Why Artificial Intelligence Will Never Beat the Stock Market

Over the past decade, the belief that artificial intelligence could solve the complexities of the stock market has spread like a wildfire. The notion that humans lack the capacity and capability compared to machines, who will, without fail, consistently beat the market over time. By simply programming a machine, it will produce the ultimate formula making you filthy rich in the process. A radical change in society where anyone can make money, but not just a stable income: a modest fortune.

Unfortunately, though, this is a mere fantasy.

There’s a major flaw in algorithms built solely to predict future market moves: they don’t. They only respect the technical aspects of an asset by taking into account past price movements, avoiding any consideration for future fundamentals. Any veteran trader will tell you the market isn’t there to give away free money. Instead, it’s a competitive environment punishing anyone — or anything — who tries to make a quick buck by trading on reactionary information already priced in.

Technical analysis alone will not make you money. In fact, the myth that it does has fueled an entire industry which preys on the vulnerable: As the homepage of many online brokerage websites illustrates, up to 96% of foreign exchange traders have fallen for the trickery. The truth about the brokerage industry is it makes money when its clients lose. So when your broker offers you a plethora of trading algorithms to choose from, the alarm bells should be ringing.

Still, you may fall for the con, because the trickery itself is seductive: Let the algorithms do everything for you, sit back and relax until you can retire. All the algorithm has to do is choose the right direction: either buy or sell, right?


In reality, feeding an algorithm with data based purely on technicals is the equivalent to putting on a blindfold and aiming at a dartboard. You hit the board 1 out of 10 times, but the rest hit the wall.

The buy or sell illusion is an anchoring effect: a cognitive bias discovered by the renowned psychologists Daniel Kahneman and Amos Tversky where your mind tricks you into believing your chances of winning are much higher than they actually are, due to being presented with a binary choice.

The stock market is one of the most complex systems we’ve created as a species and it cannot be beaten all the time. It’s the collective decision making of not just humans, but also machines, algorithms, and algorithms predicting what other algorithms are going to do next — an infinite loop of complexity. And when you multiply the probability of all these inputs together, the chance of succeeding is miniscule. Realistically, your odds are way less than 50%, and, in some cases, even less than 1%.

It’s clear by now that the complexities of the market can overwhelm a human, but they can also overwhelm machines as they have yet to counter massive market fluctuations. When they do occur, operators are forced to switch off the algorithms and allow human traders to take over. The modern market environment has become so dynamic, machines have failed to protect against huge standard deviation moves associated with black swan events.

For example, in 2015, the foreign exchange markets were a non-volatile asset class. All the major G10 currency pairs were rangebound, moving a few hundred pips here and there. For the EUR/CHF currency pair it was a quiet start to the year until January 5th when the Swiss National Bank (SNB) unexpectedly abandoned its cap of €1.20, causing a colossal intra-hour move of 20%. In a matter of minutes, hedge funds blew up, and retail traders lost a fortune, but the machines did too.

Not only are machines incapable of predicting a black swan event, but, in reality, they are more likely to cause one, as traders found out the hard way during the 2010 flash crash when an algorithmic computer malfunction caused a temporary market meltdown.

Ultimately, A.I is doomed to fail at stock market prediction. Beating the stock market over time, however, is possible. The solution lies with us because we humans have an edge. We have the ability to make informed decisions by analyzing future catalysts of an asset, and the reasons why they will move the price up or down — a strategy artificial intelligence has yet to beat us at.

Success in trading, like in any other discipline, requires hard work and extensive research, but this only results in having a slightly better chance of succeeding. With the best traders only getting up to half their trades right, this shows that if we humans have failed to decipher our own collective minds, then A.I doesn’t have a chance.

The 2020 Stock Market Dilemma

If there’s one thing that shows the massive disconnect between stock market performance and economic activity, it’s a chart of the Institute of Supply Management’s Report on Business: one of the world’s most popular economic sentiment indicators and the S&P500 index.

