The Problem with the Stock Market

We had a bear market. We still may be in a bear market. We will have bear market rallies. We will have pullbacks. Buy on the pullbacks.  The market will definitely be up in a few years. Thats all we all know. Everyone. From Warren Buffet on down. No one knows more. No one knows less. And thats a problem.

The reality is that when it comes to the risks  of the market, we have learned absolutely nothing from the past 2 years. Just as we learned absolutely nothing from the tech bubble and the calamities of markets past.

So I ask you. What is it about the stock market and those who dominate the money flows in and out of the market that has changed ? Will people be any less interested in making money ? Will mutual fund or hedge fund managers desire to make less money than they did 3 years ago ?

It all comes down to this. What will cause anyone on Wall Street to take fewer risks in the market going forward than they did before ? Might they not take greater risks as they try to recapture their losses from the last couple years ?  I guess you could argue that leverage to the biggest risk takers of the past 5 years is less available today than it was before, but for how long ? As liquidity becomes more available, why wouldn’t financial engineers find every way possible to use it in the market ?

Maybe I missed it, but has there been any structural, regulatory or systemic changes in the stock market that can prevent what we just went through from happening again ? Quickly ?

Nothing has changed over the past couple years. Its all going to happen again. Which is exactly what Wall Street wants.  The market is up 36pct in 2 months.   Everyone is making money again.

Until they aren’t. So what should we do ?  I will repeat what I wrote last October:

The Cause of Bubbles =Investment vs Financial Engineering

Let me get this straight.  In 2008, funds trying to squeeze out another basis point or two thought they were being conservative  buying insurance on heavily leveraged portfolios of sub prime loans and other debt. Once those loans started to default, it  created a cascading deleveraging event which lead to major financial institutions failing and the “smartest” minds on Wall Street being forced to dump everything to raise cash, which in turn lead to a crisis of confidence and deleveraging that created the worst week in the history of the stock markets. Did I get this right ?

In 1987, funds, trying to squeeze out another basis point or two thought they were being conservative, buying insurance on leveraged stock portfolios. Once the stock prices on those portfolios started to drop, their insurance programs pushed them to dump everything AND sell stock index futures to raise cash, which in turn lead to a crisis of confidence and deleveraging that created the worst single day melt down in the history of the stock markets.  Did I get this right ?

Think it wont happen again ? Of course it will.  Whatever money the Fed makes available to stimulate the economy will be used, as intended,  by entrepreneurs and businesspeople to create and grow businesses.

Unfortunately, it  will also be used by financial engineers to try to find a way to make HUGE profits from  highly leveraged,risk laden financial packaging. Why wouldnt they ?

If you can borrow  cheap money  , invest  in some asset that can be marked to an increasing market, borrow  against the gain and buy something else and do it as many times as possible,  wouldnt you ? Its exactly how homeowners In a bull market drove up real estate prices with a few making huge money.

If you could do the same thing, but instead of with houses, with stocks or asset backed securities, and instead of with thousands, do it with billions so you could profits in the 10s of millions or more, wouldnt you ?

Hell yes you would. You certaintly arent going to tell yourself that you could be creating the next big bubble that could rival 1929, or for future generations, would rival 2008, so dont do it. You would go for the money.

Which is the genesis of our problem in the US.  Its not wrong to run with bull markets and leverage to the hilt. That can be a very good thing. But we have to make the upside based on investments, rather than financial engineering. Which is exactly why we have to change our tax code. We want to encourage investment, not financial engineering.

The financial  markets  were originally defined as markets that created capital for businesses to start and grow.

Today, that is rarely the case. Sure companies do come to the markets for cash for growth and that should be encouraged.  But those examples are a tiny percentage of the market.  When a stock turns over its float multiple times in a day, those are not investors buying and selling the stock. Those are traders or financial engineers.

The ONLY WAY WE ARE GOING TO END THIS BOOM AND BUST CYCLE IS IF WE DIFFERENTIATE BETWEEN INVESTORS AND EVERYONE ELSE.

Investors should be rewarded for actually owning companies and gaining returns on their investments. Financial engineers should have to pay a premium for the risk they introduce to the entire financial system. It was not investors that brought on the last 2 crashes. It was the financial engineers.

The beautiful thing about this country is that we like to work hard, and we like to take chances. Unfortunately, over the last 15 years, the incentives have been to take chances as a financial engineer rather than as an entrepreneur. We give far more money to people who play games with financial instruments than we give to people who come up with ideas for the next big thing.  That needs to change if we want to remain a leader in this world.

