Mindless Robots Have Taken Over the Markets, Says Don Coxe

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FS Insider recently interviewed Don Coxe at Coxe Advisors on the large number of storm fronts that are converging upon the financial markets, whether in the disruption to the fundamental pricing mechanism that dictates corporate valuations or in the form of regulation and its impact on the oil markets.

Coxe also expressed his concerns over our current robotically-driven financial markets and their inability to account for systemically important risk factors. Here's what he had to say on this point:

Pricing Mechanisms Are Compromised

Stocks have been propped up by richly-valued FANG stocks, and ETFs and index funds are the ones driving the frenzy.

Many of the funds are essentially on autopilot, automatically allocating shares to companies with little to no regard concerning valuations as funds continue to flow into index-tracking ETFs.

“This could be the first example of what it's going to be like for the rest of the economy as technology advances,” Coxe said.

As market pricing becomes increasingly automated, Cox worries that this threatens to undermine the qualitative individual (human) decision-makers provide in valuing goods and services .

“What we're doing once again is preventing the ordinary responses to shocks from functioning,” Coxe said. “Therefore, we’ll get new kinds of shocks.”

Gold, Oil and Bonds

Multiple threats to the economy are brewing, and investors need to be aware of these developments to protect themselves.

Right now, investors should try to identify what isn’t overpriced in this environment, Coxe stated. Looking at gold and oil are a good start, he added.

He recommends identifying assets that aren’t priced superficially, and finding companies that produce something which is underpriced relative to the risks and production realities.

Zero coupon bonds could also provide a cushion against a stock market crash or other event that brings down interest rates, he added. Until some sanity returns to markets and our method of pricing assets, it’s best to be on the lookout.

“The genius of capitalism is that people make their decisions based on rational results for them,” Coxe said. “We're not letting that price mechanism work now, and it's going to come back and hit us hard.”

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