The disconnect is a result of several interventionist policies from major financial institutions and the White House: the multi-billion dollar liquidity injectionsthe buy-side algorithmsthe ability for companies to buy back their own shares, and the slashing of interest rates on a downward path to zero. As a result, stock markets are climbing in a bizarre, linear fashion reminiscent of the time before the early 2018 correction.

S&P500 Index vs. ISM

Because of interventionism within the financial system and how it shaped the market environment over the last decade, it’s rational to think that stocks will continue to rise. But for anyone who makes their investment decisions based on fundamentals, they now have to overcome a tricky dilemma: how do you commit to investing in the stock market when you know, for a fact, that economic fundamentals are failing to portray a similar narrative?

The struggle to decide whether to invest doesn’t stop there, though, as resisting the urge to take part creates the fear of missing out — or FOMO for short. If the market mania and hysteria persist for a long period of time while fundamentals continue to deteriorate, you’ll have to be comfortable knowing you’re missing out on future gains before an inevitable stock market correction.

On the other hand, deciding to participate means dealing with yet another obstacle. As the fun began in September 2019 when the Fed launched its silent quantitative easing program, it’s been a solid five months of parabolic stock market action. So what if we’re already late to the party?

Credit: CNN Fear & Greed Index

One way to find out is by following investor sentiment indicators which give us a good idea of whether we are throwing our money away and paying a cheque to the market. Right now, sentiment shows we’re doing just that: CNN’s Fear & Greed Index — a combination of seven popular indicators: stock price momentum, stock price strength, junk bond demand, put and call options ratios, safe-haven demand, and market volatility — has risen to the highest level since Winter 2017.

The current market sentiment reflects one of Warren Buffet’s famous quotes: “Be fearful when others are greedy,” illustrating how extreme greed is a reliable indicator of an overconfident market — a logical time to trade out of winners whose stock prices have risen dramatically despite weakening earnings growth and other major fundamental drivers.

Another indicator that sides with Buffett’s theory is the VIX (CBOE Volatility Index), also known as the Fear Index, which measures daily market volatility.

VIX Index (2010–2020)

Presently, the VIX is on a path towards the notorious “Volpocalypse” level of February 5th, 2018 when the index exploded 200% higher and the market sold off at least 10% from its high. When the indicator reaches such a low level it indicates extreme optimism: the belief that nothing will stop markets from climbing higher which, in reality, is never the case — there’s always a correction.

For the many investors who’ve woken up to this mind-boggling disparity, the abundance of uncertainty it creates means 2020 will be a year of wait and see; a year of sitting on the sidelines anticipating what happens next in the strangest market environment of our time.

On the flip side, for anyone who’s brave enough to participate in the current market mania, the days of valuing stocks based on company fundamentals are over. Instead, in 2020, your new role as a trader, investor or speculator is assessing the reliability of the market’s plumbing, and predicting how long before a blockage in the financial system causes a volatility explosion once again — an almost impossible task to achieve.

Why Global Stock Markets Rise Despite an Economic Collapse

We all know or have a feeling that our economy is no longer an economy, but more of a balloon that inflates and deflates depending on how much air the Federal Reserve decides to pump in.

Right now, the most powerful central bank needs a sizeable cannister as economic indicators continue to show poor readings: The world’s most influential PMI, the Institute for Supply Management’s Report on Business (ISM), points to contraction at 47.2, freight volumes are down, year on year, every month for the past two years, and even the most lagging of economic indicators like jobless claims are in a bearish trend moving into the new decade.

As the U.S economy continues to falter, a decline in global economic activity continues to emerge: Germany has narrowly avoided recession after posting -0.2% and 0.1% GDP growth in respective quarters. The Chinese economy is experiencing hiccups as financial institutions continue to be bailed out and taken over by authorities, and the U.K narrowly avoided recession despite delaying a “no-deal” Brexit.