Here is what I would do to change things

I would change to zero the taxes on any gains from the sale of stock or bonds purchased during an IPO and held for 5 or more  years. All dividends/interest paid by that stock/bond would be tax free. If you sell it prior to the 5 years, you are taxed at your personal regular income tax rate.

In addition, I would not allow the stock to be borrowed against in any way. If it was, it would be considered an effective sale. Which means you couldnt borrow on it tax free until you have held it 5 years.  Bottom line, if you hold the stock/bond , like a real investor would, you are rewarded for it.

For purchases  post IPO, in the open market,  the same rules apply, except I would tax a personal income rates the dividends/interest  for the first 5 years of ownership.

For all other transactions, whether they are options, derivatives, stocks, bonds, whatever, all gains and losses would be taxed at personal income rates.

If you are a great financial engineer and make tons of money at what you are doing, more power to you.If you are good at what you do, you pay more to Uncle Sam, but you still make a boatload of money.

38 thoughts on “The Problem with the Stock Market

  1. This will create all sorts of distortions in the market as investors time their stock sale at the 5 year mark.

    It’d just be another tax regulation to plan around, adding to the web of regulations that add complexity/cost to economic decisions..

    If investors want to avoid the risk introduced by ‘financial engineers’, aka speculators, they can create their own stock exchange that only permits companies whose stock-sale policies meet stringent requirements to prevent ownership by speculators.

    A good place to start if you want to reform the system is to advocating getting rid of the defunked SEC.

    Comment by Amin K -

  2. Mark…Great post. Builders and investors should be rewarded. So many of these financial engineers/traders provide no value add. I have shaken my head for years at the reward structure on Wall Street. Maybe that is the one good thing about this mess….people are starting to realize that very little value was being created by these structures. The fraud has been uncovered, now it is time to move forward.

    Comment by Chris -

  3. mark, before we listen to your financial advice it would help to understand your personal financial performance. Seems there are a lot of frauds out there that think having money means they know how to make it or keep it.

    BTW…How is the insider trading lawsuit coming along?

    Comment by Dave -

  4. The Markets are a Con game. Its worst than a casino. You can’t beat it. Put your a$$ets in Gold or a worthwhile commodity like oil. I rather bury gold in my backyard than buy stocks.
    Capache.

    Magic Man

    Comment by MM -

  5. “The ONLY WAY WE ARE GOING TO END THIS BOOM AND BUST CYCLE IS IF WE DIFFERENTIATE BETWEEN INVESTORS AND EVERYONE ELSE.”

    BS. The only way we are going to end this boom and bust cycle is if we differentiate between CONSUMERS and everyone else.

    You can stimulate big ideas till the end of time, but if the majority of your market can’t afford to buy the actual products without going further and further into debt, the boom and bust will continue.

    The demand for a robust economy is exactly the same right now as it was at its peak (if not higher.) The only thing that’s changed is that consumers have run out of credit to subsidize their piss-poor wages.

    There’s only one stable way to grow the economy in the long term. Increase real wages for the consumer. Pay EVERYONE who works for you enough so they can meet their needs and have something left over to actually spend.

    Most Americans would trample each other this instant to invest that extra money in big ideas in the most important way possible- BUYING THEM.

    Comment by natebiehl -

  6. Mr. Mark Cuban,
    What about this dam market. It’s become my worst nightmare. As a father of three daughters, 19, 17, and 14, this is a dads biggest challenge. I’ve never been one to whine or quit, but this whole thing has me at witts end. I broke my ass cleaning carpets for over 20 years, and thought investing for my girls future was doing the right thing. Now I try to not show my girls just how bad things really are. My oldest just finished her first year at UNH, and unfortunately can’t send her back next year. I am not looking for charity, just for some advise from someone who has a very different and amazing outlook on being so sucessful. If you have the time, please give me some suggestions. I watched your 60 Minutes interview, and said to myself …. there has to be a light at the end of the tunnel. Is there? Please, if you have any advise, I am counting on it. Thank you.

    PS. That was absolutely ‘bush’ what happened in Saturdays game … I know the pain ( I think ).

    Scotty M. – Boston, Ma.

    Comment by Scott Martinelli -

  7. Here’s some great insight about SEC and FINRA…

    http://www.facebook.com/home.php?#/video/video.php?v=1099928032676&oid=66515019921

    Comment by MC -

  8. I was embarassed by your reaction after game 3. Money can’t buy class apparently. Why don’t you sit in the owners booth going forward? I know your fans would appreciate it.

