Charlie's Blog: Wall Street Casino


Wall Street Casino

I learned early that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that.

The story of Jesse Lauriston Livermore is a strange one. He is considered by many to be the greatest trader in Wall Street history and his maxims guide many traders today. Livermore was born the son of a farmer in 1877, and he was looking at the fate of making an honest living like his dad when he ran away from home at age 14 for the easy money of the stock market. Livermore would start off at the bottom of the Wall Street world and speculate his way to massive riches. He made and lost and remade his fortune again and again. But by 1940, Livermore would commit suicide at the age of 63. Here is his suicide note to his wife:
My dear Nina: Can’t help it. Things have been bad with me. I am tired of fighting. Can’t carry on any longer. This is the only way out. I am unworthy of your love. I am a failure. I am truly sorry, but this is the only way out for me. Love Laurie
At the time of his death, Livermore was worth a paltry $5 million. That's not bad for a failure even in today's dollars. The reason for Livermore's suicide is his obvious depression but also the fact that the fun times of being a stock market operator had been decimated by the regulations that came after the Crash of 1929. Essentially, Livermore was a high stakes gambler confined to small stakes at the bingo parlor. You can learn many things from Livermore, but I think the most important thing to learn from the man is the essential truth about the stock market. It is nothing more than a casino.

People already know this truth. 1929 left an indelible mark on the American psyche. Even the traders on Wall Street know it can go bust at any moment. But that doesn't keep them from timing their exit before the music stops. Speculation is gambling. Everyone knows it including the speculators. The problem comes when we consider that other term known as "investor."

The popular notion of the investor is different from that of the speculator. The investor does due diligence and invests in stocks in good companies and holds for the long term. The investor is not swayed by the ups and downs of the market. But as our efficient market theorists have pointed out to us, these shrewd investors do no better than someone holding a basket of the broad market in index funds. The best investing is the dumb investing of just buying a low cost index fund and sitting on it for the long term. The problem with this buy and hold strategy is that it is like trying to keep your drink in the glass while riding a roller coaster. You pray something is still in there when the ride stops.

The proposed solution to this roller coaster of investing was a sophisticated strategy of a diversified portfolio or a "slice and dice" approach to investing. Basically, you divide the market into various asset classes and try to "balance" your portfolio to reduce the risk exposure. This is supposed to end the wild gyrations and stomach churning that comes with each boom and bust of the stock market. The problem comes with fees and taxes as you rebalance each year. This can be mitigated in a tax deferred account. Plus, my own look over the charts show that this portfolio strategy does little to reduce the risk as all asset classes move virtually in unison. It's like telling someone that they would be safer in the bathroom than the living room when the tornado hits.

The casino is not confined to the stock market as speculation exists in commodities, real estate, derivatives, and the like. Even investing in individual companies and ignoring the stock market makes no sense because the management of the company do not ignore the market but will make foolish decisions and even lie to keep that stock price going. Pursuing the hard nose security analysis of the legendary Benjamin Graham will do you no good if management lies in the bookkeeping.

In the 1990's, I became interested in stock market investing. It was a boom time, so I had the same interest as everyone else which was how to achieve wealth without work. Fortunately for me, my interest in stocks became more academic than actual as I never had a sizable stake or the stomach to really gamble. After all these years, I have reached one firm conclusion. It was the conclusion my grandparents reached in 1929. It is a casino. You can make a lot of money in the markets, but you can also lose a lot of money in the markets. That kind of wealth comes with immense risk.

The appeal of the markets for the players is not so much the money as the risk. Gambling is an addiction. Gamblers are no different than people who use drugs. This is because taking risks produces adrenaline, and people who play the market are adrenaline junkies like big wave riders and BASE jumpers. Most people work boring jobs doing the same monotonous tasks day after day and week after week. These speculators cannot handle this sort of routine. I suspect that this thought went through Livermore's brain right before the bullet went through his head. Life was not depressing but boring.

The sick thing about this casino is that it has been sold on the American public as a good way to preserve and grow wealth for the future. Mom and pop accept that they have to work for a living, but they anticipate a time when they will not be able to do this anymore as their bodies give out. So, they look to Social Security, pensions, and tax deferred retirement accounts to cushion them in their golden years. Naturally, Wall Street salivates over this pile of cash, and they have strived mightily to get their hands on it. Excepting Social Security, they have succeeded in this endeavor, and they may succeed with Social Security when it is all done. The result is nothing less than a Ponzi scheme for at least the last thirty years as all this retirement money has come into the market. 1982 was a golden year as it marked the beginning of a long bull run when stocks could go nowhere but up. 2007 was the wake up call. Now, even Boomers have joined their parents and millennials in the belief that Wall Street is a casino.

