The "invisible hand" is a term first used by Adam Smith
(he wrote The Wealth of Nations in 1776) to describe the unintended social benefits of individual actions. The
phrase was employed by Smith with respect to income distribution (in 1759)
and production (in 1776). This exact phrase from Smith has come to capture his notion that individuals' efforts to pursue
their own interest may frequently benefit society more than if their
actions were directly intending to benefit society.
Smith assumed that individuals try to maximize their own good (and
become wealthier), and by doing so, through trade and entrepreneurship,
society as a whole is better off. Furthermore, according to Smith, any government
intervention in the economy isn't needed because the invisible hand is
the best guide for the economy. Thus, the invisible hand is essentially a natural phenomenon that guides free markets and capitalism through competition for scarce resources.
However, despite the common sense wisdom of the great Adam Smith, it is well reported now that in addition to government intervention into the global bond markets with massive purchases, central banks worldwide are now buying equities. While proof has yet to be presented that the U.S. Central Bank is participating, I strongly suspect covert operations by the Fed to this effect. Purchases of equities by the Bank of Japan and the Swiss National Bank are well documented in the public record now. While the European Central Bank has just now acknowledged that it is purchasing European corporate bonds in addition to massive ongoing purchases of sovereign debt, I also believe that the ECB has been covertly buying equities.
While corporate share buy-back programs have been substantial here in the U.S. for many years now, I don't believe these very public efforts to support share prices have been enough lately to sustain the very high level of major market indices at or very near record highs where they are now.
Some of the greatest traders and investors of all time are now sounding alarm bells with respect to the U.S. and global stock markets. Stan Drunkenmiller, perhaps the greatest of all time, is now short stocks and long gold. Carl Icahn is bearish on U.S. stocks in almost every interview now. And George Soros has now come out and said that he is shorting stocks and buying gold. Paul Singer, another legendary billionaire investor, told Institutional Investor in an interview this past weekend that "at the moment we’re
either in a stage of stagnation or rollover, possibly in the early stages of a
global recession". Singer added that "it’s a very dangerous time in the
financial markets".
Wow! As a short-seller myself, with a 20% short allocation in the S&P 500, shouldn't I be comfortable in my position with all these legends on the same side of my bearish trade? I should be, but I am NOT !
I read this morning that according to the latest polls, the Brexit vote actually favors "LEAVE" now (the vote is on June 23rd), which is incredible to me. While I am a bit skeptical of this latest poll, market volatility (and downside air pockets) will almost certainly increase. Again, this sort of news should be great news to short-sellers like me (and the legends of the game).
Am I more comfortable given this latest Brexit news? NO! Why not? Because I strongly believe that the "invisible hand" of Central Banks will continue to support equity prices through this potentially volatile period and beyond. In fact, I now believe there could be an extraordinary short squeeze! While I probably won't lose sleep tonight with my 20% short position in tow, I will in fact be covering early this week in favor of a 100% sideline cash position. Not even gold appeals to me right now, although all the great ones who were quoted earlier in this column have apparently loaded up the truck with precious metals related investments. I won't be joining them, but I completely understand their views.