    Comment by Arthur Hutchinson -

  9. As long as we continue to privatize wall street gains and socialize the losses, I don’t see the behavior changing.

    Comment by JB -

  10. I have to disagree. Certain people know what is going to happen to the markets. The people in power they dictate the markets so of course they know. EI. The Government(senate).I also do not believe the average investor will take greater risks after they lost the majority of their portfolio in the last yr. Your totally correct the market did go up 36% but I believe a lot of the public through in the towel before this bear rally. Especially if they listened to cramer. Booyah Skii Daddyyy, What happened to wall street week? Geez I liked roukeyser. The average investors who lost all this money would not have the money to put in the market or the guts. Borrowing in this economy to put in stocks, well the banks won’t do that I think there in enough trouble with defaults. Hmm regulatory changes well maybe not keeping the market artificially up which looks like what the government is doing right now. Also the uptick rule.
    I believe everything has changed in the last couple years the market collapsed more than I have ever seen in this short of period of time. Banks and AIG, GM, And ford almost went bankrupt. These were the darlings of the Dow for decades and they almost went completely belly up and would of without the help of the government. Hopefully the market will go back up but as Mr.Cuban stated this could still be a bear rally. We will have to see.

    I also enjoy watching basketball and to see Wright foul Melo twice and not get the call is ridiculous. What does he have to do punch him in the face to make sure the foul is called.

    Go Mavs

    WW

    Comment by The Trader -

  11. I’m sure this will get lost among all the noise here . . . not sure why I bother.

    The process of allocating capital is inherently more valuable than the process of investing that capital. Mark Cuban, you look at this through the biased eyes of someone who got lucky deploying capital and don’t see the whole picture. The financial engineers, as you call them, despite all their chicanery and deception (and it is legion) actually provide more economic value to society than the entrepreneurs.

    I guess a good metaphor, given your background, would be how the creators of the infrastructure for sharing content are always better rewarded than the creators of the actual content. The system of distribution, in this case the financial engineering, is more important than what is distributed.

    So give up your centrally planned tax code that rewards the morality you think is deserving. It can only lead to a lack of competitive advantage and an atrophy of the capitalist impulse.

    Good luck.

    Comment by J:Lai -

  12. The problem is that stock market investing is at best an educated coin toss and for every winner there has to be a loser. In the case of Warren Buffet there are countless losers.

    Comment by D. Stevens -

  13. A guy like Gekko’s comments above set against GL’s below crystalize what has happened in what may be seen one day as a generational divide; the younger feeding off the last of what the elders gained by goodwill and good works, coupled with sheer appreciation.

    Conceive of a large purple onion representing layers of return on the elders generations of wealth and stability. Look at the home the elders bought in the ’70′s for the kids to go to a good school and college when working for a company all those years. It yields by time alone, $100k or $200k appreciation. Same with their stocks, bonds, and retirement funds; not to mention those pieces of family real estate that they sold throughout the ’90′s.

    Problem is that we vested these funds, profits and a suprising amount of appreciation because we didn’t know how to handle it personally. We trusted. Who? Our son’s college roommate working on wall street.

    The Gekko’s come along wanting the lifestyle of thier uncles, but want it now. Inventing, creating, learning are all to much sacrifice. So with the network of all those college buddies, when flashdance players looked at their greed, it bacame clear that risk and the ethics of what would become an industry, had an army. Laundering responsibility had many aspiring to diffuse clarity for the sake of immediacy. The flashdance players were easily identified leaders.

    The layers of wealth was sitting everwhere in would-be safe places, or so thought their owners. Why not leverage against it? Why not find a way to bet with the wealth succeeding to gain momentum? If that bet is ok, why not bet against is succeeding?

    I was in Monaco at the Casino for my first gambling experience. I got the first chair. An American had the last chair and a wealthy sage Italian in a while silk suit had the middle chair. My white Gatsby suit was not match for the silk. I knew I was in a shark tank. I won. They then could bet against me or for me, like all the players. But they focused on me. I was such a rookie. I won fast, and lost it faster; a blip, not a cone. My lesson was that with their knowledge, experience, the house rules and hedge against me knowing what I was doing, had them make more on my bets than they on theirs. My calculated risk of $ 500 caused them to gain thousands. There is a similarity here.