But if leading indicators are pointing to a global economic contraction, why are stock markets — the most reactionary markets in the world — still climbing to all-time highs? Quite simply, they are no longer a barometer for economic fundamentals.

This is evident by reviewing any popular metric used to value — or predict the future value of — a stock. Take earnings growth, for example. This once-reliable metric used by many in finance has become inconsequential: According to a recent FactSet report, the EPS growth of S&P500 companies in 2020 is set to decline by 1.4%. The biggest weighting of the index, Apple, is the poster child achieving no increase in earnings growth for over a year. But despite that, the tech giant’s stock price continues to climb higher. Price-earnings (PE) ratios also tell a similar story. The mind-boggling valuations of companies like Square and AMD that sport PE ratios of at least 200 times, remain in high demand and the market still deems them to be cheap.

So if fundamentals are out of fashion, what’s the new trend driving stock markets higher? The truth is the stock market is no longer a barometer for the value of companies, instead, its a barometer for liquidity within the financial system, and, right now, there’s an excess supply.

To counter the poor global economic data, Federal Reserve Chair, Jerome Powell, announced recently that the Fed will continue to prop up markets in 2020 by injecting billions of dollars, daily, into the financial system. And although he insists it’s not QE (quantitative easing), in reality, it’s a repeat of the same process: the rapid re-expansion of the Federal Reserve’s balance sheet. Admitting that “Not QE” is, in fact, QE, may panic investors triggering a bit of Déjà vu reminding them of the Fed’s response to the threat of a global collapse during the Great Recession. For now, though, the Fed has successfully duped the market into believing it’s a way to help out in the short term, but without long term assistance, the inputs holding the market together will not function.

The liquidity “Not QE” provides, enables public companies to inflate their earnings, therefore, inflating their stock price. By buying their own stock in the open market — commonly known as share buybacks — this once illegal practice has contributed to some of the biggest stock market bubbles in recent history. It allows any company on the verge of negative earnings to borrow money and buy a part of their company, masking the damage of any short term economic downturn.

That’s not all, though, as buybacks have a partner in crime when it comes to stock manipulation: Algorithms designed for the sole purpose of trading stocks on news headlines, analyze press releases of “trade deal optimism”. Whether the initial story was real or fake, trades executed by computer algorithms can add several hundred points to the Dow Jones in a matter of seconds. What’s more remarkable, though, is the correlation between news around “trade deal optimism” and short term rallies.

Politics is always at the center of most stock market bubbles which are more likely to form when a President has an attraction to ultra-low interest rates such as Trump — it’s a real estate tycoon’s dream. Every time the stock market falls to an unsatisfactory level, the President protests, and the Federal Reserve lowers rates. The consistent decline in interest rates creates an increasingly cheaper financial environment, enabling almost anyone to take out cheap loans and buy stocks they can’t afford outright, increasing the size of the bubble further.

While this is happening, Trump insists we have the greatest economy ever, but this is, in fact, a euphemism for the highest stock market ever. Though, a booming stock market does not equal a booming economy. You have to ask the obvious question: Why would you have to lower rates when everything is good? How can it be the greatest economy ever when the Fed is providing daily support and announcing rate cuts at all their recent meetings except one? When you remove all the non-fundamental inputs: the liquidity, the algos, the money printing, the cheap credit, the politics, who’s left to support the stock market? The answer is the people, but we’ve already hit peak optimism. Who’s next in line to buy?

This is our situation: an economy based on maintaining liquidity to prop up asset prices instead of trying to create real, organic growth. It’s been the status quo for so long that, ultimately, we have embraced it as a collective. We are entering a yoyo situation: an up and down economy where we create temporary growth and face the consequences of our actions in the future. As long as irrationality in the form of overvalued stocks, bonds, and real estate, continues to be a moneymaker, we’ll stand by this system through endless booms and busts despite the end result always being the same: another financial crisis. The bankruptcies, the delinquencies, the disparities, the misallocation of resources, the inequalities, and the ever-increasing size of the wealth gap are ignored in favor of unrealized profits.

