Hollow Men, Hollow Markets, Hollow World by John Mauldin

I’m sitting in the British Airways lounge at Heathrow terminal 5, or in other words in my usual office, and trying to catch up on my reading. I was particularly intrigued by my good friend and economic philosopher Ben Hunt’s latest Epsilon Theory post, which he calls “Hollow Men, Hollow Markets, Hollow World.” As he points out, an increasingly smaller portion of trading in the markets is between individuals looking to actually own a fractional portion of a public company for the long term. Instead, trading is gravitating to machines competing with each other in milliseconds and for a profit of milli-cents.

I get the rationale behind the supposed benefits of high-speed trading; but I have to confess, I just don’t buy it. If it was just another way to truly profit from normal commercial activity, I would pretty much have a hands-off attitude. But from everything I can see, high-speed trading is sucking billions of dollars out of the market that would otherwise go to individuals and institutions who are actually there to serve what was once the purpose of Wall Street: to provide new companies with capital and individuals with the chance to participate in the growth of the country. High-frequency trading is a zero-sum game. It takes money from “us” and gives it to funds with instantaccess to the exchanges.

The fact that high-frequency trading does not work half a mile across the Hudson River because even that short distance slows down the transactions too much, is testimony to the fact that something is truly out of whack. When the speed of light is a barrier to entry, you know we have entered a new era. I am not one to stand in front of the accelerating wave of technology and cry “Stop!” I am rather simpleminded, and it seems to me that if you simply instituted a rule that all buy and sell offers have to at least exist for an outrageous amount of time like one half second, that it would at least begin to level the playing field. The fact that large institutions are gravitating to exchanges where high-frequency trading is not allowed is evidence that the deck is stacked against the smaller investor. A point here and a point there, and pretty soon you’re talking real money.

But in today’s OTB, Ben Hunt doesn’t really focus all that much on high-frequency trading but rather on the fact that so much of economics and investing itself is hollow. Our job, he says, is to find the signal amidst all the noise. This is an Outside the Box that you will need to think through as opposed to merely read.

They will be calling my flight to South Africa in a few minutes. I’ve been thinking back over the ten times or so that I’ve flown to South Africa in the last 20 years. I first went there in the apartheid era. The moods in the country seem to shift with each visit. I can remember talking with people who were sure that South Africa would become the next Zimbabwe. “Apocalypse Now” could certainly describe the mood of those times. And then there are times when there is an optimism so intense it is hard not to get infected. I wonder how South Africa will feel this time.

South Africa really is one of my favorite countries in the world. I think my vote for most beautiful city would have to go to Cape Town (although I admit it comes down to personal taste, as there are quite a few spectacular harbor cities dotted around the world). If the weather permits, I will take my first hot air balloon ride. I’ve tried three or four times over the years and always had bad weather postpone my flight. Flying over the African savannah, looking down on lions and elephants, antelope and rhinoceros, zebra and giraffe sounds rather idyllic. I need to enjoy my time at Kruger National Park, because my hosts have put together a rather aggressive schedule for next week. Even so, I will get to meet scores of South African businesspeople and investors and hopefully gain a renewed sense of where one of the more important countries in the world is heading. I will report back from the frontlines. Until then, have a great week.

Your ready to be in a real bed analyst,


John Mauldin, Editor
Outside the Box
[email protected]

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Hollow Men, Hollow Markets, Hollow World

Hollow Men Hollow Markets Hollow World

Apocalypse Now (1979), based on “Heart of Darkness” by Joseph Conrad

Kurtz: Did they say why, Willard, why they want to terminate my command?

Willard: I was sent on a classified mission, sir.

Kurtz: It’s no longer classified, is it? Did they tell you?

Willard: They told me that you had gone totally insane, and that your methods were unsound.

Kurtz: Are my methods unsound?

Willard: I don’t see any method at all, sir.

Kurtz: I expected someone like you. What did you expect? Are you an assassin?

Willard: I’m a soldier.

Kurtz: You’re neither. You’re an errand boy, sent by grocery clerks, to collect a bill.

It is my belief no man ever understands quite his own artful dodges to escape from the grim shadow of self-knowledge.The question is not how to get cured, but how to live.Joseph Conrad (1857 – 1924)

Billions of dollars are flowing into online advertising. But marketers also are confronting an uncomfortable reality: rampant fraud.

About 36% of all Web traffic is considered fake, the product of computers hijacked by viruses and programmed to visit sites, according to estimates cited recently by the Interactive Advertising Bureau trade group.

–   Wall Street Journal, “The Secret About Online Ad Traffic: One-Third Is Bogus”, March 23, 2014

Over the last decade, institutional management of equity portfolios has increased from 54% to 81%. …

Institutional buys and sells accounted for 47% of trading volume between 2001 and 2006, but only 29% of trading volume since 2008. 

One of the most significant results of the tension between fewer market participants and larger parent order sizes is that the share of ‘real’ trading volume has declined by around 40% in the last five years.

–   Morgan Stanley QDS, “Real Trading Volume”, Charles Crow and Simon Emrich, April 11, 2012

I first saw Apocalypse Now as a college freshman with two roommates, a couple of years after it had been released, and I can still recall the dazed pang of shock and exhaustion I felt when we stumbled out of the theatre. Nobody said anything on the drive back to campus. We were each lost in our thoughts, trying to process what we had just seen. Our focus was on Marlon Brando’s Col. Kurtz, of course, because we were 18-year old boys and he was a larger than life villain or anti-hero or superman or … something … we weren’t quite sure what he was, only that we couldn’t forget him.

When I reflect on the movie today, though, I find myself thinking less about

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