    The “Rulers” …. you know, the guys who go to church with both of these generations of fathers and sons, saw this opportunity. Then with the promise of being geek heros, it is not that difficult to hire a couple dozen mathmaticians and layers of lawyers to perfect the “Weasle.” Simply, that use of the word “Swap” versus insurance, supplanted and insolated this new industry from regulation. Then came the holocaust. Half a billion spent on lobbyists in DC; at doorsteps of the industry oversight specialists revising sentences of logic and language to deflate the strength of “regulation.” Lots of golf games, weekends in the Hamptons, off-shore accounts and no wonder wine now costs $12 for 4 oz and steaks cost $55.

    The game was set. But who and how do you get the “PUNCH.” How to create true velocity for this leverage and how to make it happen as fast as possible, was simple. “GET EVERYONE!!!” That was the call. And they all came into the fold.

    AIG took care of the world. Banks were the new convenience stores, and the wave built. The elders’ funds bankrolled this by leverage as the consummate “just-the-tip” [Wedding Crashers] mentality became profuse in the 30/40 somethings. “They will never miss it.” “It will continue to go up.”

    What’s left? The lowest common denominator: mortgages. Lots and lots of people made to beleive that they could have the dream and that their kids could go to nice new schools in over-built boomtowns on prarie land. Thousands of workers came across the border to build all these new subdivisions. All based upon leverage, promises, and driven by the “PUNCH.” [likely one day to be seen as a huge version of a “Short on our American financial foundation.”

    Consider and investigate the website: “America’s 400 Wealthiest.” Their income for one year doubled from an average of $132 MM to $260 MM. The ave tax rate was 17%. Now the drum roll: Cap gains was $61 BN for this group. Imagine the sell-off of assets over the last 3 years to have those gains for just 400? Take the top 10,000 and calculate those gains.

    By example look at the Sam Zell sale of approximately $36 BN of assets to Blackstone. I understand that they pixilated these and sold them for 3X that. Musical chairs has these owning the 3X assets far upside down, while the sellers at the top for cash, have great wealth now being horded. Then those loans still marginal with their banks, are being stalled until the uncertainty is laundered out by further infusion of workers capital of future generations.

    Until this game of chicken is over, we are hostage to the gaming.

    Madoff is guarding his family against the consequences of turning over the institutionalization of this SUNAMI by criminal money laundering. When you think of how ironic it is that the wisdom, art and magic made by “ET”, “MUNICH” and “Indiana Jones” and generations of value, is now dilluted with real blood money. It is sad.

    The divestiture of stewardship for the growth of the purple onion was and is the beginning. The ordaination of principals of war and mission for the US presence around the world is also a false vestiture. While trust is essential to our governance and the grace of living free, in all generations, respect needs to be restored.

    We are purging the American workforce of those most competent, for those most eager to expedite personal wealth over community wealth. This sea-change is lurking but not in practice as the history of this era on privatizing distribution of wealth by war and consolidation of wealth may be just too awsome of a task to bear in the world as it now realizes it has to loose the innocense of it’s cavalier independance nation to nation. Separation has cost too much. This occurance eshibits now that globalization is essential.

    And to make Mark’s point on the heirarchy of the internet [THE COM], effectively none of this was possible without computers. All the random software has a marginal reach where interplay is essential. There are disconnects in security between these realms. That those who would seek to “slither” between the cracks, make it game.

    In the end, we are trying to register alignment of the essential columns of a fragile global agora seeking to be a forum of a renewed world of civility.

    Seems there once was a young man who with outrage, threw out the moneychangers on the steps of the agora in his time. While we heal, all of this needs to be accomplished. The dangerous will return in another form unless we are prepared. We must trust.

    GL you must endure. The Gekko’s need to go to work for a change and contribute to his community. Inventors like Mark Cuban translate vision to contracts and shape pruduction. We have to herald ideas as prosperity again. Then jobs will be capitalized. Time is of the essence. If this gaming takes too long, 10% unemployment, another 10% underemployment with struggling reinventors has he patience of Jobe. It will not last forever. It is clear, that gun makers will profit each and every way with delay.

    Let’s keep pushing for faith by animated and purposed conversation, risking ideas, and listening to well-meaning ideas for at least 30 min, so says Jeff Greemberg, Journalist.

    And as a cityscape planner and investor, consider this. Whether it’s your homestead, a piece of prarie, a lot on a lake you hope to retire to one day, land for commercial development in the path of growth………take a minute to stand upon it one night. Look at the stars. Consider the simple grace of God letting you be the steward for that piece of His earth for at least awhile. Look up at the stars. Then look down; take a sip of scotch, even urinate….girls too. That is true freedom and pride of stewardship. We do not own the earth. We are privilage to care for it with our equity, our inventiveness and our labor. That is how land differentiates between sending money over the internet into the stock market; basically the biggest gambling casinos of the world.

