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Paul B. Farrell: Wall Street’s profits addiction and $100 million trading days will drive America over a new 1929-style cliff and into a new Great Depression II…It’s Inevitable!!!


By Paul B. Farrell, MarketWatch

 

Wharton School economist Jeremy Siegel, author of two classics, “Stocks For the Long Run” and “The Future for Investors,” is one of America’s most respected financial minds. He recently told cable channel CNBC that Dow 15,000 was “definite,” with 50-50 odds of Dow 17,000 by year-end 2013.

He even doubled down in Kiplinger’s: “My Dow 17,000 projection may turn out to be too timid.” Now that’s real bull, a 20%-plus gain for 2013.

Dow 15,000? Dow 17,000? Irrational exuberance? DNA flaw? Delusional? Or are these predictions just typical marketing hype calculated to drive Main Street’s 95 million investors into Wall Street casinos for another end-of-a-bull-market slaughter?

Whoa, stop, take a deep breath before we dissect Siegel’s over-the-top Dow 17,000 prediction. First, a refresher course in basic market psychology. Let’s remind ourselves: There’s a profound difference between the DNA, brains and biases of bulls versus bears.

A bull brain has a massive blind spot. They can’t see the light-at-the-end-of-a-tunnel. Only short-term profits. Wall Street makes money on the action, on volatility. Whether up and down generates opportunities and profits. Bulls blindly hang on till the profitable last drop. Bears do see the light. But once lured into the game, they’re blinded by the light. Trapped as both ride over the cliff.

One more time, Wall Street will push everyone to the edge … and over

Here’s a great summary looking inside a bull’s brain:

“While the end-of-the-world scenario will be rife with unimaginable horrors,” predicts the CEO of a leading Wall Street bank, “we believe that the pre-end period will be filled with unprecedented opportunities for profit.”

Profits, profits, profits … get it? Bulls may see the end of a rally, end of a bull cycle … but till the very last unpredictable minute, they’ll squeeze every last ounce of profits out of the casino … and into their pockets.

And they honestly believe they can get out well ahead of all the little investors who are always left holding the bag … America’s 95 million average investors who naively believe predictions like Siegel’s Dow 17,000 for 2013 … who get stuck with heavy losses in the next recession … till Wall Street starts hyping a new bull market.

Can you guess which bank CEO concluded, “We believe that the pre-end period will be filled with unprecedented opportunities for profit?” It was a CEO in the Cartoon Bank. Actually, that prediction was made by the New Yorker magazine’s Robert Mankoff who brilliantly captured the behavioral science problems with Wall Street’s brain.

28 words tell all you need to know about Wall Street’s addictive brain

Read it, commit it to memory … those 28 words are everything you will ever need to know about behavioral economics … everything about what a neuroscientist sees in the brain scans of high-frequency derivative traders … about the all-consuming addiction driving Wall Street bank CEOs … about the obsessions that drive financial lobbyists to block all regulation reforms … even the fierce war against the environment waged by corporate CEOs … everything you can ever imagine about the stock market’s ever-increasing volatility, wild disastrous swings … everything you need to know about why, inevitably, Wall Street’s profits addiction and $100 million trading days will drive America over a new 1929-style cliff and into a new Great Depression II.

Behavioral economics isn’t complicated. The DNA in Wall Street’s brain is simple: Markets go up. Markets go down. Wall Street knows how to get rich in up and down markets. Their casino makes money skimming a third off the top. On the way up or down. And when the end comes, Wall Street bulls are always several steps ahead of Main Street’s 95 million naive investors. So the house always wins at the Wall Street casino.

No, we’re not predicting the end of the world. That’s not the point of our behavioral economics lesson. Rather we want you to visualize Wall Street’s brain in action, see what their brains are doing every microsecond, every minute, of every day. Throughout 2013. For all eternity.

Their brains are your worst enemy, plotting their next move in the stock market, to take maximum advantage of your naivete, smiling as they say: “While the end-of-the-world scenario will be rife with unimaginable horrors, we believe that the pre-end period will be filled with unprecedented opportunities for profit.” So you trust, invest in their money-losing casinos.

