Hi Duray,
I love it when I can get you riled up.
Nothing about the markets, differing opinions, or any such topics get me “riled” up. The only place on SI that I get “riled” up – and then, with pleasure; for the debate is so much fun and culminates in the ultimate deliberation of the dispute, is here:
Subject 34441
You are one my most seductive debating partners here on the threads simply because you are so brilliant and insightful.
Great! And thanks!
And willing to see the several sides to every coin.
Always.
A rare and wonderful talent you have.
Rare and wonderful? Thanks again!
I don't tend to see the world in black and white myself…
Well, your citation of portfolio insurance as the cause of the 1987 stock market crash brings this self-description into question, LOL.
…but I do sometimes write about that way for effect, in order to draw people out and challenge them.
This is the “escape hatch.” The exhaust mechanism built into your message through which, if you are embarrassed enough by my response you can say, ‘Well, I was just trying to motivate some conversation.’
Nonetheless, it is yours to use if you see fit.
You, sir, are one of the few who can meet the challenge and create a spark of doubt in my own mind as to the way I'm approaching my rapprochement with Mr. Market in all his moods.
Thanks yet again. Jeez, I feel like I just won on a TV game show!
Let's begin with the simple top down view of American Capitalism.
Here begins the humorous portion of tonight’s show.
First lesson. Wall Street owns Washington. Second Lesson. Washington has been hired by Wall Street to put the "full faith and credit" into the punch of the Plunge Protection Team because both WS and Beltropolis know deep in their gut that the American public are saps and emotional ones at that. They know that the little goy hedge funder and the little guy retail patzer are both gonna stinkin' panic whenever they are given the chance.
OK, Duray, this is the spot where you’re supposed to put the punch line.
First response: ROFLMAO. LMAO!
Second response: Been here, done this. Enter the conspiracy theory.
Whether it’s specific groups, such as market makers, short sellers, hedge funds, daytraders, Canadians, analysts, the NASD, or the SEC…or slightly more nebulous scapegoats, like the “Wall Street establishment,” “large institutions,” the “government,” the “big boys,” the “momo crowd,” “bashers,” ad infinitum: the conspiracy theory mindset has reached a pitch which I feel justifies my referring to such as Religion Lite for the message board moaners.
Conveniently for you, Duray, these approaches employ entities and/or beings involved in plots consistently (and inherently, of course) above and beyond the comprehension of individuals. They are also structured (not unlike religions, LOL) so as to be fundamentally indisputable via absolutist tenets (see below) and share – whether economic, social, political, etc. – weak support via convenient, circumstantial evidence.
In the words of Col. Richard Weaver:
“The debunking of conspiracy theories is inherently a no-win business; the theorists dismiss all assertions to the contrary as part of the conspiracy itself.”
Or, Ryan Norwood:
“Conspiracy theories ever die; over time they get bigger and more complex.”
How true; and yet I’d bet that neither Weaver or Norwood scrolled through a Yahoo, Raging Bull, or one of mercifully few SI threads embodying those sentiments. I’d add that such shake n’ bake theories’ plotlines conform, over time, to circumstances which revise and legitimize them as evidence pointed to their absurdity.
Yes, Duray, you are engaging in the social psychology of irrational beliefs arising out of either (a) the perception or actuality of exclusion, such as from social clubs (Freemasons), institutions (government, capital markets), and other groups; or (b) an attempt to force realities, overwhelmingly inexplicable ones, into your frame of reference. More importantly, to make the limited understanding you have, and limited evidence you can garner, approximate a self-assuaging line of reasoning.
With regard to Wall Street conspiracy theories about strange orders of power, rigged markets, and other such meanders, the individuals take themselves out of their uncomfortable, unpleasant (and completely accurate) place as excluded and/or uninformed, and plant themselves comfortably into the role of victim. Ah, to be the victim. Effectively trading whatever stoicism takes us through our everyday lives in the face of similarly exclusionist circumstances (perhaps it’s the money in the markets that makes it so different?) – for the heavily padded diaper of imagined Uberantagonists.
Not surprisingly, as we will see, you later extol the (IMO, at best questionable) virtues of governmental/regulatory paternalism to that of the markets which, save for some tinkering in 1933, 1940, 1976, 1987, and throughout the nineties, got us where we are today.