    It may be fun, even mostly essential for communicating values of company intelligence. But for those holding hopes and dreams in their savings, their assets accrued by longevity and provision to their community and family….it is a renewed challenge to learn the difference between trust and liquidation. Never again. Interesting that this site crystallizes so much of what is happening: The clarification of a class conflict; the generational conflict; the question of mission versus political incorporation to cloak consolidation of wealth; and the spiritual challenge now of what community is after this mass taking. Have faith all.

    HAWKEYE – 5.9.09

    Comment by Hawkeye -

  14. Why do i study the markets so much? I have wasted a decade on it. So far I have been a failure. I got fooled by a technical analyst persuading me the market would make a 38% pullback that never comes, Fibonacci,elliot,trendlines are all junk. The market keeps rocketing up.
    Funny thing is I planned on buying all commodities near the low and got sidetracked, most have tripled since that bottom. I am in some bad positions Mr.Cuban I stopped following the rules. I stopped following the one thing that gave me consistent gains. I am sorry but the stock market has killed me. Or maybe I killed myself trying to prove something to my dad.
    I have saved and accumulated to give to the con game. I was good once upon a time now I am just another statistic. Maybe I can get it back but every time I triple my account I fall on my face. I’m just looking for a way to finish off my life. I am No F$c%in Good.

    GL

    Comment by Bear Vs Bull Bang -

  15. In my opinion you are safer taking your money to a casino craps table that pays 100X odds. The combined house edge is only .021% with no inside information, or market manipulation. (ala Jim Cramer – http://www.huffingtonpost.com/2009/03/11/jim-cramer-shorting-stock_n_173824.html )

    Comment by BrentSpy -

  16. I agree with your assessment of the problem. Your solution is another thing. It makes too much since. You completed what you’d do in just about a paragraph. Your financial solution must be 2000 or more pages, encased in a really expensive binder just to get the attention of those who really need to read it. But again, I do like the idea. Just add 2 or 3 thousand more pages and I think it might be a go.

    Comment by DL Turner -

  17. Mark,

    You propose a 5 year holding period for investors of IPOs. My question is, why 5? Why not 2? or 7?

    Secondly, I will agree with you that our tax system needs revamping. However, the best solution out there right now is the Fair Tax (www.fairtax.org). We abolish the 16th Amendment, and do away with corporate taxes, capital gains taxes, estate taxes, death tax, marriage tax, any tax–and replace with a national sales tax. This way, we are taxed only on what we spend. No plan is perfect, but this is the best–even better than a flat tax.

    Our biggest problem as a country is a lack of saving and investing for our futures. The Fair Tax is the plan that will incentivize us to save more and spend less.

    Comment by Brian -

  18. Something major did change two years ago, it was the mark to market rules. Each quarter since this amendment banks had to write down billions of dollars of “toxic assets”—even though their value was only temporarily, depressed. If banks never plan on selling these assets today why should they be forced to value it as if they did? These assets are expected to remain on banks balance sheets for the foreseeable future. This rule requires banks to mark to market instead of mark to model as previously calculated since the inception of FASB. Pre FAS 157 when an investment vehicle trades thinly (such as mortgage backed securities) the underlying holder of the investment is allowed to use its own assumptions on fair value, today it must be valued based on what it can be sold at in the open market. If I’m a bank and expecting to receive future cash flow of $1000 a month over the next 30 years on an loan of 200K for a total payment of 360k, based on todays fair market value and panic in the market the underlying issue has been written down to 40 cents on the dollar or approximately 80k and this is a conservative figure.

    Comment by thevoice@voicedup.com -

  19. Mark,
    I certainly agree with your ideas to keep motivation in place for things that drive actual economic growth. I will disagree with the possibility of it actually causing any significant impact. The majority of financially engineered products available are not offered to individuals. They are offered to institutional investors and the hedge funds and private equity firms that invest institutional money. I trust that you see where I am going with this. The majority of the money in these types of products is tax-free money to start with. There is no benefit from a tax standpoint to invest any differently regardless of tax treatment. There would have to be an absolute return enhancing component to spur economic investing.

    You also mentioned “insurance products” are concerned, some are quite legit and others are back-tested randomness. Several engineered products serve a very good purpose in terms of alleviating certain risks. For example: If you really like a Brazilian company and want to invest in it, but don’t necessarily want to take on the added risk of the Brazilian economy, polictical structure, upheaval, etc, it makes sense to buy the stock (based on your conviction) and for a small premium, buy protection against the macro element of the investment. That could be done through many engineered products, futures, swaps, option, credit default swaps, etc.

