Fake Responses 

One month ago we asked: What kind of stock market purge is this?  Over the last 30 days the stock market’s offered plenty of fake responses.  Yet we’re still waiting for a clear answer.


As the party continues, the dance moves of the revelers are becoming ever more ominous. Are they still right in the head? Perhaps a little trepanation is called for to relieve those brain tensions a bit?  [PT]


The stock market, like the President, knows the art of ballyhoo. Day after day, stocks behave in shocking and unpredictable ways.  They bluster and then recoil with the inconsistent elegance of a President Trump twitter tirade.

Wild multi-hundred-point swings on the Dow Jones Industrial Average (DJIA) have become the norm.  Up 300 points one day.  Down 300 points the next.  Do you hear anything? All we hear from the stock market is a giant racket. There’s much noise being made.  But there’s nothing of substance behind it.

Certainly, after a nine year bull market there’s risk of a massive sell off.  That much is abundantly clear.  Perhaps it could be another 50 percent bloodbath like what happened in 2008-09.  But when will the next great panic hit?

Is all this volatility of late coinciding with the actual market top?  At this point, the verdict is still out.  Remember, market tops are unknown until well after they pass.  Market tops are also a process; not a single event. What to make of it?


Just in case you were wondering about the cure proposed above – it has been known for about 5,000 years and reportedly cures almost everything. It drives out demons, fixes chronic migraines, and according to its modern-day practitioners “increases brain blood volume”, which  “gives you back the energy you had as a child” and provides you with a “permanent high” to boot. We just wanted to make a little joke, but after looking into the issue more closely, we found out that the above depicted Bart Huges actually triggered a kind of mini-mass psychosis after his auto-trepanation and writing a bizarre manuscript entitled Homo Sapiens Correctus while in prison (he avers he was in jail for “experimental reasons”). A bunch of people who otherwise come across as quite normal (if slightly eccentric) decided to mimic him and drilled holes into their heads as well. The depth of their delusion is nothing short of astonishing – buying stocks at a CAPE of 33 is probably quite rational by comparison (here is a video for those who have the stomach for it; at first it is funny, but on second thought it is sad). [PT]


Two Short-Term Data Points

Any old halfwit can venture an endless supply of guesses as to why the market is doomed for a massive panic attack.  What follows is a running list:

Rising interest rates.  Diminishing liquidity.  A new Fed Chairman.  Quantitative tightening.  Rate hikes.  Trump trade tariffs and a new trade war.  A new fighting war.  The 115th U.S. Congress.  Kim Kardashian.  Extreme valuations.  A market that is overripe for rot.  An economy that may be weaker than advertised.  Inflation.  Deflation.  And much, much more!


Here is one of the problems: short term rates are going up sharply. LIBOR in particular reflects that European banks are scrambling to obtain dollar funding – as a result, their US subsidiaries are not expanding credit, which has a sizable effect on the overall creation of inflationary credit and deposit money in the US. There is a certain irony in the fact that this time, European banks may actually trigger the bursting of the bubble by reining in the creation of fiduciary media. [PT]


You name it.  Any one of these prospects sound like a valid reason for an imminent market crash.  Make of them what you will.  Here at the Economic Prism we like to keep things real simple.  Hence, we’ll offer two other short-term data points to be on the lookout for…

The DJIA hit an all-time high on January 26 of 26,616. Then, after an explosive decline, the DJIA hit an interim bottom of 23,360 on February 9.  Since then, the DJIA has bounced around within this range, fluctuating wildly on a day-to-day basis.

What is important to watch for is if the DJIA first breaks out above the January 26 high or if it first drops below the February 9 interim low.  Should the market first drop below the February 9 interim low, it could continue down for another step or two lower.  Moreover, it increases the likelihood that the bull market’s days are numbered.


The Dow Jones Industrial Average, the S&P 500 and the Nasdaq are getting all the press – but broad-based indexes like the NYA are probably a better reflection of how the average domestically  focused portfolio of equities is performing. Since the rebound has in the meantime begun to take an a-b-c shape, one would be inclined to expect a push above the last interim high – mainly because such chart formations very often develop strong symmetry/ self-similarity between their individual legs; there is no “rational” explanation for this tendency, it is merely an empirical observation. The question is though: does this look bullish? Not really, at this juncture. Admittedly that could easily change, since the all time high is not very far away. Volume is declining as the rebounds continues, and the strong initial sell-off has all the hallmarks of a “kick-off” move. [PT]


One Fight Too Many

Over the last nine years those who followed the mantra ‘buy the dip’ were rewarded for their mindless optimism.  However, at some point one of these dips will not be the dip to buy.  Rather, the subsequent bounce will be the bounce to sell.

