{"id":49334,"date":"2014-04-02T19:37:02","date_gmt":"2014-04-02T23:37:02","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=49334"},"modified":"2014-04-02T19:37:02","modified_gmt":"2014-04-02T23:37:02","slug":"outside-box-hollow-men-hollow-markets-hollow-world","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2014\/04\/02\/outside-box-hollow-men-hollow-markets-hollow-world\/","title":{"rendered":"Outside the Box: Hollow Men, Hollow Markets, Hollow World"},"content":{"rendered":"

By John Mauldin<\/span><\/h4>\n
\"\" <\/p>\n

I\u2019m sitting in the British Airways lounge at Heathrow terminal 5, or in other words in my usual office, and trying to catch up on my reading. I was particularly intrigued by my good friend and economic philosopher Ben Hunt\u2019s latest Epsilon Theory<\/em> post, which he calls \u201cHollow Men, Hollow Markets, Hollow World.\u201d As he points out, an increasingly smaller portion of trading in the markets is between individuals looking to actually own a fractional portion of a public company for the long term. Instead, trading is gravitating to machines competing with each other in milliseconds and for a profit of milli-cents.<\/p>\n

I get the rationale behind the supposed benefits of high-speed trading; but I have to confess, I just don\u2019t buy it. If it was just another way to truly profit from normal commercial activity, I would pretty much have a hands-off attitude. But from everything I can see, high-speed trading is sucking billions of dollars out of the market that would otherwise go to individuals and institutions who are actually there to serve what was once the purpose of Wall Street: to provide new companies with capital and individuals with the chance to participate in the growth of the country. High-frequency trading is a zero-sum game. It takes money from \u201cus\u201d and gives it to funds with instant<\/em> access to the exchanges.<\/p>\n

The fact that high-frequency trading does not work half a mile across the Hudson River because even that short distance slows down the transactions too much, is testimony to the fact that something is truly out of whack. When the speed of light is a barrier to entry, you know we have entered a new era. I am not one to stand in front of the accelerating wave of technology and cry \u201cStop!\u201d I am rather simpleminded, and it seems to me that if you simply instituted a rule that all buy and sell offers have to at least exist for an outrageous amount of time like one half second, that it would at least begin to level the playing field. The fact that large institutions are gravitating to exchanges where high-frequency trading is not allowed is evidence that the deck is stacked against the smaller investor. A point here and a point there, and pretty soon you\u2019re talking real money.<\/p>\n

But in today\u2019s OTB, Ben Hunt doesn\u2019t really focus all that much on high-frequency trading but rather on the fact that so much of economics and investing itself is hollow. Our job, he says, is to find the signal amidst all the noise. This is an Outside the Box that you will need to think through as opposed to merely read.<\/p>\n

They will be calling my flight to South Africa in a few minutes. I\u2019ve been thinking back over the ten times or so that I\u2019ve flown to South Africa in the last 20 years. I first went there in the apartheid era. The moods in the country seem to shift with each visit. I can remember talking with people who were sure that South Africa would become the next Zimbabwe. \u201cApocalypse Now\u201d could certainly describe the mood of those times. And then there are times when there is an optimism so intense it is hard not to get infected. I wonder how South Africa will feel this time.<\/p>\n

South Africa really is one of my favorite countries in the world. I think my vote for most beautiful city would have to go to Cape Town (although I admit it comes down to personal taste, as there are quite a few spectacular harbor cities dotted around the world). If the weather permits, I will take my first hot air balloon ride. I\u2019ve tried three or four times over the years and always had bad weather postpone my flight. Flying over the African savannah, looking down on lions and elephants, antelope and rhinoceros, zebra and giraffe sounds rather idyllic. I need to enjoy my time at Kruger National Park, because my hosts have put together a rather aggressive schedule for next week. Even so, I will get to meet scores of South African businesspeople and investors and hopefully gain a renewed sense of where one of the more important countries in the world is heading. I will report back from the frontlines. Until then, have a great week.<\/p>\n

Your ready to be in a real bed analyst,<\/p>\n

John Mauldin, Editor
\nOutside the Box<\/em>subscribers@mauldineconomics.com<\/a><\/p>\n

\n

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\n

Hollow Men, Hollow Markets, Hollow World<\/strong><\/span><\/h2>\n\n\n\n
\"\"<\/p>\n

Apocalypse Now (1979), based on \u201cHeart of Darkness\u201d by Joseph Conrad<\/em><\/strong><\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Kurtz: Did they say why, Willard, why they want to terminate my command?<\/strong><\/p>\n

Willard: I was sent on a classified mission, sir.<\/strong><\/p>\n

Kurtz: It’s no longer classified, is it? Did they tell you?<\/strong><\/p>\n

Willard: They told me that you had gone totally insane, and that your methods were unsound.<\/strong><\/p>\n

Kurtz: Are my methods unsound?<\/strong><\/p>\n

Willard: I don’t see any method at all, sir.<\/strong><\/p>\n

Kurtz: I expected someone like you. What did you expect? Are you an assassin?<\/strong><\/p>\n

Willard: I’m a soldier.<\/strong><\/p>\n

Kurtz: You’re neither. You’re an errand boy, sent by grocery clerks, to collect a bill.<\/strong><\/p>\n\n\n\n
\n

\"\"<\/p>\n<\/td>\n

\n

It is my belief no man ever understands quite his own artful dodges to escape from the grim shadow of self-knowledge.<\/strong><\/p>\n

The question is not how to get cured, but how to live.<\/strong><\/p>\n

Joseph Conrad (1857 \u2013 1924)<\/em><\/strong><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Billions of dollars are flowing into online advertising. But marketers also are confronting an uncomfortable reality: rampant fraud.<\/p>\n

About 36% of all Web traffic is considered fake<\/strong>, the product of computers hijacked by viruses and programmed to visit sites, according to estimates cited recently by the Interactive Advertising Bureau trade group.<\/p>\n

\u2013 \u00a0 <\/em>Wall Street Journal, \u201cThe Secret About Online Ad Traffic: One-Third Is Bogus\u201d, March 23, 2014<\/p>\n

Over the last decade, institutional management of equity portfolios has increased from 54% to 81%. …<\/p>\n

Institutional buys and sells accounted for 47% of trading volume between 2001 and 2006, but only 29% of trading volume since 2008. <\/strong>…<\/p>\n

One of the most significant results of the tension between fewer market participants and larger parent order sizes is that the share of \u2018real\u2019 trading volume has declined by around 40% in the last five years.<\/p>\n

\u2013 \u00a0 <\/em>Morgan Stanley QDS, \u201cReal Trading Volume\u201d, Charles Crow and Simon Emrich, April 11, 2012<\/p>\n

I first saw Apocalypse Now <\/em>as a college freshman with two roommates, a couple of years after it had been released, and I can still recall the dazed pang of shock and exhaustion I felt when we stumbled out of the theatre. Nobody said anything on the drive back to campus. We were each lost in our thoughts, trying to process what we had just seen. Our focus was on Marlon Brando\u2019s Col. Kurtz, of course, because we were 18-year old boys and he was a larger than life villain or anti-hero or superman or … something … we weren\u2019t quite sure what he was, only that we couldn\u2019t forget him.<\/p>\n

When I reflect on the movie today, though, I find myself thinking less about Kurtz than I do about Martin Sheen\u2019s Capt. Willard. Both Kurtz and Willard were self-aware. They had no illusions about their own actions or motivations, including the betrayals and murders they carried out. Both Kurtz and Willard saw through the veneer of the Vietnam War. They had no illusions regarding the essential hollowness of the entire enterprise, and they saw clearly the heart of darkness and horrific will that was left when you stripped away the surface trappings. So what made Willard stick with the mission? How was Willard able to navigate within a world he knew was playing him falsely, while Kurtz could not? I don\u2019t want to say that I admire Willard, because there\u2019s nothing really admirable there, and this isn\u2019t going to be a web-lite note along the lines of \u201cThree Things that Every Investor Should Learn from Apocalypse Now<\/em>\u201d. But there is a quality to Willard that I find useful in recalling whenever I am confronted with hard evidence that the world is playing me falsely. Or at least it helps keep me from shaving my head and going rogue.<\/p>\n

