An article by Gillian Tett in the Financial Times, “Trading volumes retreat with investor trust,” contends that the notably low trading activity of late is a sign of deeper changes in financial markets:
The most pernicious issue hanging over the system right now is a loss of confidence – not merely in the idea that the future will be a brighter place, but also, most crucially, about whether anybody is able to predict that future at all.
Think back, for a moment, to the halcyon years before the summer of 2007. Back then, it seemed to be such a cosy and stable economic era that economists dubbed it “the Great Moderation” and most investors and businesses had absolutely no qualms about making 10-year plans. Indeed, that was expected in a world, where long-term planning – armed with complex computer forecasts – appeared to be not just rational, but a hallmark of modern society, something that separated us from earlier ages.
However, the financial crisis has shattered that sense of complacency. And while the immediate panic that erupted in the autumn of 2008 has now ebbed away, in its wake it has left a loss of trust – and innocence. These days, investors and businesses know that the world can sometimes be a profoundly unpredictable and uncontrollable place. No longer does it seem wise for corporate boards (or investors) to make 10-year plans, instead, time horizons have shrunk and many businesses and financial players have developed a mentality more akin to third-world peasants, who create strategies – but do so with bated breath, constantly braced for fresh storms.
And in practical terms, there are a myriad of uncertainties – or potential storms – out there now. The political trajectory in the US, for example, seems pretty volatile, given the rise of populist rhetoric. The government is intervening in the economy in unpredictable ways and financial reform could potentially change capital flows significantly. New jitters are afoot about a double-dip recession and deflation too.
And just to make matters worse, the memory of the May 6 “flash crash” haunts the markets. In the past three months, US regulators and bankers have scurried around trying to work out what caused equity prices to gyrate so wildly that day. But, thus far, they have not offered any convincing explanation.
While I agree with Tett’s bottom line, I’m not fully on the same page with her in her assessment. First, I think she overstates and to my mind, somewhat mischaracterizes the mood of early 2007 (which is odd, since her articles then were pitch perfect). Perhaps government statisticians felt comfortable with ten year time frames, but corporations? Short-termism was rampant, due to bad incentives. but also the sense that technological change moves so quickly that it is futile to plan very far out. And as Tett herself chronicled, and other Financial Times writers noted, market participants knew the frenzied financial activity could not last forever. I’m putting up a summer rerun (set to be next in the series, so the timing is apt) that illustrates that there were warning signs aplenty in late 2006 and early 2007 of pending, serious trouble. Chuck Prince of Citigroup’s famed “dancing as fast as we can” quote epitomizes the mood: partying on the edge of a volcano everyone knew was due to erupt soon, with investors mistakenly believing that they could exit cleanly and profitably at the last possible moment.
So the mood was not complacent, it was overstimulated, frenzied, nervous, and with good cause. It wasn’t hard to see how out of line conditions were with anything “normal”: the tremendous risk spread compression, the explosive growth in CDOs and CLOs, and the related markets that benefited, the housing market and M&A.
And the big shock to confidence was the crisis itself, the fact that so many formerly stodgy markets (like money market funds, interbank lending, even the rock solid German covered bond market) were infected by risk and duly had heart attacks. Investors were traumatized. The fact that the markets have recovered to a fair degree does not mean they are over the wrenching experience of watching a big chunk of their net worths vaporize. I know people who did stay in and went 100% into cash when the S&P got back over 1100. That was close enough to recovery of losses for them, they didn’t want to be at the mercy of equity market volatility again.
That isn’t to say that we don’t have greatly heightened uncertainty in the aftermath of the crisis. But I regard it as an overstatement to place as much weight as Tett does on uncertainty about government policy (this frankly is corporate carping; if you were to do a spreadsheet and do scenario planning on various environmental factors in play, I strongly suspect that the range of plausible regulatory changes will have far less impact on projected profits, say, than the impact of a dollar or euro meltdown, an eruption of war with Iran, the outbreak of a global pandemic that epidemiologists say is long overdue, the collateral damage of a not unlikely rise in protectionism, to name a few. The reason that businessmen harp on regulations, and the media unwittingly carries their bags, is it is one of the few uncertainties that they might be able to influence).
But Tett is right about the demoralizing impact of the lack of explanation of the flash crash (see this related Wall Street Journal story; the fact that journalists are still chipping away at this nearly three months later is not a good sign), the failure to rein in algos and high frequency trading. Investors, not just retail, but even a fair number of institutional investors feel the deck is stacked against them (I would argue ’twas ever so, but they never questioned the system when being long was an easy way to make money).