Well, that is - if you don’t invoke the escape clause you included above :)
This is good for the wire houses in the short run, but bad in the long run. Thus, things like the blowup on Oct. 19-20, 1987 aren't something that the powers that be want to see repeated, because it tends to destroy the public's faith in a rigged game.
OK, again: you spoke in favor of curbs, saying that a market without them was rigged, but then spoke against stop loss orders, calling them self-aggravating measures. I asked you if you saw the inconsistency therein, to which you had no answer.
Can I take that as a resounding yes?
So now we have "curbs" on Mr. Market's tantrums. I say that's a good thing. Mr. Market is way too moody a fella anahoo.
I say it’s a bad thing.
I say, who are you…or I…or a bureaucrat…to say what percentage or point drop is okay, and what is “bad” for every different risk appetite or investment goal in the market, from a $500 retail account to a $20B pension fund.
I say, why are there curbs on the way down, and not on the way up? (Why, Duray?)
I say, why must short selling require an uptick/Bid Test but long purchasers not be limited to transactions on a downtick?
The answer is, of course, because regulatory interventions in markets, however well-intentioned, almost always accelerate concentration trends, resulting in greater disparities (and poorer functioning of the market in question) than before. More about this below.
Never really having a rational justification for his positions at any moment of his gambling career.
And you think it should?
Rational as per whose expectations? Yours? Mine? A bureaucrat?
Who expects, or feels they should expect, rational pricing in a financial market?
They say that the cacophony of dissent is the harmony of democracy. So too, as I see it, for the market. The difference in decisions, and varying forces pulling down and pushing up are the same mechanism that provide for the creation, and destruction of capital.
You can’t have it both ways, guy.
I copied your statement from the first message: A lot of very bright people don't conclude that it was the culprit in 1987; to which you responded: Yeah, and your point is?
It was your point, which I referred to.
Message 16053308
Ask yourself what the point was – I’m still wondering.
A lot of very bright people were gathered by John Merriwether into a very exclusive office in Greenwich, CT and they collectively nearly blew up the world's financial markets via their "money machines" at LTCM.
Well, another saying basically says that financial markets look very different from Cambridge than they do from Wall Street. I couldn’t agree more.
So what was your point about a lot of very bright people?
It was your point, not mine; see the link above.
They tend to run amok regularly.
When? What others can you cite, if it happens regularly?
In fact, Duray, the more intelligent market speculators are those who’ll be buying/covering when you’re selling and selling/shorting when you’re buying, not only absorbing the risk you’re divesting but slowing the decline in the prices of your stocks and mutual funds in the process.
I told you that Barron's reported that Allan Greenspan was unaware of the debacle of Oct. 19, 1987.
Yes, and I told you that I thought that such was a good thing. I don’t want a Fed preoccupied by the equity markets anymore than I want an SEC habitually breathing down the necks of savings, credit, and lending institutions.
Do you suppose that millions of individuals with mutual fund holdings woke up that morning and panicked collectively and told their managers to sell?
Exactly. Like I said, slow technology and lots of sellers running the spectrum of size and access trying to squeeze out a tiny door at once – a door that was, in some cases, closed for the first two hours of the session, heightening the panic – was the cause of the decline. Portfolio insurance aggravated, but did not cause, the decline.
I don’t, and didn’t assert, though, that the decline started that morning…because that’s not what happened.
The Fed had been raising interest rates for most of 1987. On October 13th, 1987, Congress started a series of debates concerning corporate takeovers that would have greatly slowed the pace of M&A activity which characterized the go-go eighties to that point. Not surprisingly, many of the stocks which started to slide on that Tuesday were those which were either in play or known to be on the prowl. On Wednesday, October 14th, 1987, James Baker announced that the large (and growing) trade deficit required a fall in the until-then strong dollar, which lead – almost instantly, to liquidations of foreign equity holdings in the U.S. And on Thursday, October 15th, 1987, the headline of the Wall Street Journal read: “Stocks May Face More Than A Correction,” which set market participants further on edge.
Between Tuesday and 4:00pm Friday, October 16th 1987, stocks fell just under 10%. It was the largest 3 day decline in over just under 50 years, and there was but a single word on the minds of investor ranging in size from retail to unreal:
SELL.