    Just my two cents.

    Comment by J.S. -

  20. Mark,

    Obama is beginning to address the tax code. You are in a position to discuss ideas with him (if Lance Armstrong can sit down with Bush, you should be able to sit down with Obama or atleast Sumners).

    As an entrepreneur, I hate hearing about people making money shorting companies or simply making deals. I strongly believe in a free market, but a market that is guided (through regulation) to benefit the global economy.

    I think your suggested adjustment to the tax code is a great concept (although your thoughts on tax breaks are a different manner).

    Comment by Mike Nierengarten -

  21. Portfolio insurance will happen all over again both through the 401k/pension system and social security. The rumblings in the retirement investment space have already started.

    Comment by Ari -

  22. Mark – great ideas on this. You are a forward thinker. Another issue I’m writing about now, maybe for an Op Ed piece, is the missing data. Go to Yahoo! Finance and type in the ticker for Bear Stearns…BSC. It’s a whole other company!

    Also missing are Enron, Countrywide Financial, as well as those of legit acquisitions such as BankBoston, PaineWebber, and Solly. We can’t create models to learn from if the data is tucked away. I’ve found only ONE company that even has it – it’s not advertised, you have to ask for it – and it’s at a premium cost.

    So all the financial engineering you’ve written about will produce biased results due to the Survivorship bias.

    Comment by Michael Martin -

  23. Mark this is an excellent post, and I can definitely understand the need to distinguish between Investors and everyone else. As far as this quote is concerned,

    “But we have to make the upside based on investments, rather than financial engineering.”

    Why can’t you have both? It would seem to me like WallStreet is a giant sounding board with no room to let the noise translate into useful, real products. I denied a job working as a cold-caller because something just feels unnatural about asking a persons income in the first two minutes of conversation. About as natural as it feels to hang up on them after discovering they don’t meet the criteria.

    It seems to me like you mean financial engineering to be defined as tricksters that create algorithms that shuffle money (often into the wrong hands) and think there is no lesson to be learned from the art of the shuffle. Well, not that there isn’t one to be learned, but that we have yet to learn one if anything can be learned at all.

    Shuffling money around doesn’t do harm unless the ones that reach in and grab for it don’t know what to do with it other than throw it back into the perpetually increasing pile. That’s where the differentiation comes into play. Investors worth their weight in meth will generally have a vested interest in whatever it is they want to produce and distinguishing between interest and greed should always be the deciding factor. It doesn’t mean that they are not also engineers.

    How does one do both?

    Comment by AndrewAtor -

  24. Greed dominates and as Gordon Gekko says, “Greed is good.” By the way, you saw that Wall Street 2 the movie is green to go, right? Interesting time to get that produced and released… capitalize on the hype around the crisis: http://www.marketfolly.com/2009/04/wall-street-2-movie.html

    Anyways, interesting thoughts Mark. Unfortunately, the problem is that it will take years and years to even enact such change. Everything is so reactionary in terms of regulations and disclosures, when it should be proactive and preventative. It’s a shame, but it’s always how it is. We need to get people into office and positions of power that can make something happen. Or, at the very least, get more public figures to bring it up. You’ve got a large following so that certainly helps.

    I actually track hedge funds and their portfolios on a daily basis on my site and have found that many HF’s believe the themes going forward (at least for this year anyways) will be deleveraging on both the institutional and consumer level.

    Your recommendation to buy on dips for long-term investors is a prudent one, as here’s a great chart of a total real return index (performance of markets from 1802-2001): http://www.marketfolly.com/2009/01/total-real-return-indexes-1802-2001.html

    In the end, though, it’s all part of the cycle. You’d like to hope that such a large financial crisis would force change. But, I’d imagine it simply flushes out and yet again resumes the boom & bust cycle. I guess it’s appropriate to end how I began: “Greed is good” … and Wall Street certainly loves greed.

    Jay

    Comment by Jay (market folly) -

  25. and oh..here are the links to the bills sorry..I should have added in my original post…

    http://www.govtrack.us/congress/bill.xpd?bill=h111-977 -HR 977

    http://www.govtrack.us/congress/bill.xpd?bill=h111-676 HR 676

    http://www.govtrack.us/congress/bill.xpd?bill=h111-1068 HR 1068

    Comment by Darren Fox -

  26. And There are a lot of new bills that are setting there sights on traders. One of the most incendary bills I’ve seen proposed is H.R. 1056 introduced by Congressman Peter DeFazio of the great state of Oregon. The proposal would put a 0.25 percent tax on all securties tranactions in an efoffrt to pay for TARP. Then there is a health insurance bill introduced by John Conyers of Michigan that contains a single line in the bill instituting a transaction tax. The scary thing about this bill is that 64 members of Congress currently support the bill.

