WASHINGTON, February 8, 2018: Budget issues, temporary government shutdowns, interest rates, bond prices, issues with ETNs associated with trading volatility, aka, the VIX? You name it, the financial pundits have an easy answer for why stocks continue to get killed in February thus far. But maybe there’s a simpler answer. Maybe a bunch of clueless morons have taken over the market, a bit like the inmates taking over the asylum.
After positive looking futures Thursday morning, stocks raced out the opening gate for a short, sharp gain at the opening bell, only to succumb, within what seemed less than a minute or two, to another avalanche of relentless selling action, very likely courtesy of February’s brigade of morons.
As we write this – approximately 12:30 p.m. ET – the Dow is off over 500 points, having earlier hit a low of around negative 450. That’s in excess of a 2 percent loss on the day thus far, making it apparent that the Dow, at least, has now entered official correction territory today. (UPDATING: The Dow has now plunged over 600 points as of 1:15 p.m. ET.)
The S&P 500 and the NASDAQ are also getting hammered today, off by nearly the same percentages as the Dow.
All this crashing and burning is taking place as positive economic news continues to roll out. Jobless claims reportedly hit a 45-year low, totaling approximately 221,000, with that number having dropped from 230,000 a week earlier.
Meanwhile, wage increases and bonuses continue to accrue for American workers, and corporate earnings continue, for the most part, to impress on the upside. Maybe a cadre of market morons are simply getting sick of all the winning.
At any rate, all this good news has stirred the bond ghouls into action. After backing off their relentless dumping of bonds Tuesday, they’ve been back selling bonds and related instruments with a vengeance, causing interest rates to spike actually in excess of what the Fed has been planning. This, in turn, is putting relentless pressure on stocks.
But according to CNBC’s longtime, always-controversial but often right Jim Cramer, “This week’s crazy market swings are largely due to a band of uninformed investors caught out speculating.” Those would be the morons we’ve been referring to.
We’d agree that the idiotic and out-of-control trading of little known speculative investments that mimic the movements of stock averages got out of hand late last week and continues to be a major cause behind the recent bout of serious market weakness. But Cramer manages to nail the increasingly likely reason in no uncertain terms.
“‘A group of complete morons’ who traded little-known, leveraged products that bet on volatility are ‘blowing up’ everything, Cramer said on ‘Squawk on the Street.’
“This week, Cramer has been particularly critical of those who put money into the VelocityShares Daily Inverse VIX Short-Term exchange-traded note (XIV) and the ETN itself.
“The XIV is supposed to give the opposite return of the Cboe Volatility Index (VIX), which is often referred to as the market’s fear gauge.
“‘What bothers me is the people who have never looked at a stock and don’t know how to analyze it [are] out in full force today,’ said Cramer, the host of ‘Mad Money.’
“‘They’ve never been better about not knowing anything about the stocks,’ he said. ‘They got it all figured out,’ he added, sarcastically.
Laugh at Cramer all you want. A moron brigade of commenters does so every day on any number of web sites and news sites. Cramer can indeed be out to lunch. But then again, so can anyone else in this business.
In truth, Jim Cramer was a former long-time hedge fund manager. While in this business, he battled a previous generation of wealthy and amateur idiots and competing hedge funds himself back in the day and he knows what he’s talking about when he discusses market shenanigans and manipulations that take place behind the scenes.
Most market commentators, including me, have long worried about the misuse of leveraged short ETFs and ETNs (ETFs and ETNs that magnify positive returns as well as losses by using borrowed money or shares) by professional investors and amateur investors alike. To his credit, Cramer himself got involved in the criticism of these high-risk exchange-traded vehicles very early in the game.
Back before such instruments existed, the only ways you could place risky bets on the downside of anything in the securities business were pretty much limited to shorting stocks, buying and selling stock options, or taking risks big-time by trading commodities and futures.
Than as now, however, average investors wanting to trade options or short stocks still have to sign a lengthy, fine-print agreement with their brokerage house to do this. These agreements, after all the lawyer verbiage is done, basically state that the investor is fully aware that he could lose his ass in these investments and agrees to indulge in them anyway.
Further, smaller investors and proverbial little old ladies were deemed “unsuitable” to invest in these vehicles due to the risk involved. Brokers who talked such investors into high-risk investments were liable to lose their jobs if their investors’ risky business suddenly did a 180.
The problem is that volatile, highly leveraged ETFs and ETNs, whether long or short, leveraged or not, are treated just like any other stock on the exchange. That essentially means that basically anyone, including small investors and those hapless little old ladies can invest in an absurdly risky ETN like XIV without having to sign any warning agreements or notices at all.
Why this situation has been allowed to stand, I don’t know. Greed on the part of the institutions that create leveraged ETFs and ETNs, perhaps?
But the proliferating number of leveraged and risky ETFs that are available to anyone at all, regardless of suitability, should either be restricted or banned outright. No one in Washington or New York seems to care.
Thus, a major reason underlying this week’s awful market crash remains available to kill again. Sure, there have been a lot of other reasons why the current bull market was ready to correct. But the potent selling arguably caused by the morons who over-used misunderstood leveraged ETNs, in this case, has turbo-charged the current decline, which, effectively, won’t end until all these moronic, uninformed bets are finally un-wound.
It’s a scandal, and, quite frankly, there oughta be a law.
While we all fume and pound the table, frustrated by the futility of it all, perhaps we should take a time-out and get a glimpse of how a trio of real morons conduct their business in public: