The Markets Are a Stacked Deck in a Rigged Game…But I Can Teach You How to Win
About the Author Shah Gilani is considered one of the world's foremost experts on the credit crisis. He not only called for the implosion of the U.S. financial markets, he also predicted the historic rebound that began in March 2009. Shah is the editor of Capital Wave Forecast and Spin Trader. He also writes Money [...]
The markets are broken.

And what has to be done to fix them likely won't get done. That's because the folks capable of fixing them are actually captives of the folks who like them the way they are.

That's the bad news.

The good news is, if you understand what's wrong and who's responsible, you can actually make a lot of money playing the game the way it's been set up.

Let me explain.

First of all, what's happened isn't by some grand design. There is no great conspiracy to screw the public. (Not this time.) Rather, incremental changes in various corners of the capital markets manifested innumerable unintended consequences.

The net result is this: Our capital markets aren't functioning for the greater good of the economy and the nation. And the public is getting screwed. But you knew that.

The markets have become a kind of stacked deck in a rigged card game.

A game being played by a bunch of whispering pros against mostly deaf, dumb, and blind amateurs (yeah, I'm taking about too many people you know) in a shady casino overseen by pit bosses who work for the house - which is owned by the pros who set up the game in the first place.

I'm not going to break down what the incremental changes were that got us here. I've done that over innumerable articles I've written for, Forbes, Wall Street Journal's MarketWatch and right here.

This isn't about how we got here. This is about proving where we are now by means of a kind of grand supposition that hopefully is going to open your eyes. It's probably going to scare the you-know-what out of you.

Earlier I said the public is getting screwed, but you knew that.

How do I know that you know the public is getting screwed? Most people are out of the market. They are either on the sidelines or out of the game for good. They know the markets are a casino, and most people have come to realize that they have no idea what the game is, let alone how to play it.

And that, children, is the unhappy ending.

Precisely because the public is so leery of losing their shirts and knickers in the strip poker club, investing is a thing of the past.

Long-term investing is dead. Long live short-term trading.

No One Left to Play Volatility has undermined the kingdom of "buy and hold," of building wealth by accumulating shares of solid companies, and of a future of promises of an easy retirement with a nest egg of safe investments yielding something, anything we're capable of living off of.

Want proof the public has exited stage left?

I'll give it to you in the simplest of terms. You need this proof to understand that a huge part of the volatility that is now on the back of every card in the decks we're playing this crazy game with isn't going away.

Look at volume. Keep looking. It's there; it's just that you can't see it because there's so little of it. There's no volume because the public has left the casino.

The ICI (Investment Company Institute) recently reported that since the great rally (yeah, that one that's gone missing lately) began last October (we were up some 25%), some $42 billion has exited equity mutual funds.

Since the 2008 credit crisis and market crash, some $400 billion has exited the markets.

I'm not talking about what was lost. I'm talking about money that came out of the market because people had had enough - enough losses and enough of their shirts being ripped off of them in the strip game.

According to Credit Suisse Trading Strategy, average daily volume is now half of what it was at its peak in 2008. We've gone from an average of some 12.1 billion shares being traded on a daily basis to an average of just over 6.5 billion shares being traded daily now.

New York Stock Exchange daily volume (and the NYSE is still one of the principal exchanges in this country, although there are too many others now) is down 23% year-over-year.

Oh, and that's the good news.

You see, inherent in the low daily volume today is a too-often-ignored little piece of extraordinarily frightening news...

Are you ready?

About half of the volume today, on any given day, is the result of high-frequency traders plying their game. And their game ain't investing, folks.

So, if you want the truth ("You can't handle the truth"... I love that line!), any rally we see is based on traders trading and not investors investing. In other words, there is no backstop. There are no investors waiting with wads of cash to pick up shares when they slip a little.

There is only the great unknown under wherever we go, under whatever heights we get to.

And that's what scares the hell out of me.

The Insider's Card Game Of course, I'm supposed to throw in some hopeful news in these sermons (am I preaching?).

Here it is: Call the lack of volume, which is the result of a lack of long-term investors, the "fundamentals" of what's scary in the market. The "technicals" are worse.

Remember the "flash crash?" We still don't know what caused it.

You probably don't remember that BATS itself (another fairly large exchange venue where tons of shares are traded, well maybe not tons, there aren't tons traded anywhere anymore) decided it was time to do the first IPO on its own exchange. And guess who their first IPO was for? It was an IPO of BATS shares; how cool is that?

Only tragedy struck when they had to pull the IPO on its IPO debut because the exchange blew up. Not that that is likely to happen at any other exchange, so don't worry.

Oh, wait. Didn't that just happen at the NASDAQ with another small inconsequential IPO that you may recall goes by the name of Facebook Inc. (Nasdaq:FB)? Oh, yeah, that fiasco.

Bad technicals, folks.

The markets are broken. The fundamentals are bad, and the technicals are bad.

But keep on investing. You'll do just fine.

Or, you can join the traders at the insider's card game. And guess what, I have seats at my table. I'll teach you how to play the game.

And the message (sermon) to take home today is: "Rules are alright, if there's someone left to play the game."

Sincerest regards,

Shah Gilani, Capital Waves Strategist

Further Reading...

Starting on May 18, 2012, millions of hardworking Americans got ripped off for an estimated $35 billion in the span of a week. It happened because they didn't understand The MATRIX.

But Shah does. And you can too. To learn more about The Matrix click here.

About the Author

Shah Gilani is considered one of the world's foremost experts on the credit crisis. He not only called for the implosion of the U.S. financial markets, he also predicted the historic rebound that began in March 2009. Shah is the editor of Capital Wave Forecast and Spin Trader. He also writes Money Map Press’s most talked-about publication, the Wall Street Insights & Indictments e-letter, where he reveals how Wall Street's high-stakes game is really played, and how to win it. Learn more about Shah on our contributors page.

View articles by Shah Gilani

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