The Federal Reserve also bears blame in this matter as they pump out those inflated dollars providing the credit for the credit bubbles. If stocks are gambling, sitting on cash leaves you with the slow decay of monetary inflation. The financial system as a whole is a gigantic wealth destruction machine. Then, there is Uncle Sam with his taxes, his deficits, and his national debt that will never be repaid. The prophets of the financial apocalypse are many, yet you feel helpless as you watch it all head to impending doom. What can you do?

I believe that all of this madness has one main source, and this source is paper money. People are always looking for money for nothing. But when your money comes from nothing, the error is compounded exponentially. The reality is that paper is not money. It can never be money. Granted, we expend great effort to acquire those pieces of paper, but they come out of thin air. Somewhere, someone has to get stuck with the nothing.

The only thing that is money is gold. Gold has always been money. You can trade and barter other things including pieces of paper, but gold is the only true store of wealth. This is because gold is finite, divisible, indestructible, and requires great effort to mine out of the earth. People will argue that gold is useless. You can't eat it. You can't do anything with it except maybe make jewelry out of it. These are valid points. But if gold is so useless, what does that make of paper? Am I supposed to put more faith in paper because I could use it as toilet paper in a pinch?

I am a gold bug. I know this puts me in the camp with the crazy people that wear tinfoil hats. But what else is there? You can gamble on stocks, or you can watch your cash, bonds, and savings disintegrate from inflation and taxation. My suggestion for people wanting to save is to buy gold from a reputable source in its physical form and put it someplace safe and secret.

The reason so many people hate gold is obvious. The first is that an ounce of gold buried in a vault will be exactly that in thirty years' time--an ounce of gold. Gold does not increase in value. But the converse is also true. It does not decrease in value either. The second reason is that gold takes your wealth out of the economy. This means that it can't be taxed, lent out to others, or bled for fees. This is why FDR confiscated the gold back in the day and a good reason to take physical possession of your yellow metal. As they say, if you can't touch it, you don't own it. The last reason these people hate gold is because it frees you from the Fed's control of you. The Fed has vast influence over the economic decisions of millions of people because we insist on holding and exchanging their green pieces of paper. With a single word, Janet Yellen could set off a run on banks and the stock market.

When it comes to creating your own economy, gold is a large part of the program. As James Grant put it, "Gold is the store of one's work." And that is ultimately what the controversy comes down to. There are essentially two mindsets at work in the world. There are those who work for what they get while there are others who scheme for what they get. The schemers can only acquire wealth second hand from those who actually work. The workers are hapless fools who dutifully turn over their wealth to be looted by these schemers. If you confront these schemers, they will be at pains to defend themselves as being workers, too. They will claim lineage to some father or grandfather with rough and dirty hands from working in the coal mine or the factory. They will even defend their scheming as benefitting the larger economy. But when you press them further, they will calmly and sociopathically confess to their real worldview which is Darwinian to the extreme. They are the strong, and they are entitled to their exploitation of the weak. Honest working folk are the weak, and they deserve to be devoured.

People who work hard want to save, but saving is foolish in today's low interest/high inflation environment. Consequently, you can either spend it, or you can dump it in the casino. The spenders seem foolish, but they are actually doing the most logical thing. They are converting their cash into commodities which are safer havens than anything offered by a bank or a stockbroker. The only foolish part is that they consume these commodities rapidly, or they sign up for the usury trick of credit cards and consumer loans from the local finance company or rent-to-own store. Yet, the smartest thing these fools could do would be to buy gold and diamond encrusted grillz for their teeth. This is because you can sell that gold when your fortunes go south.

These are strange times we are living in as every financial mind that I respect admits candidly that they have never seen anything like the environment we see today. There is no historical parallel to this madness where bubbles are everywhere and everyone anticipates a massive crash. Interest rates have been at zero for six years. The market is at an all time high while the economy is tanking. This is the economy one would find on the home world of Bizarro Superman. The culprit is all that paper money. It represents a vast store of financial black powder waiting for a single spark to send it into the most massive economic explosion the world has yet seen. The effects will be worldwide and devastating. No one will be untouched. Someone has to get stuck with the nothing, and that someone is us.

My prescription for survival of this calamity looks much the same as those paranoid preppers with their bomb shelters in the woods. But that sort of stuff is extreme. My advice is to become more self-reliant in your lifestyle and less reliant on the larger economy. Work hard, live simply, and put your savings in gold. I might be wrong, and we have nothing to worry about. But history tells me to worry. For good or bad, I think my advice will serve you well either way. The only thing you will miss is the excitement of the casino.