The reasons? Loss of faith in the efficacy of the markets themselves and of trust in those who make them function. Which, when you are asking to manage trillions in Other People's Money, is not a helpful selling proposition.
The salient issues appear to be rooted in technological innovations that have increased the markets' speed for those who trade in them. The problem being that those same mutations have increased the institutional risks while shifting the burden to those with the least current information. In other words, computerized high frequency trading and the regulatory bias towards market efficiency have enhanced the information asymmetries that give insiders their edge. All of which has given former, current and potential investors the sense that the proverbial playing field is decidedly tilted - away from them.
Still smarting from the losses they suffered during the crash and, perhaps, even more corrosively, sensing that others prospered from their bad fortune, investors' loss of faith and hope in a fair outcome have combined to stifle growth. That the market risk has also climbed for them, but not for professionals adds to the hesitation to get back in. The irony is that market appreciation for the value of intangibles over the false assurance of audited financials has risen just as the impact of those factors has fallen most heavily on the markets themselves. JL
David Weidner reports in the Wall Street Journal:
Do you trust the markets anymore? Do you trust regulators?
When you buy a stock or invest in a mutual fund, do you have confidence that the performance of that security is tied to the performance of companies, industries and the economy? If you don't, welcome to the club. It's getting crowded in here. If you do still have faith, well, maybe you also believe Accenture ACN -3.43%PLC was responsible for going from $41 a share to $5.34 in just 17 minutes, a swing that represented $20 billion, or 86% of it market value, during the flash crash last week. Like us doubters, you'll get what you deserve
The U.S. stock market used to be the gold standard of world exchanges. Up or down, investors could at least take comfort in fairness and transparency. Sure, front-running has always been a problem. Yes, manipulators are always looking for an angle, and insider trading continues to keep regulators busy.
But by and large, the markets moved with reason even if that reason was the credo of greed and fear.
The flash crash, however, illustrates how much the markets have changed. Mechanized trading not only dominates, it skews, and no one seems to know how to fix it. A week after the Dow Jones Industrial Average tumbled nearly 1,000 points, the Securities and Exchange Commission and other market regulators still don't know for certain what happened.
The result? Many investors have had it. In a piece called "A Nightmare On Wall Street," the Daily Show's Jon Stewart played a clip of TV talking heads repeating the same phrase in explaining the sudden market falls over the last couple of years: "the perfect storm."
"I'm beginning to think these are not perfect storms," Mr. Stewart observed. "I'm beginning to think these are regular storms and we have a s— boat."
He's not the only one. Many investors are losing faith, both the sophisticated guys and the mom-and-pops.
"Most retail investors think the market is a sham," said Michael Bechara, an accountant and director of Granite Consulting Group Inc.
Ben Bush, a Los Angeles-based risk management consultant to hedge funds, points out that 70% of the market volume during the last year has come through program trading and high-frequency computer models.
"Last Thursday shows there are no real buyers when one wants to sell," Mr. Bush said. "Why would the investing public come back in to the market?"
For some, including Phil Fragasso, a Boston-based investment adviser, Thursday's 20-minute meltdown reinforced his skepticism.
"I do fear that hedge funds have too much influence in moving the market," Mr. Fragasso said. "The market has always put individual investors at a disadvantage. The trick is to stay diversified and not allow your emotions to rule your investing strategy and tactics."
Likewise, David Collum, 55, a chemistry professor at Cornell University, said he lost sleep over his investments in 1998 and sold half of his mutual funds. The next year he sold the rest and bought into a bear fund. By 2007, he began to tell his students the banking system would collapse.
"Wall Street is a crime syndicate, and I am not speaking metaphorically," Mr. Collum said. "The banking system is oligarchic and the political system has metastasized into state capitalism. The most important market in the world—the market in which lenders and borrowers meet to haggle over the cost of capital—is the most manipulated market in the world."
Mr. Collum may be in the extreme, but many investors feel regulators aren't up to the task of reining in what they believe is a rigged game, if not straight up cheating.
Peter Chepucavage, a consultant with Washington-based Plexus Consulting LLC and a former SEC attorney in market regulation, believes the markets need pretrade limits and that circuit breakers, the main tool being used by the SEC to avoid another trading breakdown, only work "after the damage is done."
"We must understand financial markets through a new paradigm which recognizes that they always provide a biased view of the future, and that the distortion of prices in financial markets may affect the underlying reality that those prices are supposed to reflect," Mr. Chepucavage said.
Bob Bengston, a retired television executive in Punta Gorda, Fla., who manages his retirement portfolio, isn't optimistic given the regulatory track record. Like many, Mr. Bengston feels skeptical of regulators who couldn't catch billion-dollar fraudsters and brokers who switch allegiances between clients on a whim.
"I'm sure the government will oversee fixing this problem," Mr. Bengston said. "Probably the same people who couldn't understand what Bernie Madoff was doing when an accountant handed them the case on a gilded platter."
Not everyone has lost faith, however, David Herskowitz, an economist based in San Diego, is optimistic. "I support efforts for enhance regulations, and I have not lost confidence in their ability to respond appropriately as regulatory issues arise," Mr Herskowitz said. "Regulators have made mistakes and they are responding appropriately to correct policies."
Also, Arnie Mori, a former portfolio manager now retired, said investors need to keep perspective.
"In the long run, intelligently diversified portfolios reflect a reasonable approximation of underlying value," Mr. Mori said. "Traders, on the other hand, are at the mercy of irrational price swings and anomalies such as last week's glitch."
Maybe so, but as last week's events underscored, investors need a pretty strong stomach to ride the market waves, especially when you in such a s— boat.
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