Monday, October 19th, 1987. -508 pts, a ~ 23% drop. By comparison, the 1929 drop was on the order of -12 to 13% in a single day.
Don't be a fool about this.
LOL; ok, I won’t. Instead, I’ll adhere to your conspiracy theory which, given the sweeping, inconclusive and improvable nature of them…not to mention the accuracy of your other assertions…erodes even a fleeting wisp of legitimacy they might have had.
The maelstrom of the 19th was strictly a contrived affair that was triggered, precipitated and amplified by the computer programmers who were scripting the "portfolio insurance" of the day.
There’s that diaper again. A contrived affair!
But, more importantly, in this statement you reveal a lack of knowledge about the subjects at hand which renders your argument (as if not there already) especially impotent. Not that you should have such knowledge, by any means…unless you were trying to prove a point…in which case, knowing what you’re talking about isn’t a half-bad strategy to begin with.
As I mentioned in my last message, program trading has little to do with automated trading. Most people envision a computer shooting millions of buy and sell orders into the market, but that’s how few program trades are accomplished.
Program trading, and the oft-used catch phrases “buy/sell programs” describe nothing more than a strategy going out consisting, in one order, of 15 or more stiocks with a total value of $1,000,000 or more. Whether routed via SuperDOT and SelectNet or delivered by hand in the form of order tickets being walked across the floor to various specialist booths at the same time, from the same firm, it is still program trading.
Portfolio insurance is not programmed every day, and not even every week. It would be rebalanced whenever the portfolio is (usually quarterly) to the extent that the options replication doesn’t reflect whatever portion of the portfolio is “insured.” It is little more than a recipe derived from the Black-Scholes model calling for selling (and by some methodologies, repurchasing) options contracts in specific percentages to hedge against a precipitous decline.
Besides being fundamentally wrong, your suggestion is diametrically opposed to the reality of the situation. The aggravating effect of the contracts on the decline of October 19th, 1987 was rooted in the fact that firms proving portfolio insurance thought that when the eventual crash came, the deltas could be reset by human beings – the programmers which, while not working everyday as you suggested, would have determined the proper hedges.
Instead, the option gammas became detached from the equities they were supposed to underlie, such that cash and futures bore no resemblance to each other.
In short, things moved too erratically, and disjointedly, for any human being to speculate (much less with capital in the precarious balance) on the correct replications. Let alone, Duray, to “script.”
And, to the extent that short futures or stock positions were covered, well, perhaps the hedging actually slowed the decline, big guy.
What do you think about that?
They were a cabal…
Uh-huh.
…the [sic] all had the same script and they all moved to the same side of boat at the same time.
That’s true, but not because it was a script. A market crash, be it of equities, commodities, real estate, numismatic coins or comic books arises because of a systemic failure of price discovery, which leads to capitulation. This is to say, a market fails to exist.
You find it surprising that with the chronology of the week before the crash as it was people wouldn’t have besieged their brokers on Monday morning with sell orders? And, that with the two-hour opening delay on Monday, the unwillingness of some firms to pick up their telephones, and the panic that ensued once the market did open, that even the heartiest of speculators wouldn’t have joined the sellers to some extent or another?
Groupthink is the most dangerous human trait.
Sometimes. That’s an opinion, and one using a pejorative term at that. If the word “groupthink” was replaced with the word “agreement,” that sentence would look pretty silly, wouldn’t it.
The destruction of capital on that one day is the prime example of our herd mentality and its destructive capability.
It sure is. And the bull market up to that point – just like the one leading up to April 2000, when the bear growled with a ferocity few had seen before - is a prime example of the constructive capability of our crowd psychology.
And, the subsequent recoveries are indicative of a cyclical process, which in the science of economics follows…perhaps not coincidentally, whadaya say, Duray!...the tendencies of other scientific fields, including biology, physics, and astronomy.
I wrote: As early as 1988, the Brady Commission reported that portfolio insurance related stock- and futures contract sales each totaled no more than 20% of the respective total volumes traded on those two days. to which you responded: And Arlen Spector wrote the "single bullet" theory into the Warren Report…[d]o you really believe that Brady and his ilk would tell you the truth?
Again, as per the good Colonel: “The debunking of conspiracy theories is inherently a no-win business; the theorists dismiss all assertions to the contrary as part of the conspiracy itself.”
