Contrarian Theory: Are Americans Ready to Capitulate?


Some may find it ironic that when stock market capitulation occurs in the current bust cycle, even Mark Hulbert will not know except in his rear view mirror — so he claims. Meanwhile, he is helping the American investor understand better than before just what capitulation is, and is not. There is a certain value in this, at least to the practitioners of long cycle contrarian investing.

As an academic and a former employee of two Wall Street firms I want to press Mr. Hulbert to define his argument in ways that have real meaning to his whole audience, not just to those who practice his contrarian ideals. What is stock market capitulation in terms of its societal outcomes and distributive effects? What is the impact of capitulation upon the institutions of justice and fair opportunity? After all, democratic capitalism is supposed to exist to further worthy purposes — purposes sufficient to justify its existence relative to other plausible economic systems.

Is the purpose of capitalism to elevate the power of super elites while compounding the miseries and vulnerabilities of workers? If not, is its purpose to enlarge the common good and better distribute happiness in the world? If capitalism is neither of those polar purposes, is capitalism simply a random phenomenon — a meaningless experience as humans vie for power? Readers of Hulbert's weekly essays might benefit if we could see to what purpose he thinks capitalism exists. The answer to the capitalism question would help illuminate the reason for which the specific event of "capitulation" is so vital in his schema of how equity markets operate in supposedly free market environments. (Surely, Mr. Hulbert, someone on your staff will bring these questions to your attention!)

I've been reading Mr. Hulbert's MarketWatch work for some time, long enough to have difficulty imagining any explanation for capitulation other than one, variously phrased. Capitulation is the point of time at which acquisition of profit-making opportunities for trading elites is maximized at the expense of investment opportunity losses for comparatively weaker traders, meaning the general public. In other words, the environment of fear, confusion, disgust and helplessness at the time of the common investor's capitulation makes it relatively difficult for the general public to retain its fair share of the profitability of public corporate enterprise, or at least the gaming of that enterprise (as is nowadays the case). Never mind the fact that even without capitulation the public never gets its fair share due to executive stock options, perks, and the way major corporations expense their operations.

Under conditions of capitulation, members of the general public are generally unable to defend their investment interests, thus increasing the odds that elite traders will be able to cover short positions under optimal conditions. This is the same environment that allows the most advantaged elites to set up massive long positions that could not be put on at such advantageous prices were it not for the public's misinformation about the evolving situation.

The public operates under the media-fed impression that it can invest on Wall Street turf and make out alright. But reality comes short of expectations, for the end game of Wall Street elites aims at puffing up the public with bubbled profits so as to induce novice investors to over-extend themselves relative to what they can live with during a business turndown. Then, in the bust environment when bids for stocks dry up, the investing public can be shaken out of their positions first under conditions of preliminary capitulation (which Mr. Hulbert now calls "panic"), and ultimately during the doldrums of complete estrangement with the market (final or long-cycle capitulation). In this game, money changers acquire massive hunks of the investment capital that should reside in the public domain. Best positioned elites also capture most of the paper profits that novices thought were theirs — profits realized for elites through short positions and their derivative equivalents.

Naturally, elites lose money in some environments — some elites losing more than others as the recent Lehman and Bear Sterns experiences illustrate. But these losses are inconsequential in the larger scheme of capital redistribution. Some players, and some Wall Street institutions, must be sacrificed to the snake — to the end game. The end game has to be scored in terms of super elites' total accumulated gains — including ill-gotten gain they take off the ‘Wall Street table' and convey to offshore hedge funds and trusts. The winnings of elites must then be compared with the post-crash ownership holdings of the general public. Viewed from this perspective it becomes obvious that the long term money game is about the ratio of one side's gains and losses to the gains and losses of the other side. This is war — financial terrorism — carried on every day by networked cabals against industrious peoples worldwide who try (vainly) to retain their share of capital generated by their creativity and constructive labors.

As long as a small number of Mercurians grow their wealth at rates considerably faster than the wealth gain rates of the Apollonian masses, the compounding effect of the differential of financial gains will within seventy years put most of the ownership of critical corporate assets in hands of super elites. This in turn converts working class people — white collar and blue — into mere wage servants on their own soil. But these are the people who build a nation's infrastructure and service its needs. What a tragic outcome! (If you don't believe it, compound one million dollars for seventy years at a 10% rate differential.)

If Mr. Hulbert's readers understand this matter rightly, this is the speculative game that he calls "capitulation." While it bears some resemblance to the game of chicken where a Fiat convertible tries to stay on the yellow median line as a semi-truck roars toward it, the Fiat crash just decapitates a few reckless youth while the stock market crash, with capitulation, de-capitalizes the majority of the electorate. This de-capitalization undercuts the electorate's ability to control their country's destiny, especially in the context of overwhelming annual deficits and growing national debt. When the nation can no longer acquire sufficient public source capital to finance it's structural deficit, the nation either accepts restructuring terms from financial elites or sinks in ruination.

Argued from this perspective it is easy to see why readers everywhere should insist that the good Mr. Hulbert explain clearly the ends to which he believes democratic capitalism ought to exist. Hulbert's law is that there will be no end to the public's pain until the most vulnerable segments of the stock holding public capitulate to the strong. Shouldn't we have a clear picture of what this approach to finance capitalism entails and just where it leads? After all, there are more appealing ways to structure and operate democratic capitalism!