Ben Stein in an article in the NY Times yesterday seems to focus on the extent to which "traders" control the market and that the market won't go back up until the "traders" want it to.
I don't really want to dump on Stein nor do I want to debate him on this point but this most recent NYT piece brings up a point make by Nassim Taleb in the Black Swan book about the need to explain things. You should read the book to get his full meaning, I can't possibly do it justice but essentially it would be like saying "stocks were down today because..."
Stein's article tries to make an explanation or give an accounting of the current market. On some level perhaps knowing that Fed action, or bit of unfriendly data or a bad earnings report is to blame for what the market does can make us feel better. But an explanation given, though maybe plausible, may not be correct.
I have actually tried to make a similar point in the past, mostly in the context of discussing fast declines. The reason that most fast declines end is no reason, they just end with no need to explain.
It makes sense that other market action needs no explanation either, or maybe very little explanation. When I first started to express concern about the slope of the yield curve a couple of years ago I made no attempt to try to guess what would happen or when I just cut back on financials.
Stock market cycles end. They tend to give certain signs of ending, even if it is tough to know exactly when it will happen, and the reasons why are less important than the fact that it will end. Couldn't the inverted yield curve only have resulted in lousy earnings for the banks leading one to conclude that the index would not do well without its largest sector? Only expecting and bad fundamental environment was enough to be right. Being underweight financials was likely more important than knowing how much they would go down.
In this context there was no need to see the magnitude of the liquidity crunch/sub prime crisis. The simplicity of heeding a signal like the yield curve is all you need to do to have a chance of going down less.
In finding things to write about I am probably as guilty as anyone of trying to explain things when no explanation is necessary but a lot of the portfolio decisions are made around how the market works based on normal cycles (which have not been repealed) without, I believe, over analysis.
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13 comments:
Roger,
I liked your commentary today, a good perspective on Stein's article. I read Taleb's Fooled By Randomness, in which he discusses the Black Swan Theory, and I intend to read that book as well. I don't have much to add, except that the existence of just one black swan upsets any empirical apple cart. Observation and experience may provide evidence that all swans are white, until one day we see a dark bird floating in the lake. Stein is always interesting and his piece makes for good copy, but perhaps he should not be more cautious in his explanations.
"should NOT be more cautious": Delete the "not". Read as "should be more cautious."
Here is a case where I did not detect the black swan in the sentence, leading me to the wrong assumption about my syntax.
have not read Fooled By Randomness but probably should.
I don't know if this can make sense but I find some of Taleb's ideas to be very important but I tend to draw some different conclusions as I try to apply his concepts.
As the book was not an easy read I may have misunderstood some of what he said too though.
And then there is always the last gasp explanation seized by market journalists who, when polling their contacts, can find no plausible reason for a market move: "technical reasons."
As in, "The Dow fell 200 points today for technical reasons."
exactly
It's always a treat to read the jounalists' headlines regarding market moves, but I find their prognostications even sillier. Headlines like, "Traders expect more volatility in week ahead" are simply vapid. Duh.
Good post Roger. I wish the financial press would quit pretending every daily move in the market is a reaction to single event or piece of news.
Bens been saying that everythings fine, no housing issues, etc..
So When the markets goes against him hes got to blame someone. Traders are an easy target.
The old I was right but the traders manipulated the market. I've seen done both ways. Shorts like to blame the PPT.
Isn't it obvious that the market is simply discounting a Giants loss this weekend? ;-)
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Roger do all Bears, feel like there is a macro meltdown in the fundamentals? This is my 4th Bear and this one seems the most scary for what I've read. CDOs CDSs Swaps and all make me feel that they can't let the natural cleansing of recession set in for fear of chain reaction. Am I way off base on this one?
Market declines are all "different" and trigger their own sense of fear of the unknown.
what makes you correct about this time is that solvency can't be fixed with liquidity.
what makes you wrong is that a lot of people think there will be a meltdown.
The worst case scenario never really pans out. the 1970 were horrible yet the market went much higher in the next decade. The market cut in half at the start of this decade but yet made a new (albeit briefly) this year.
Of course this could be different but history say that is a difficult bet to make.
"what makes you correct about this time is that solvency can't be fixed with liquidity."
Are they creating more insolvency?
If they dodge the bullet will they fix or can they fix the structure?
"what makes you wrong is that a lot of people think there will be a meltdown."
Yes, I'm always wrong, but what bothers me this time is that I want to be wrong.
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