May 11th, 2010

Wall Street mystery

Do we yet have any idea what actually happened that day the market fell so precipitously?

[NOTE: This guy says he knows why it happened. But to me, his explanation sounds like "it happened because it happened." Why did it begin at that particular moment? Why did it suddenly stop?

In my opinion, it seems to have been a very small black swan event.]

29 Responses to “Wall Street mystery”

  1. James Says:

    I have a theory, but I have no evidence, what would you call that?

    Europe is socialist. Socialist countries must devalue their currency as they get poorer. Poverty is the end state of socialism.

    Europe tried to have socialism with a strong currency. This is inherently contradictory, and at some point the whole world discovered the contradiction. That caused a crisis which would have frozen financial markets around the world.

    The EU central bank has come to its senses and will start to devalue and inflate – which is the only thing socialist countries can do. It was inevitable, but they would only bow to the inevitable (reality is bad news), only when the world was about to stop.

  2. Perfected democrat Says:

    Additionally, this article… I read Taleb’s book this last winter, this event seems less like an authentic Black Swan, than a gambling miscalculation somewhat similar to the Hunt brother’s silver scam years ago. In any case, once the market is in motion, especially with many stop loss market orders underlying, its sheer size dictates sizeable magnitude…

  3. Sergey Says:

    A short answer: panic. Panic, like fire, expands and consumes more and more, until somebody stops it. The reason for this panic was unclear perspectives of the world finances associated with Greek debt crisis. Seeking for “cause” is futile. It is like Chicago fire: may be, a cow overturned a kerosine lamp; may be, not. Actual reason: too many combustible materials gathered in crowded space. It is just ominious sign of realy big Black Swans that can arrive soon. The mountain of bad sovereign debt made financial market volatile, and Great Panic can flare up any moment.

  4. will Says:

    I know it sounds flat-out stupid, but I have no idea what happens there on stable days, let alone on that day. Nice to learn a new term though!

  5. Curtis Says:

    Right on for the “it happened because it happened:”

    . . . people stopped buying stocks, because the market was in freefall . . . because people stopped buying stocks . . .

    Taleb’s ten principles are awesome. Could we call number three, “People who were driving a school bus blindfolded (and crashed it) should never be given a new bus,” common sense?

    And if the Harvard and Yale intellectuals and elites mismanage and malpractice our financial system, why are they also claiming our moral system?

  6. ahem Says:

    Read zero hedge.

  7. Baklava Says:

    Curtis,

    I read that. Too much COMMON SENSE in those principles !

  8. Baklava Says:

    From this article:
    http://online.wsj.com/article/SB10001424052748704879704575236771699461084.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

    Around 3 p.m., the selling pressure abated. Just as swiftly as the market fell, it recovered ground. One factor behind the swift recovery, traders say, were funds that use computers and formulas to sniff out bargains in the market. These funds swooped in on hundreds of cheap stocks, helping push the market higher.

    I buy low. I do the opposite of everybody else. :)

  9. Curtis Says:

    My first thought upon reading Neo’s above blog was to call to mind Malcolm Gladwell’s, “Blink,” which I had thought was satisfying because it so nicely expressed common sense such as the “10,000 hour rule.” And I thought the financial community, most of which have put in their 10,000 hours and could be considered experts whose “blink” (hunch) we could trust, had a blink which expressed their knowledge that the whole system is hanging by a thread. They know the truth of what James and Sergey and PerfectedDemocrat have asserted. I googled Gladwell and found he has written a book called “Outliers,” the same term of importance in “Black Swan” theory.

    And on an entirely unrelated note, but as a need to keep and increase involvement, please observe the following. It’s hate week at UCI.

    http://www.msu-uci.com/

    http://www.youtube.com/watch?v=gJ1lk3xz_UE

  10. F Says:

    Curtis:

    “Outliers” is (like other Gladwell books) a good read. The message I took away from it, though, is that exceptionalism in science, the arts, or whatever, has a lot less to do with a stroke of luck and much more to do with practice. He points out that people like Bill Gates or The Beatles got where they got not because they won the lottery; instead they all worked very, very hard perfecting their skill set. It’s a good lesson, and a good book. F

  11. MikeLL Says:

    It was the E*Trade baby. Seriously. Malicious little runt.