11 reasons Dow 17,000 prediction creates a “sucker’s rally” in our minds

A long 10 months ago USA Today’s mutual fund guru John Waggoner said in his column “the bull market was now in its fourth year.” That reminded us of something Bill O’Neil, the publisher of Investors Business Daily, said in the first edition of his classic, “How to Make Money in Stocks”: “During the last 50 years, we have had 12 bull markets and 11 bear markets … The bull markets averaged going up about 100% and the bear markets, on the average, declined 25% to 30%,”And “the typical bull market lasted 3.75 years and the classic bear market lingered only nine months.”

Get it? This aging bull is now way past retirement age, ripe for a lengthy bear. And yet bulls like Jeremy Siegel want us to believe the rally in stocks (which rocketed over 100% since March 2009) can go up another 20%, at least to 15,000.

More likely, that will lure you into a suckers rally, where the bulls just keep hyping the good times so every naive investor left will finally pile in, fearful they’re missing the race to 17,000 … forgetting the dot-com disaster in 2000, forgetting the huge losses after the subprime mortgage disaster of 2008.

The professor should follow his own advice, be more cautious in making such over-the-top predictions. In his classic “Stocks for the Long Run,” Siegel studied market turning points from 1801 to 2001. His bottom line: In 75% of the time he found no rationale for big market turns. None.

Siegel should also reread Nassim Taleb’s “The Black Swan,” as well as Brandeis Professor William Sherden’s “The Fortune Sellers: The Big Business of Buying and Selling Predictions.” Sherden tested the accuracy of leading forecasters over many decades. His research concluded: There’s “no way economic forecasting can improve since it is trying to do the impossible.”

In short, whether you’re a bull or bear, optimist or pessimist, conservative or progressive, Republican or Democrat, predicting the future of the economy is impossible, delusional, bordering on hoax … in fact, most of the time the game of predicting is an attempt by Wall Street to manipulate investors’ minds. Sherden’s 11 findings are scary:

1. Economists’ predictions are no better than guesses

Forecasting skill of economists is no better than guessimates by Main Street investors.

2. Government economists often worse than guesses

Sherden discovered that predictions made by the elite economists on the President’s Council of Economic Advisors, the Federal Reserve Board, and even the non-partisan Congressional Budget Office were actually worse than guessing.

3. Long-term accuracy is impossible

The accuracy of forecasting declines the longer the lead times.

4. Turning points cannot be predicted

Economists cannot predict the crucial turning points in the economy, confirming Siegel’s research. Worse, the vast majority of all long-term predictions fail.

5. No specific forecasters are better than the rest of pack

Sherden also learned that no particular forecasters were consistently more accurate.

6. No forecaster was more expert with specific statistics

No forecaster has consistently higher skills in predicting any one economic statistic.

7. No one ideological orientation was better

No ideology perspective consistently produced superior forecasts.

8. Consensus forecasts do not improve accuracy

But still, the press and their readers love those lists, averages and consensus forecasts.

9. Psychological bias distorts forecasters and their forecasts

Some economists are naturally optimistic and bullish. Others are naturally pessimistic bears. Some are conservative, some progressive. Why? Look inside their brains at their DNA, Every economist has mental biases and political ideologies that distort their choice of research topics and data selection, and therefore, skew their predictions.

10. Increased sophistication does not improve accuracy

Sorry folks, but all the new scientific methods, technologies, algorithms and computer models of the economy can make forecasts worse. At least give skilled Wall Street insiders an even better edge over naive retail investors.

11. No improvement over the years

Finally, Sherden says there’s no evidence that economic forecasting has improved in recent decades, despite vast new technologies.

In recent years the science of forecasting has been deteriorating more as partisan politics intensifies, along with global macro trends, high-frequency trading, Wall Street’s market manipulations, and unpredictable black swan events. All increase volatility, uncertainty and create countless new ways for forecasters to invent new illusions of economic accuracy, while hardening the mental biases of forecasters.

Fidelity’s Peter Lynch said it best many years ago: “If you spend 15 minutes a year studying the economy, that’s 10 minutes too much.”

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