating the ability to short stock on a down tick would at the very least slow down High Frequency Trading which is responsible for the monster moves in markets that is forcing real investors to the sidelines. I couldn’t agree more with Neuberger Berman’s Marvin Schwartz when he made the statement "High Frequency Trading adds very little to the economy". Where is the investment if the capital invested has a life span of minutes? I find it laughable when proponents of HFT talk about the liquidity added. As a professional money manager I assure you it can disappear in a nanosecond. As I have said in previous articles the machines are compressing months into weeks and days into hours. If we continue at the present pace there will be a market accident leaving machines trading with machines in some sort of pornographic stock market masturbation. Washington and regulators will respond with their usual “Close the barn door after the horse is gone” action plan.
- Tax Reform – I am not going to use this forum to duke it out with those on the left calling for tax hikes on the “rich” or those on the right demanding that taxes be cut. Most Americans with the possible exception of accountants and tax attorneys know the current system is broken. Any system as complicated as our present tax code invites loopholes, corruption, fraud and cheating.
- Fed needs to refocus – The Fed has two mandates. Stimulate output in the short term and a long term goal of price stability. We all know that Ben is a student of the Great Depression and that he places a greater emphasis on the destructive power of deflation. In the past the focus of the Fed has been to stimulate the economy and asset prices would follow. With programs like QE II Mr. Bernanke had hoped that by inflating asset prices the economy would follow. Once off life support the economy soon started to falter. Many are calling for a QE III but I doubt in the current environment the political will is there. Anything that could jeopardize the US Dollar’s role as the world’s reserve currency could prove catastrophic.
- Glass Stegall Act - Bring it Back! The repeal of the depression era Glass Stegall Act during the Clinton Administration opened Pandora’s Box and the wall between investment and commercial banking activities was knocked down. Chief Executives at our largest banks like JPM JPMorgan know the biggest potential profits exist on Wall Street not Main Street. Once banks were allowed to merge with investment houses the seeds for the 2008 Financial Crisis were planted and the term "To Big to Fail" was born. The answer is obvious. Break up the Big Banks. If they are too big to fail make them smaller.
- Obama should cancel the rest of his vacation – Sure I know there is nothing he can do in two weeks but with the economy and markets on the brink Americans need to see their Commander in Chief huddled with advisors working on something that resembles a plan. Frolicking in the surf is not going to be a real confidence builder for the unemployed average Joe whose retirement is going up in flames.
On their own none of the above can cure the mounting problems in our financial system. We are going to need lots of common sense solutions to start turning this steamship around.
Let me know what you think. If you have an idea; share it here. I will be sure to respond and pass it on.
Disclosure: I am long JPM.