From hedge fund manager Bill Fleckenstein
My friend believes we’re getting closer and closer to a moment when quants [computer-driven trading not based on fundamentals] no longer rule daily trading, as their universe is losing participants that underperform. The ones that remain are desperate, trying feverishly to chase what’s working. He contends that the higher the market goes and the faster it rallies, the more certain and ugly the collapse will be.
He went so far as to suggest that when this unwinds, some big Wall Street firm will essentially go out of business and that the building it occupies will be, in his choice word, depopulated. When I responded by saying, wow, you’re more bearish than I am, he replied: No, it’s not about being bearish. It’s just a fact.
This collapse, when it comes, will have impact far beyond the rarefied world of Wall Street finance. Companies will go out of business or cut back severely. Workers will lose their jobs, maybe their homes too. We may be about to see a real life crisis of capitalism unfold before us. And the wreckage will be severe.
I’ve been trading stocks and options considerably lately, and thus am following the market closely. It’s just not been real rational of late. XYZ announces a gigantic loss and huge writeoffs for the quarter – and the stock goes up. This is what Fleckenstein is talking about. The buying of XYZ isn’t being driven by the fundamentals of the stock, but instead because some quant trading program decided XYZ was undervalued compared to the spread of Japanese corporate bonds against Euro junk bonds, so it shorted orange juice futures and bought XYZ as a hedge (while simultaneously doing 100 other trades.) It’s just outta control. Fleckenstein suggests the day of reckoning is nearing.