The stock market has a way of humbling even the most successful investors.  A body of work built up over decades can be rapidly wrecked by a bear market.  Sometimes there’s no coming back.

Boxing champions always seem to hang around for one fight too many.  Time has a way of sneaking up on even the greatest fighters without them knowing it – or being willing to recognize it.  Money and glory often cloud their decisions.

Some champion boxers lose their desire.  Some lose their physical edge.  Some lose both at the precise moment they’re in the ring, functioning as a human punching bag.  Muhammad Ali should have passed on his 1980 fight with Larry Holmes.


Larry Holmes (left) pummels his much older rival Muhammad Ali. Watching this sorry excuse for a  fight in hindsight, one suspects Ali was already suffering from Parkinson’s disease. If it wasn’t that, he was seriously damaged from his previous fights (by the time this fight took place, he had allegedly taken a total of 200,000 hits in the course of his career). Sylvester Stallone watched the  fight and remarked that “it was like watching an autopsy on a man who is still alive”. It was the first time Ali lost in a fight that was stopped by the referee, also known as a “technical knock-out”. The last round is pitiful to watch. [PT]

Photo credit: John Iacono


He was near 40-years-old.  He’d taken a lot of punches.  He’d lost his edge. But he fought anyway.  He needed the money.  Boxing writer Richie Giachetti called it “…the worst sports event I ever had to cover.”

Ali should have quit while he was ahead.  Now may be a good time for investors to quit while they’re ahead too.  Otherwise, they could be setting themselves up for something ugly…


Achieving the Impossible

Bill Miller knew he was smarter than the stock market.  He knew this not because he believed it was so.  He knew he was smarter than the stock market because he had the track record – data – to prove it.

As fund manager of the Legg Mason Value Trust fund, Miller outsmarted the stock market for 15 consecutive years.  From 1991 to 2005, Miller beat the stock market every year.  No other fund manager we know of matched this near impossible achievement. Was it innate intelligence?  Was it luck?  Did he guess the correct coin flip 15 times in a row?

Most likely it was a combination of hard work, shrewd acumen, an attuned gut, and dumb luck.  Indeed, Miller could do no wrong.

On New Year’s Day 2006, Miller should’ve hung it up.  He had nothing to prove. He should have quit while he was ahead, and taken to wood whittling or restoring old cars. Like an aging boxing champ, Miller had lost his edge.  He just didn’t know it yet.  The market had changed.  He hadn’t.  In short, he had become a disaster waiting to happen.


How to Blow $12.2 Billion in No Time Flat

When the stock market peaked out in mid-2007, in the early days leading up to the 2008-09 crash, Miller knew exactly what to do.  Like now, it was unclear in the fall of 2007 if the moderate decline that had occurred was merely the market coiling for the next spring upward or if it was rolling over for a more advanced decline.


A real-life test of the Martingale strategy. In Casinos users of this strategy usually either fail because their bankroll is eventually exceeded, or because they reach the Casino’s betting limit (n.b.: the strategy would have a long term expected value of zero if 50/50 bets were actually available; alas, the presence of one or two zeroes on the roulette wheel guarantees that the expected long term value of the strategy is negative). Systematic roulette players reportedly broke the bank at the Monte Carlo Casino several times in its early years (in the 19th century), despite the undeniable long-term mathematical advantage enjoyed by the house. According to lore, the strategies employed by these players were essentially the opposite of the Martingale. While the details are not known, they were apparently increasing their bets when they were on winning  streaks and focused on lengthy uninterrupted runs in single chances. One reported case involved a sharp observer spotting and exploiting imbalances in roulette wheels. Note that all these reports are unconfirmed to this day; while it is true that the bank was broken a few times, the precise circumstances and identities of the people involved are a matter of dispute. [PT]


Miller held his licked finger up to the air and felt an amiable warm breeze blowing across the land.  So, like what he’d always done, he seized the moment, and began Martingale betting the market.  What we mean is he was buying the dip with ever increasing bets.