What’s scarier, though, is the people in power are unwilling to accept that economies fix their imbalances at some point in time. They will never drop the strong economy narrative even when economic data shows otherwise, because, simply, its political suicide. If our leaders truly believe we have the best economy ever while, in reality, we’re on the brink of collapse, a weak economy is something sinister; a situation we all want to avoid, but we all know is coming.

What the Return of Global Stimulus Means For Markets in 2020

At the end of 2017, investors witnessed one of the steepest climbs in stock market history. But the expectation that economic growth would continue into 2018 didn’t fuel these new all-time highs. Instead, it was the massive injection of fiscal stimulus pumped into markets worldwide — especially into the Chinese financial system — at the start of 2016.

The aim was to recreate the Plaza Accord: a global, coordinated effort to devalue the U.S dollar, reigniting economic growth in response to a recent U.S manufacturing recession that took its toll on the global economy. The decision to enact loose monetary policy created an abundance of liquidity in the global financial system, and when paired with the corporate tax cuts from President Trump, cheap money ebbed and flowed throughout the world.

As 2018 began, stock markets looked unstoppable; their charts resembled a parabolic curve. But for investors who thought they made a fortune were about to experience one of the worst weeks in stock market history: During the first week of February 2018, out of nowhere, all gains from the previous quarter were wiped out as the S&P500 Index fell 12.1% and the Dow Jones Industrial Average fell 11.7%.

This particular crash, however, was in a league of its own due to the absence of an obvious catalyst. There was no “Lehman Moment” or a natural disaster like Fukushima that would explain a sudden market sell-off. To find out what really caused the crash you had to overlook market fundamentals and dive deep below the surface of the global monetary system. There you will have found liquidity transitioning from net-positive to net-negative for the first time in over a decade.

The actual cause was the initial shock of several monetary policy changes made by central banks around the world. For a start, the ECB (European Central Bank) began to buy fewer bonds that provided essential liquidity to key European financial institutions, and this paired with regular interest rate hikes from the Federal Reserve, caused credit markets to gradually become illiquid. This not only had a negative impact on U.S markets but global markets too as a rise in dollar strength made it expensive for emerging markets to repay their dollar-denominated debts. With all these policy decisions creating a strain on the availability of credit, a shift from loose liquidity to tight liquidity spelled disaster for markets addicted to cheap money.

As we move into 2020, what’s interesting are the similarities between now and the spring of 2016, and the potential for history to repeat itself.

In response to U.S manufacturing indicators falling to recessionary levels, central banks around the world have reopened the credit taps by cutting interest rates and reintroducing QE (quantitative easing). From October 5th, 2019, the Federal Reserve has been injecting billions of dollars into the financial system on a daily basis — which has been infamously coined “Not QE” by many financial journalists and commentators. The European Central Bank (ECB) has also joined the QE party by reintroducing its bond-buying program; a farewell gift from long-standing ECB chairman Mario Draghi.

With loose monetary policy set to continue in 2020, if central banks and governments can achieve a Plaza Accord 2.0, markets will have a decent start to 2020. Though, the numerous market corrections we saw recently demonstrate that risk is increasing every year and markets need more than investors’ liquidity to support them. It’s also becoming clear that stocks no longer trade on company fundamentals, valuations, price-earnings ratios, and earnings growth which had a major impact on investment decisions in the past but are now more irrelevant than ever.

In the modern financial world, liquidity is the new king of global stock market sentiment, and, at some point, markets will have to face the reversal of the risk parity trade that has caused an epic rise in stock prices over the past few months.