My respect for you argument dropped several notches on this line of yours.
While I humbly appreciate your calling me “brilliant” and lavishing praise upon me in the beginning of your message, this is going too far.
To tell me that I slipped a few notches on your scale as a result of my postings is flattery above and beyond that which I deserve. Really.
My gosh, I thought you were a sophisticate.
A ‘sophisticate’ or sophisticated?
I don’t see where you’d have come up with the former assessment, and with regard to the latter…eh. Make your own decision. :)
I wrote: What then does a rapidly expanding market indicate? to which you responded: I believe it is how the market is rigged at the time.
Ah, I see. So the market was “rigged” for the crash, but not for the bull market leading up to it or the bear market of the early seventies. Mmm-hmmm.
Are you aware that lame duck isn't originally a political term relating to an office holder who's term is ending? It was actually coined in 1720, at the end of Exchange Alley, where the patzers who'd just lost their last hope in the South Seas Bubble would walk out of the alley with their worthless bonds in a most dejected air, as if they had their singed tail feathers between their legs.
Fascinating, however irrelevant.
Here’s one for you in return: Did you know that banana “trees” are not trees at all? Nope. They’re huge, herbaceous plants, very closely related to hemp.
Also, that the “daddy longlegs” spider is not a spider at all but a form of prehistoric, winged mosquito Freaky! :)
Don't get me started on the nature of boom and bust capitalism.
If it’s anything like your “simple top down” explanation of American Capitalism, I’m tempted to implore you to post it. UFOs, Freemasons, black helicopters, Atlantis, and all.
You do recall Juniper Pierpont's role in the Panic of '07 don't you?
Well, I wasn’t there personally. But as I recall reading, he made a personal appearance on the floor, purchasing stocks to attempt to instill confidence in the markets, as well as provide some buoyancy to offset the selling.
If you are so naive as to think that equity markets ought to be unsupervised, then I've got a bridge I'd love to sell you.
The fact that you could post a message like you did – again, pertaining to your “American Capitalism” conspiracy theory – and use the word naïve in anyway other than directed squarely at yourself is naive in a way that fairly staggers the mind.
I don’t believe that equity markets should be “unsupervised.”
I believe that market structures should be almost entirely unfettered, in particular by artificial, governmentally- or regulatory-imposed mechanisms such as trading curbs, uptick/bid test rules, minimum/maximum quote sizes, and the like. On the other hand, I believe that practices and procedures (sales, marketing, etc.) should be supervised such as they currently are…and in some cases should be more strictly. In some cases, less.
What you and others, Duray, don’t understand is that efforts to control the markets nearly always backfire. In the wake of the attempts in the mid-90’s to decrease dealer advantages over individuals, within two years the top ten dealing firms has gained over 13% more market share than they had previously.
Your lust for paternalism, for a guiding, soothing hand to come and take away the pain nearly always causes more problems, reduces fairness, and, at the very least, does no good at all.
If allowing the market to decline/correct/crash without curbs, and sell short without upticks, and trade off the floor in private, third market transactions was so bad, we have the right – perhaps the obligation – to ask how it is that we got here in the first place? Adam Smith himself wrote that attempts to intervene in markets – especially where concerns about “equal access” were concerned - were so subject to arbitrary, individually-determined tests and formulas that their imposition would not be “consistent with liberty and justice.” Not to mention the fact which I’d have pointed out to Mr. Smith had I been looking over his shoulder, which is that once a step is taken in that direction, it becomes a slippery slope. Furthermore, that each step taken must either reference or invalidate a previous step, resulting in a logic train reminiscent of a Keystone Kops routine. Indeed.
There’s a school of thought that asserts that curbs and halts in the market accelerate declines by not allowing for a quick, harsh drive to an irresistible market value, instead respectively causing selling pressure to build and fear (and with it, knee-jerk decisions) to be made while the half-hour or hour timer to reopen ticks down.
Similarly, I recently posted an academic article showing that toxic convertibles where short selling was not prohibited experienced far less declines than those where short selling was strictly prohibited.
Unless, of course, the researchers were part of your conspiracy, LOL.