  12. betsybounds Says:

    F,

    A tourist asks, “How do you get to Carnegie Hall?” The New Yorker replied, “Practice, practice, practice!”

    As to luck, “Fortune favors the prepared mind.”

  13. Paul Snively Says:

    As a few others have kind of hinted at, the question isn’t why there was a 1,000-point drop in an hour; the question is who/what is trading now, and why. There’s no volume in the market. The evidence is that all that’s trading is a handful of computers following the momentum of a handful of stocks, mostly the financials. See http://www.zerohedge.com/article/dissecting-crash and http://www.zerohedge.com/article/no-volume-meltup-nth-edition-dow-36000-sight

  14. Occam's Beard Says:

    So would it be fair to say that we’re skeptical of the efficient market hypothesis, certainly in the strong and largely also in the weak form?

    I always viewed EMH as providing a fig leaf for economists to justify use of calculus. Stochastic market hypothesis seems much closer to observation, particularly given the profound irrationality of humans.

    (I know some will claim that the integral over individual (flaky) decisions will average out the irrationality and leave a rational result as a residue that does not average to zero. Sometimes I believe that too. The flaw is that that perspective implicitly assumes independent behavior, while markets are notoriously herd-like, leading to high correlation coefficients between individuals’ actions, external data notwithstanding.)

  15. jon baker Says:

    The real question ought to be “With such high levels of national and private debt in America, why is the market still so high?”

  16. Curtis Says:

    Snoop Dogg: If the ride is more fly, then you must buy. Drop It Like It’s Hot.

    Word.

  17. betsybounds Says:

    Well I don’t know the answers to these questions. But it does occur to me that, early in the Great Depression, not long after the ’29 crash, the stock market experienced a fair rebound, and stayed relatively high for a bit. Most of the analyses I’ve read suggest that it was because, sketchy as things were, it was still the only safe place to stash money. If that is true and this is anything like a replay, the market is going to crash again soon.

    I guess we’ll see.

  18. Baklava Says:

    Jon Baker,

    The answer is that there is wealth. There is income.

    With 80% employment.
    With 1/3rd of the people who rent and 1/3rd of the people who own their home OUTRIGHT and out of the 1/3rd who have a mortgage at least 60% of those people are not upside down with their value…

    That means if people are investing in their future – they are investing and hopefully diversifying.

    That does mean market investment.

  19. jon baker Says:

    Baklava,
    You make valid points about the home ownership thing. You are looking at the glass half full point of view.

    “…out of the 1/3rd who have a mortgage at least 60% of those people are not upside down with their value… ”

    Unless you plan on selling your house why should it matter that the value is upside down? From a property tax point of view, if you do not plan on selling, it could be to your advantage. Other than that it indicates you bought into a bubble.

    My concern is with those who bought more house than they can afford- and those who just up and walk away from an “upside down mortgage” because they can- thats the ones that worry me.

    Forgive me if I suspect the current Stock market value is also a bubble- like the houseing market before it or the whole tech stock thing before that.

  20. rickl Says:

    I got out of the market about a year ago, and while in hindsight I would be better off today if I had stayed in, I’m not sorry to be out.

    The stock market no longer bears any relation to the real economy. It’s a house of cards that could collapse at any moment. The fall of 2008 wasn’t a crash, it was a warning. The real crash hasn’t happened yet, but it is coming.

  21. rickl Says:

    The newest bubble is the government bubble. Should be interesting when it pops.

  22. Perfected democrat Says:

    rickl is correct about the bubble. The cure for the Democrats is, unfortunately for us, the Democrats. Accelerated inflation is already showing its ugly face in the consumer sector. Health care reform will be the biggest bait and switch scam this country has ever experienced…

  23. John Says:

    I’m wondering how much George Soros made that day.