The WSJ article cited above \u2013 where it now seems that more than one-third of all Web traffic is fake, generated by bots and zombies to create ad click-throughs and fake popularity <\/strong>\u2013 is a good example of what I\u2019m talking about. One-third of all Web traffic? Fake? How is that possible? I mean … I understand how it\u2019s technologically possible, but how is it possible that this sort of fraud has been going on for so long and to such a gargantuan degree that I don\u2019t know about it or somehow feel it? I\u2019m sure that anyone in e-commerce or network security will chuckle at my na\u00efvet\u00e9, but I was really rocked by this article. What else have I been told or led to believe about the Web is a lie?<\/p>\n

But then I remember conversations I have with non-investor friends when I describe to them how little of trading volume today is real, i.e., between an actual buyer and an actual seller. I describe to them how as much as 70% of the trading activity in markets today \u2013 activity that generates the constantly changing up and down arrows and green and red numbers they see and react to on CNBC \u2013 is just machines talking to other machines, shifting shares around for \u201cliquidity provision\u201d or millisecond arbitrage opportunities. <\/strong>Even among real investors, individuals or institutions who own a portfolio of exposures and aren\u2019t simply middlemen of one sort or another, so much of what we do is better described as positioning rather than investing, where we are rebalancing or tweaking a remarkably static portfolio against this generic risk or that generic risk rather than expressing an active opinion on the pros or cons of fractional ownership of a real-world company. Inevitably these non-investor friends are as slack-jawed at my picture of modern market structure as I am when I read this article about modern Web traffic structure. How can this be, they ask? I shrug. There is no answer. It just is.<\/p>\n

My sense is that if you talk to a professional in any walk of life today, whether it\u2019s technology or finance or medicine or law or government or whatever, you will hear a similar story of hollowness in their industry. The trappings, the facades, the faux this and faux that, the dislocation between public narrative and private practice … it\u2019s everywhere. I understand that authenticity has always been a rare bird on an institutional or societal level. But there is something about the aftermath of the Great Recession, a something that is augmented by Big Data technology, that has made it okay to embrace <\/em>public misdirection and miscommunication as an acceptable policy \u201ctool\u201d. <\/strong>It\u2019s telling when Jon Stewart, a comedian, is the most authentic public figure I know. It\u2019s troubling when I have to assume that everything I hear from any politician or any central banker is being said for effect<\/em>, not for the straightforward expression of an honest opinion.<\/p>\n

The question is not \u201cIs it a Hollow World?\u201d. If you\u2019re reading Epsilon Theory I\u2019m pretty sure that I don\u2019t have to spend a lot of words convincing you of that fact. Nor is the question \u201cHow do we fix the Hollow World?\u201d Or at least that\u2019s not my question. Sorry, but being a revolutionary is a young man\u2019s game, and the pay is really bad. More seriously, I don\u2019t think it\u2019s possible to organize mass society in a non-hollow fashion without doing something about the \u201cmass\u201d part. So given that we are stuck in the world as it is, my question is \u201cHow do we adapt <\/em>to a Hollow World?<\/strong>\u201d As Conrad wrote, the question is not how to get cured, but how to live. How do we make our way through the battlefield of modern economics and politics, a world that we know is hollow and false in so many important ways, without losing our minds and ending up in a metaphorical jungle muttering \u201cthe horror, the horror\u201d to ourselves?<\/p>\n

\"\"<\/p>\n

Two suggestions for adapting to the Hollow Market piece of a Hollow World, one defensive in nature and one for offense.<\/p>\n

On defense, recognize that modern markets are, in fact, quite hollow and everything you hear from a public voice is being said for effect. But that doesn\u2019t mean that the underlying economic activity of actual human beings and actual companies is similarly fake or bogus. The trick, I think, is to recognize the modern market for what it IS \u2013 a collection of socially constructed symbols, exactly like the chips in a casino, that we wager within games that combine a little skill with a lot of chance. There is a relationship between the chips and the real-world economic activity, but that relationship is never perfect and often exists as only the slimmest of threads. The games themselves are driven by the stories we are told, and there are rules to this game-playing<\/a> that you can learn. But it\u2019s a hard game to play, and it\u2019s even harder to find a great game-player<\/a> who will bet your chips on your behalf. A better strategy for most, I think, is to adopt an attitude of what I call profound agnosticism<\/em>, where we assume that ALL of the stories we hear (including the narratives of economic science) are equally suspect, and we make no pretense of predicting what stories will pop up tomorrow or how the market will shape itself around them. What we want is to have as much connection to that underlying economic activity of actual human beings and actual companies as possible, and as little connection as possible to the game-playing and story-telling, no matter how strongly we\u2019ve been trained to believe in this story or that. I think what emerges from this attitude can be an extremely robust portfolio supported by more-than-skin-deep diversification<\/a> … a portfolio that balances historical risks and rewards rather than stories <\/em>of risk and reward, a portfolio that looks for diversification in the investment DNA<\/a> of a security or strategy as well as the asset class of a security or strategy.<\/p>\n