Business Insider, in a December 10, 2008 article titled, The Fall of Bill Miller , offered the gory particulars:


“Mr. Miller was in his element a year ago when troubles in the housing market began infecting financial markets.  Working from his well-worn playbook, he snapped up American International Group Inc., Wachovia Corp., Bear Stearns Cos. and Freddie Mac.  As the shares continued to fall, he argued that investors were overreacting. He kept buying. What he saw as an opportunity turned into the biggest market crash since the Great Depression.  Many Value Trust holdings were more or less wiped out.  After 15 years of placing savvy bets against the herd, Mr. Miller had been trampled by it…”


Between late-2007 and late-2008 the Legg Mason Value Trust fund collapsed nearly 60 percent, wiping out the gains that had been accrued in the funds lengthy streak of beating the market.  The fund’s assets under management collapsed from $16.5 billion to $4.3 billion.

There are many fun and interesting ways to blow $12.2 billion in no time flat.  Some people buy professional sports teams.  Others buy expensive hotels and private tropical islands with outdoor air conditioning.  Some build indoor ski resorts in the desert.  Others start businesses that consume massive amounts of capital producing electric cars. Some even get mixed up with questionable women with names like Stormy Daniels.

Miller, no doubt, was lacking in creativity.  For Miller did none of these things.  He merely flushed $12.2 billion – which represented the hard work, hopes and dreams of countless fund investors – down the toilet.  What a waste.


Could it be that Bill Miller was the inspiration for this guy? Probably not – consider that burning billions in standard money is actually outright deflationary, as the money de facto disappears from the face of the earth. This is not what happened with the money Miller lost – he gave it to those who gladly sold their shares in failing financial companies to his fund. The money as such didn’t disappear – it merely changed hands. Obviously this was no consolation to investors in his fund (as an aside: he got to keep his yacht, the $100 million “Utopia” – see further below). [PT]


Every decision to buy anything has been wrong,” said Miller following his disastrous performance. There are dips to buy and dips not to buy. The stock market dip that occurred between mid-2007 and mid-2008 was a dip not to buy.

Most likely the next stock market dip will be dip not to buy too.


Miller’s luxury yacht “Utopia”, a $100 million extravaganza (reportedly he has sold it in the meantime, and instead bought a “large mansion north of Baltimore”). Insert: Fred Schwed’s classic on an age-old and evidently still quite pertinent question… [PT]


Charts by: StockCharts, acting-man.com, expertbet.info


Chart and image captions by PT


MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.




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4 Responses to “How to Blow $12.2 Billion in No Time Flat”

  • Hans:

    Miller, had to know that so or later a reversal would have to come.

    The fears of normal interest rates sinking the equity markets, are
    IMHO, over exaggerated. Market growth will be tempered but not

    What I do worry about is an unknown bubble, such as Kim Kardashian,
    as lustful hands blinded by unusual gains, unexpectedly find a bottom
    busting, bubble.

  • HardMoney:

    MN Gordon is always a good read.

    On the Bill Miller 15 year outperformance there is something I do like to point out – though in my mind it should be intuitively obvious to most people even if they have not logically reasoned it through.

    The thinking that the probability for anyone to outperform an average s around 1/2 (there are various assumptions and costs in terms of a stock index). Thus, to do so 5 years in a row would be1/2 to the power of 15.

    But why track against an yearly performance – why not daily, monthly, by the minute. Other than data being available there should be no reason to pick one time period over another.

    The answer is that the time period does not matter. All that is required is that the pedkrmace did each period be independently distributed.

    So if Bill Millet makes a bet large cap US stocks in 1990 – and then these stocks have a bull run, ie, the performance from one year to the next is correlated, the this does not satisfy the independent distribution conditions.


  • domain:

    So Mr. Gordon and Mr. Tenebrarun, do you have any view on where to seek shelter?

    Cash and Gold come to mind, but what do you think about gold miners where they are priced now, in the scenario that the market took a swan dive?

    I thought I recalled that one of your past articles mentioned a possible change in character for miners in this current cycle, in regards to their performance in the event of a crash. I’ve been grappling with taking losses and being safe, or holding on at this point thinking that the miners are at a good price point.

    There are several losers in my portfolio, but the damage has largely been done at my own hands due to my own lack of experience in investing in gold miners.

    So your opinion would be appreciated, with the understanding that it is not investing advice per se.

    • Hans:

      “Cash and Gold come to mind, but what do you think about gold miners where they are priced now, in the scenario that the market took a swan dive?”

      Domain, if I remember correctly, during the 2008/09 govcession, the miners
      tanked with the rest of the market, recovering for two years and then entering
      the current bear market.

      Cash and money market funds only.

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