  24. Sergey Says:

    Efficient market hypothesis is hardly applicable to stock market and often is not applicable to financial market. If you read a complete set of necessary conditions for market efficiency, you find that some of this conditions are not met. These markets are driven by trader’s expectations: stocks and currencies do not have intrinsic values, they can became wortheless in a moment. Expectations are inherently volatile, especially in crisis times. And Occam is right that traders often demonstrate herd behavior. When total volume of trade is small, statistical fluctuatios are big, and every such fluctuation can ignite panic.

  25. Le Trebuchet Says:

    Some one or some organization takes a huge short postion then spreads a rumor that Taleb’s Hedge Fund has shorted the market. The rumor spreads and the market flips to the short position, no buyers. The computerized trading programs trip and begin selling and the Dow drops like a dead duck. The perp that originated the short cashes in and turns to a buy, the markert recovers and Voila!, several hundreds of millions if not billions of dollars have been laundered.

  26. Geoffrey Britain Says:

    This may have relevance: Looks like a Million
    http://wizbangblog.com/content/2010/05/12/looks-like-a-million.php

    “Why is this important? Among other reasons, we are still in a recession. While the economy is slowly showing some signs of recovery, we have simply not had the enough economic growth to justify the explosion in the Dow average, which nearly doubled from 6600 in March 2009 to 11,200 only thirteen months later.

    In other words, it’s unlikely that enough wealth was being created by the US economy to pay for Goldman Sachs’ trade profits; someone else had to be losing money in order for GS to be making money every day for 63 consecutive days.

    the DJIA has nearly doubled even though the economy is still in the dumps, Doug Ross has put together a disturbing post, http://directorblue.blogspot.com/2010/05/crony-capitalism-statistical-evidence.html suggesting that major investment banks are deliberately gaming the market in order to artificially inflate stock prices and market performance indices.

    Specifically, retail trading (individuals buying and selling relatively small numbers of shares) has been completely dwarfed by very high volume proprietary business-to-business trades between brokerage houses and investment banks.

    This has been a concern to market watchers for some time. And many people have speculated that it was a glitch in one of the computerized investment bank trading systems that caused the recent 1000 point plunge in the Dow.

    I’m not a conspiracy monger, but I’m intelligent enough to know that Team Obama desperately needs signs of an economic recovery if the Democrats are to have any chance at all in this year’s mid-term elections.

    Just as the Clinton-era SEC turned a blind eye to the flimsy IPO’s that drove the late 1990′s tech bubble, is the Obama Justice Department and SEC also deliberately ignoring what appears to be (at best) an egregious case of crony capitalism in order to be able to claim that their policies have resulted in large-scale economic growth?”

  27. Baklava Says:

    Jon Baker wrote, “Forgive me if I suspect the current Stock market value is also a bubble- like the houseing market before it or the whole tech stock thing before that.

    It may be. That’s the gamble.

    Seems leftists and Obama go on with rhetoric that almost criminalizes people who bet in the stock market.

    But it may be that it’s the only refuge for people seeking to invest.

    However ! People are thinking twice with proposals to double tax investments in various ways. The assualt on the free market is going on constantly.

  28. Baklava Says:

    To add to what Rickl is saying:

    I believe that when sellers outnumber buyers things will go down dramatically.

    Right now the unemployment with the 16-26 year old crowd is between 20% and 35% depending on your race/ethnicity.

    Right now the unemployment rate with the 40-60 year old crowd with a bachelor degree is about 4%.

    As retirements rise and 401K’s are withdrawn on to supplement the Social Security checks two things will happen:
    1) Social security will be negative each year (ALREADY STARTED THIS YEAR)

    2) The market will fall and fall as sellers will consistently outnumber buyers.

    There can be 20 threads on this topic in the future as we see it happen.

  29. Baklava Says:

    http://american.com/archive/2010/may/in-the-red-state

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