On offense, look for investment opportunities where you have information that reflects an economic reality at odds with the public voices driving a market phenomenon. This is where you will find alpha. This is where you can generate potential returns when the economic reality is ultimately revealed as just that \u2013 reality \u2013 and the voices shift into some other story and the market matches what\u2019s real. These opportunities tend to be discrete and occasional trades as opposed to long-standing strategies, because that\u2019s the nature of the information beast \u2013 you will rarely capture it in a time and place where you can act on it. Almost by definition, if the information is being generated by a public voice it\u2019s probably not actionable<\/a>,<\/span> or at the very least the asymmetric risk\/reward will have been terribly muted. But when you find an opportunity like this, when you have a private insight or access to someone who does against a market backdrop of some price extreme … well, that\u2019s a beautiful thing. Rare, but worth waiting for.<\/p>\n\n\n\n
\n

\"\"<\/p>\n<\/td>\n

\n

I\u2019ll close with a few selected lines from TS Eliot\u2019s The Hollow Men<\/em>, because I\u2019m always happy to celebrate a time when poets wore white-tie and tails, and because I think he\u2019s got something important to say about information and communication, authenticity and deception.<\/p>\n

Between the idea<\/strong><\/p>\n

And the reality<\/p>\n

Between the motion<\/p>\n

And the act<\/p>\n

Falls the Shadow<\/strong><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

What is the Shadow? I believe it\u2019s the barrier that communication inevitably creates among humans, including the mental barriers that we raise in our own minds in our internal communications \u2013 our thoughts and self-awareness. Sometimes the Shadow is slight, as between two earnest and committed people speaking to each other with as much authenticity as each can muster, and sometimes the Shadow is overwhelming, as between a disembodied, mass-mediated crowd and a central banker using communication as \u201cpolicy\u201d. Wherever you find a Shadow you will find a hollowness, and right now the Shadows are spreading. This, I believe, creates both the greatest challenge and opportunity of our investment lives … not to pierce Eliot\u2019s Shadows or to succumb to Conrad\u2019s Heart of Darkness in our hollow markets, but to come to terms with their existence and permanence … to evade their influence as best we can, all the while looking for opportunities to profit from their influence on others.<\/p>\n

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Note: Joining The Mauldin Circle is not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for investors who have registered with Millennium Wave Investments and its partners at http:\/\/www.MauldinCircle.com<\/a> (formerly AccreditedInvestor.ws) or directly related websites. The Mauldin Circle may send out material that is provided on a confidential basis, and subscribers to the Mauldin Circle are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private and non-private investment offerings with other independent firms such as Altegris Investments; Capital Management Group; Absolute Return Partners, LLP; Fynn Capital; Nicola Wealth Management; and Plexus Asset Management. Investment offerings recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1\/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor’s services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend\/market, they only recommend\/market products with which they have been able to negotiate fee arrangements.<\/span><\/p>\n

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 <\/p>\n<\/div>\n

The article Outside the Box: Hollow Men, Hollow Markets, Hollow World<\/a> was originally published at mauldineconomics.com<\/a>.<\/div>\n
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<\/div>\n","protected":false},"excerpt":{"rendered":"

By John Mauldin   I\u2019m sitting in the British Airways lounge at Heathrow terminal 5, or in other words in my usual office, and trying to catch up on my reading. I was particularly intrigued by my good friend and economic philosopher Ben Hunt\u2019s latest Epsilon Theory post, which he calls \u201cHollow Men, Hollow Markets, … <\/p>\n

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