    And here is everyone favorite: H.R. 977–The Derivatives Markets Transparency and Accountavility Act proposed by Collin Peterson (Minnesota) Chairman of the HOuse Mittee on Agriculture. His board overseesCommidty Futures Trading Commission (CFTC).

    The bill would give the CFTC more authority to oversee over-the-counter derivaties, set stringent limits, on deliverable commodities, and would require ITC deruvatuces ti be ckeared on a CFTC or SEC exchange.

    The bill was approved by Peterson’s committee. The problem with this bill is that it would encourage the diversion of trading in highly regulated commodity and energy futures markets to less regulated OTC and foreign markets accessible to U.S. investors but beyond the reach or jurisdiction of the U.S. government.

    Forcing these securities to be cleared by the CFTC or SEC would drive the business offshore.

    Comment by Darren Fox -

  27. Mark call me lucky. Over a month ago I wrote that I would buy Dana holdings (DAN) @ $1.98 and stick with it until it got north of $1.25. I stock with it. I got lucky and hit a home run.

    I lost my job and I don’t see myself being hired anytime in the near future. So, I’ve turned to the stock market to make a living. I’ve been pretty lucky and conservative with most of my bets.

    I’ve bought OWW on Tuesday and sold it yesterday for a very nice profit. Before that I bought Dow Chemical and made a nice return. I got into the stock one week to one day before earnings (depending how depressed the stock priced is) and I place a bet.

    I am learned a little more each day. I invested in LDK solar below $4 but sold it. Lesson learned: stay with your homework even when times seem rough.

    I am betting 25% of everything I have on CBS tomorrow. During my tenure at my employer, I closely watched Eddie Lampert. I started to think to myself, what does this guy know that I don’t. I came to rationalization that he just invests a lot of patiences, time, and money. I true investor has to have all three.

    I am up till 1 am doing research and working by 5:00 am each weekday. I read everything I can about stocks, companies, and statiscial analysis (I was already a statistical junkie given my line of work).

    The only change should be the uptick rule. Short selling is needed, but the current rules allow investors to deflat a stock as quickly as you can let air out of a basketball.

    Comment by Darren Fox -

  28. “We give far more money to people who play games with financial instruments than we give to people who come up with ideas for the next big thing.”

    Thats the money shot. I left the world of engineering to move into finance. There’s just little incentive to go through the pain and uncertainty of innovating (most startups and small businesses fail, etc.) when more riches are to be had speculating on asset prices. We always get paid well even if we fail (I always collect my 2% fee). If we fail catastrophically we get a taxpayer funded bailout (see Q4 2008). So we always win. No matter what. Tell me what other industry or line of work has this incentive structure. Detroit? They’re fighting for Viagra and pennies. In my work, we ask for trillions we get trillions. There’s no fight, in fact DC Congressman fall over themselves to work with me. No rational person should work in any other field. I’m a rational person and that’s why I’m here and staying unless something changes. Only the government can fix this but even if they attempt to do the right thing my crowd will just cry socialism and McCarthyism works remarkably well. Oh and we have one of the best lobbies. Come find work here in finance. Let China and India innovate. They’re willing to day and night and for a very cheap price. Are you? Do you really want to compete with 2 billion+ people who are literally starving for any opportunity? Let them go through the trial of fire. Here on Wall Street, we just own and trade. You should too.

    Comment by Gordon Gekko -

  29. The other big question relating to the stock market and markets in general is what do we want of our banks. Should they be more public utilities taking deposits and making loans to small business and individuals or companies seeking to always increase ROI every quarter thru financial engineering.
    Debt is a major cause of this as well as John noted above but the reason we had increasing levels of debt starting back in the 80s was because it was sold on down the line. The economy moved from an industrial and manufacturing base to a transactional economy. The reason we get 15 offers a month for credit cards in our mailboxes is not because we all have an awesome credit history and are pillars of financial responsibility, it’s because banks can securitize the debt stream and sell it on down the line. They don’t care whether we can pay or will pay because they won’t hold it and have charged on that risk. When all the banks are doing the same thing, someone ends up holding it and we all are essentially today holding the bag. The system becomes really unbalanced when going thru the normal business cycles because the debt can no longer be paid off when someone loses their job in a recession and creates a downward spiral as more are effected.
    So again, banks should be public utilities as important and similar in structure as our power and water companies. They are highly important to our economy just like power and water companies are important to our country’s health and security. They should be public utility businesses not freewheeling magicians taking the CDO and CMO rabbits putting them in a black hat box and making them disappear. Because when the shows over, everyone leaves knowing, the magician didn’t perform so called magic just sleight of hand and illusion.