***
I ask you: Doesn’t the pursuit of happiness (whether arising of financial success in the markets or otherwise) and the competition arising thereof work better than a forceful regulatory plan to, by tinkering with mechanisms it is scarcely equipped to understand (and as history shows, less equipped to actually affect) parcel out happiness in a quasi-socialist structure?
And, does not a plan of interfering with markets effectively trample notions of property and association by causing a de facto blessing of certain market participants while simultaneously subverting others?
***
There is a polite lie that is told that the markets are free, and the FRB ought not to interfere with equity players.
To whom is that lie told? I’ve never been told that the markets are free, and I don’t believe that they are. Not enough, at least.
With regard to what the Fed should or shouldn’t do, again: it’s a matter of opinion. I need only cite the lack of any statement in the 1913 Act tying the FRB to the equity markets to back up the reasoning behind my opinion, although I do recognize that different Fed actors, and the political constituency within which they exist, influences that tendency to some extent.
Poppycock.
Agreed!
You do recall the absolute devastation that excess margin created in '29 thru '32 don't you?
I wasn’t there, but yet again, it is predictable that finding solace in a conspiracy theory, you’d also – as with portfolio insurance and the ’87 crash – find a culprit – excess margin lending. You don’t think that lingering economic tremors from the First World War, among other factors, had anything to do with the crash either?
More on this below.
Given their head, arrogant traders will always opt for as much risk as possible, without the least regard for the consequences.
If you exchange the words “their head” for “a regulatory environment in which the moral hazard of paternalism rescues the foolish from themselves” and “arrogant traders” with “most amateur and some professional market participants,” – hey! We might have something there.
Since we've already learned these lessons, isn't it wise to curb the excesses that lead to real problems for the real economy before they get out of hand?
I find it as unnatural to try to arrest economic/financial cycles as I would the suggestion that the weather be adjusted for particular climates...especially if the promise that no unintended consequences would arise as a result was touted.
As you pointed out inadvertently, lessons are learned, and evolution continues. Have you seen 10% margin on equities lately? How about in the last 50 years.
Ah ha... ;-)
No, obviously I'm out of touch…
If you say so, though I’m not sure where that little burst of self-deprecation came from.
Actually, IMO, you’re worse than out of touch, Duray. You’re part of what I consider a frightful new wave of market-participant-cum-armchair-regulators who, given their druthers, would regulate the financial markets into the ground, emasculating them of their express functions in the process.
I'm not a "free marketer".
That is evident, though I respect your right to have a different opinion. Nor am I, for that matter, in all of its' implications.
I'm someone who understands the history of business and knows it runs to excess. In 1810, the canal companies, in 1873, the railroads, in 1907, the industrial conglomerates, in 1929, radio and all that jazz, in 2000, the internet.
But you don’t, apparently.
If you truly understood the history of business, you’d know that at one point in this country there were several hundred automobile concerns; now there are a handful. And, while it was financially painful for the stockholders of the majority of companies who experienced the loss of some or all of their investment, today we have large, surviving companies. Same thing with the internet companies: those who survive the shakeout may, if history is any guide, be those who deserve to survive by virtue of the workability of their business plan, their fiscal sense, and the management savvy that guided them through the tough times, if any.
You want a free ride. Recognizing - as you must - that such doesn’t exist, you want mom to come and save you from your own errors, while leaving you to enjoy your victories. And yet, many of the reforms you encourage are promoted - laughably enough - in the name of fairness, LOL!
The problem is that every time the maternal overseer wipes away your tears and changes the rules to what is intended to be your benefit, the ride gets shorter and the ticket more expensive.
But once the manias run their course, isn't it prudent to try to control the violence and the volatility [sic] of Mr. Market's mood swings?
In my opinion: not at all. It is imprudent, irresponsible, and deranges the capital creation process (of which destruction, IMO, is an integral part) which has worked so well to this point in history and underscores many of the successes our nation can claim.
Let fly with the manias, the ups and downs, and the booms and busts; and let both the imprudent investors – both retail and institutional – and the poorly planned companies fall by the wayside.
I'm just musing...
Does that mean that I wasted my time with this reply, perhaps my magnum opus of posts, or is that another escape hatch through which you can disavow your conspiracy theory post? :)
…and trying to see the big pitcher [sic & ROFL]......
Well, here are two suggestions:
vesperresearch.com
sports.yahoo.com
Ever so cordially yours :)
LPS5 |
