Sunday, April 6, 2014

Of Course The Stock Market Is Rigged - But ...

Earlier this week "some dood with a book" (Michael Lewis, in the book Flash Boys) made news headlines by taking about the stock market being rigged for the high frequency traders.  His argument is that they get ahead of the market by milliseconds - by buying the fastest network connections money can buy - and take advantage of the rubes. 

Whether this is true or not, I can't tell you.  Predictably, all the cable finance shows, finance magazines and columnists repudiated the idea (for example).  I say "predictably" because to the man (or to the info-babe), they push Wall Street as the only way an individual can build wealth. 

The problem is that the market is rigged, and it's rigged in ways nobody is talking about; it's rigged by a combination of the Federal Reserve and the too big to fail (TBTF) banks.  The endless creation of "money" out of thin air is driving the market prices up.  I've written before that if you try to compare the major market indices to any standard of value: gold, silver, or any commodity, the Dow peaked in 2000 and has been losing value ever since.  Even if you just look at the annual inflation rate reported by Shadowstats and divide the DJIA backwards, you find this. 

If you get nothing else out of my ramblings, get this point: what the Fed is doing to the market is helping nobody but the institutional traders who buy and sell from each other and their infrastructure.  A simple example might help.  If the market is truly healthy and populated by successful companies, they pay earnings or dividends.  Some stocks, especially the tech stocks, value growth over dividends or earnings and the goal is for them to go up in price, perhaps split to more shares at lower prices.  The "blue chip" stocks emphasize dividends and paying stock holders.  According to The Motley Fool, Exxon Mobil, paid dividends of 63 cents per share this past quarter, for shares that cost $97.32 (0.65%)  Five years ago, the dividends were 42 cents per share on shares that cost $69 (0.61%).  So just how has the higher stock price benefited anybody?  The stock costs 41% more today and you're earning marginally lower dividends per share.  You're certainly not earning 41% more dividends for a stock that's 41% more expensive!  Why would I want to pay more for a stock giving me the same percent dividends, let alone paying slightly less?  

But the broker who sells the stock to you is earning a bigger commission based on that higher price. He must love the Fed.
Remember, Janet said if she could make you pay a penalty to save money, she would. 


  1. True and inflation favors institutions in that they receive the liquidity injections (freshly printed funny money) first and are able to buy at normal prices. After that money flows through the economy and hits our wallets, prices have adjusted up to reflect the larger pool of cash. We pay the higher prices while the institutions and well connected do not.

    In effect the poor and middle class are subsidizing the rich with the current Fed policies. If average folk ever understand this en masse, we might see an American Spring.

  2. I think I'm with you, but what does "divide the DJIA backwards" mean?

  3. Mike, with regard to your last paragraph, there's a quote credited to Henry Ford, "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

    Anon - I apologize for the atrocious English. What I meant is that if you go to Shadowstats, you can make table of inflation values per year from 2000 to now. Take the end of year DJIA value and divide by inflation; if inflation was 9%, divide by 1.09. Then take that number and divide it by the previous year's inflation. Then repeat. That gets you to what the DJIA would be if there was no inflation.

    My rough numbers show that this year's high DJIA close of around 16,5000 would equal a year 2000 DJIA of 5040. The Dow was around 10,000 that year, meaning it has performed worse than just the inflation rate. Money in market has lost value as it inflates away.