    Comment by J. Kingsbury -

  30. Government should create laws that reward behavior our society wants to encourage. Your proposals for changes in the tax code reward investors and entrepreneurs, not the financial engineers. That’s as it should be. Congress–are you listening?

    Comment by deb -

  31. Mark,

    I don’t disagree with anything you have said, but your solution does not address the root cause of all this speculation, and this is the ever expanding money supply. Without an honest, commodity-based medium of exchange that derives its value from the marketplace, you cannot hope to restore balance to this economy. If we didn’t have a centrally planned monetary system, we would never have bubbles of this magnitude.

    I have a better idea, but the banks are not going to like it. My suggestion is that private, well capitalized banks, as well as commodity based ETF’s should begin issuing their own debit cards. Imagine if the GLD revamped their business plan and allowed their investors to make payments to one another in gold bullion. People laugh at the idea of returning to sound money, but if we worked to implement such a monetary standard, then we could never be held hostage by a wreckless central bank and its broker dealers. I think this is a hell of a lot easier to implement than trying to fix problems through playing with the tax code. It is also a free-market solution, which means that the entrepreneur get’s back in the monetary driver’s seat instead of entrenched corporations that have been controlling the nation’s wealth for generations.

    Comment by hullaballoo -

  32. Mark,

    I remember this post back in October and still mention it as a potential solution whenever I discuss how much power the shorts have in this market. Have yet to hear a compelling argument against it. Wish we had more innovative minds in Congress and the SEC like you.

    Comment by Doug -

  33. Mark, excellent thoughts that I agree with wholeheartedly. It seems this is the current thought in our society and that we do not reward substance in any meaningful way. It creates a dilemma for those who believe this way but see how rewarding (read: money) is being given to greedy individuals with indifference to the bigger picture. In particular appreciate your offering solutions and not just pointing out a problem. Keep up the good work – your blog is one worthy of reading daily!

    Comment by Chuck Watson -

  34. Financial engineering is not really the problem, debt levels are. Historically, if you go back to every fianancial crisis, the problem is the aggregate debt levels- and in 50% of those cases the problem is real estate related debt.

    I agree with your sentiment though that the underlying problem which is debt to gdp at about 250% (if you eliminate double counting from a unadjusted 350%). in fact we are increasing debt levels, not decreasing it.

    But financial engineering and even reckless speculation won’t cause crashes like the one we just had, unless of course–its financed by debt like this one still is.

    Comment by john -

  35. I’m not certain about every single one of your ideas, but your call for innovation and a system-wide restart is golden.

    Big thumbs up.

    Comment by Daniel Holter -

  36. Mark – GREAT post. You’ve highlighted exactly why regulators should just get out the way and let institutions fail. FDIC should back any money people had in checking or savings accounts but that’s about it. I think the real issue with the way the American economy has developed over the last 15 years is you’ve had more talent go into high risk/high reward professions like financial engineering and such. We’ve become a country that relies heavily on cheap imports financed by US treasury purchases by China and other exporters who hold down their currency and are basically step child economies to the US. That cannot go on forever as eventually they will run away from the dollar once our citizens and our government cannot pay back the loans with interest. We have to become a country that goes back to designing and manufacturing advanced technology and other high value products here that advance our standard of living instead of relying on people who may not have our best long-term interest at heart.

    I like your ideas and think you should push them with President Obama. We need real innovation again here..not more financial wizardy that ends in systemic destruction.

    Comment by Sekar -

  37. I have been trading for approximately 25 years and history will repeat itself over and over and over again. If you are an entreprenuer… know your risk limits. Create a plan and stick to it — There is money to be made in both a bear and a bull market, so decide where the market is and take wins and losses like a true entreprenuer. Taxes are a part of life… put that in your business model.

    SW

    Comment by Stephen Wood -

  38. I believe I understand the concept and see how this would motivate the investor mind. How would this concept convert a trader / financial engineer into an investor? The mindset of the trader is to get in and out fast with no regard to tax implications.

    Comment by Quinn -

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