Judgment day in 2020 will be the central banks deciding — once again — to turn off the credit taps and tighten liquidity by becoming overconfident in the market’s ability to support itself without regular interventionism. When that day comes, anyone hoping to invest in the future will want to know the answer to the following question: If central banks are no longer supporting asset prices then who is?

The Concept of a U.S Dollar Collapse Goes Mainstream

Over history, all currencies backed by a pure fiat monetary system come to an end in one way or another. Whether it was recently with the Euro replacing various European currencies like the Portuguese Real in 1999, or during ancient times with the fall of the Denarius, the currency of the Roman Empire, in 274.

The transition from a sound to an unsustainable monetary system is particularly common when currencies gain reserve status, which, in itself, is the cause of their demise. It forces leaders to finance an expansive empire resulting in the gradual debasement, devaluation, and destruction of their currency. Two textbook examples are the British Empire and the Roman Empire whose currencies collapsed by trying to fund imperialism. The debt they owed from trying to outgrow their productive capacity became such a burden it wasn’t just their currencies that fell, but also themselves.

Still, today, if you ask most people about the U.S dollar, they have yet to question its stability. Despite the Greenback being on a gold standard for the majority of the last two hundred years, recently, the currency has been supported by a fiat system and the rest of the world has gone along with it. Millennials and Boomers have yet to experience what it’s like to operate within a financial system that promotes discipline while prohibiting massive leveraging of debt. When the majority realize their currency is backed only by debt the government will never be able to pay back — $23 trillion to be exact — the U.S dollar will face a reality check.

Of course, for the U.S dollar to lose its hegemonic status, there has to be a good enough reason for the world to want to replace it. But, recently, there’s been an increased awareness around the world that the Greenback’s global reserve currency status is under threat.

Mainstream financial media who normally don’t have the opportunity to delve deeper into technical aspects of the monetary system are beginning to publish articles on the death of the U.S dollar. The topic has also become a popular topic on various financial podcasts such as Macrovoices which features the infamous dollar bear, Luke Gromen, who’s predicting — like many others — that the existing gold standard will supersede the current debt-backed system.

Meanwhile, even prominent central bankers are considering alternatives: At the annual Jackson Hole meeting, Mark Carney, the Bank of England Governor, hinted at the idea of a crypto-backed system playing the role as the new global reserve currency: “It is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies.”

Over the past decade, we’ve started to see real evidence of the U.S dollar becoming unfavorable. Various global powers are making a consolidated effort to decouple from the U.S dollar’s hegemonic status by stocking up on commodities that have been used as a store of value in previous monetary regimes. Having been employed in recent monetary systems preceding global fiat it’s no surprise that gold is in hot demand, especially from two of the U.S’s biggest rivals, China and Russia. From the beginning of the 21st century, Russia has increased its gold reserves by 680% — 340 to 2241 metric tonnes — and China has increased its gold reserves by 393% — 395 to 1948 tonnes.

Yet it’s not just gold, its oil too. Following the introduction of sanctions implemented by President Trump, the Iranians have been searching for an alternative medium of exchange while their currency — the Rial — continues to depreciate against the Greenback. During an address to the United Nations, Iranian Foreign Minister, Mohammad Javad Zarif said, “The actual mechanism would be to avoid dollars,” to achieve bilateral trade with countries in other currencies.

It’s evident that the world is waking up to the negatives of the Greenback’s reserve currency status, but what would be a suitable replacement? Now, the countless new, exotic forms of money produce a dilemma for anyone trying to predict the U.S dollar’s successor. History tells us its a gold standard; not out of choice but out of necessity to restore stability during a monetary regime change. Yet, this time, there are new contenders: cryptocurrencies like Bitcoin that bring power back to the people and other currencies that preserve institutional power like the IMF’s infamous SDRs.

With the world applying an ever-increasing amount of pressure onto the Greenback in capacity and complexity, it’s not a matter of if, but when the U.S dollar will be forced to make way for a new reserve currency. The challenge, however, is predicting what it will be.