what’s wrong with the market? and what’s the antidote?
TRANSCRIPT
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WHAT’S WRONG WITH THE MARKET?
AND WHAT’S THE ANTIDOTE?
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“Greed is bad and results in conditions
detrimental to investors” – Jeff Friedberg, 2015
Friedberg Investment Management
“Greed is good” – Gordon Gekko, “Wall
Street”, 1987.
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The machines have taken over, generating lots of volume and volatility but providing no liquidity since the driving algorithms are all similar. Benefit to investors? Zero.
Solution – regulators need to levy a transaction tax, perhaps $.001/share, to reduce profitability of HFT.
GREED – HIGH FREQUENCY TRADING
Friedberg Investment Management
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Hedge funds can gang up to force down the value of a company’s stock.
GREED – UNRELENTING SHORT SELLING
Friedberg Investment Management
Solution – the SEC should reinstitute the uptick rule, which requires that short sales can only be done on an uptick.
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GREED – CARRIED INTEREST
Hedge fund managers pay tax at a favorable capital gains rate on fees for managed money even though they have no investment of their own at risk.
Friedberg Investment Management
Solution – Congress or the IRS needs to change the tax code to disallow this outrageous situation.
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GREED – STRUCTURED PRODUCTS
Created by investment banks to pool risky investments along side A-rated securities in packages sold at high fees to retail investors.
Friedberg Investment Management
This practice nearly crashed the whole financial system when many of the risky securities defaulted in 2008. No individual has been taken to task.
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CIRCUMSTANCE – ETFS
ETFs are baskets of stocks which typically have something in common. If some of the stocks in the basket plunge, the whole ETF loses value due to forced selling.
Friedberg Investment Management
This is perfectly legal and widely accepted. But investors need to be aware that just a few bad apples in the barrel can spoil the whole basket. Example – high yield energy.
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OTHER STUFF
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GREED – OBAMACARE
Malpractice insurance is very expensive for docs. One of the most obvious improvements to medical care in the US would be tort reform.
Friedberg Investment Management
Plaintiffs lawyers have a very strong influence on Congresspersons, many of whom are lawyers. Too bad.
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GREED – POLITICAL OFFICE
“Power tends to corrupt, and absolute power corrupts absolutely”, Lord Acton, 1887. It is very difficult for a challenger to unseat a sitting congressperson.
Friedberg Investment Management
Solution – term limits, like 2 terms for the Senate and 5 for the House. Congresspersons could run again after some time out of DC.
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MIDDLE CLASS WAGES
In this tepid economy they are stagnating, exacerbating the divergence between the fortunes of the wealthy and the middle class.
Friedberg Investment Management
Solution – lower FICA, a tax on wages, and raise taxes on gasoline by a similar amount. There is no reason that Social Security needs to be funded by a tax on wages.
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CONGRESSIONAL GRIDLOCK
Too many left wing Democrats and right wing Republicans in Congress. Very difficult to reach compromise for any legislation.
Friedberg Investment Management
Solution – redistricting. Political gerrymandering has made it difficult for moderates of either party to be elected to Congress. Political greed prevents this.
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OUTLOOK FOR THE MARKET
Economy
Oil
Profit Margins
Interest Rates
Valuations
Stocks
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“It’s not a stock market. It’s a market of stocks”– anonymous
Q & A