But we are a long way from the revulsion towards financial markets of the later 1970s and early 1980s. Some restraint on behalf of dealers could help restore faith in markets. But like the fable of the scorpion and the frog, modern trading firms seem unable to change their nature, even when their conduct is self destructive.
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Personally speaking I am out of the market, and it is a result of lack of trust. Furthermore, transparency is being clouded by fancy accounting with regard to toxic assets. The financial industry is doing just fine with recapitalizing with my tax dollars. I see no need to give them any more via investing in market. Until real transparency and bad debt gets liquidated from balance sheets, I’m staying in cash. I know I won’t stay ahead of inflation, for sure, but I will preserve what I’ve got.
Interesting … they seem to be having the same problem at “The Love Shack”, but have finally wised up over there …
Excerpt;
“We reconcile on our 4th anniversary, seek counseling, talk, love each other, buy a new house, life is GOOD! We were finally DONE with the cheating BUG that infected us for so long. Happily ever after was just around the corner. 8 months of bliss and I start getting this weird, but familiar feeling in my stomach once more. I’ve felt this before, I know what it is, but I can’t put my hands on it. It can’t be! She wouldn’t! But why is my 6th sense telling me otherwise. She says, she needs some room to ‘become herself.’ So I decide to take a road trip for a few weeks to let her ‘breathe.’ And lo & behold, while I’m visiting her brother, I come across an e-mail from her to her new lover. Every internal organ in my body shut down. I was in complete shock, disbelief; but at the same time, it was so familiar that it almost felt normal. I immediately called her up calm & collect, asked her about who she was seeing. She outright denied & lied about it so I started reading her the e-mail. She shut down in an instant and I told her we’re getting divorced. We are a DONE DEAL BABY. She acted like she could care less. So over the next couple of months and to this date, I am still heart-broken. She acts like, it is no big deal. That hurts. Marriage was so important to me, and I take it seriously.
When cheating happens repeatedly, you can only get smacked in the face so many times until you decide to remove yourself from the situation. I myself could care less about the sex. Who cares? It’s just sex, and when your comfortable with yourself, you can get over it. The problem that I had, that I could NOT forget about, was the TRUST issue. When your best friend, lover, spouse, the person you give yourself to and trust with all of your being repeatedly lies to you, it rips your insides out. When the trust is gone, the relationship is OVER. Remember that, There is no coming back once it starts. If you have a loved one that decides to stray- don’t be me. It doesn’t get better. People don’t change. Get the hell out, and let them go. It will come back to bite you in the ass if you don’t.”
More here …
http://www.loveshack.org/forums/t25184/
Deception is the strongest political force on the planet.
that’s a good one ball, we’re in the “Mary Joe Buttafucco” market. LOL.
That’s a trip down the DML “degenerate memory lane”
Otherwise, Ms. Tett is reportedly an academically trained anthropologist, which makes me wonder why she doesn’t use more of that sort of perspective and analysis in her writing.
I wonder if her editors at FT are so brain-drunk on the language of high finance that they wouldn’t get it anyway, or if maybe even she is. After all, if a woman drinks red coolaid for long enough I suppose she can even convince herself it’s wine.
Either way, it would be an amusing test of the boundaries of financial journalism, which are constricted indeed.
I’ll team up with her on a by-line if she wants. And I’ll work cheap, just for the exposure. ha hah ha.
Most people may not understand economics, markets, indicators etc. However, most people are able to see a system that has been corrupter and rigged by a ruling class. So they refuse and will continue to refuse to do any “investing” as long as the government is seen siding with the oligarchs and as long as they see that if you belong to the banking syndicate you are above the rule of law.
Re: However, most people are able to see a system that has been corrupter and rigged by a ruling class.
This might be true, but the peasants I know are not talking about a “ruling class” yet.
The peasants who are true-believers in one of the Republicrat Teams still have hope that their very very very very very very smart leaders will “fix things”; each side claims all it will take is a “clear majority” and then things will be MUCH better. These people generally want a “ruling class” but have trouble reconciling that a “ruling class” (the phrase) is generally bad so their brain creates bullshit to turn “ruling class” into “the other Team’s wealthy supporters” which isn’t exactly the same.
The peasants (I know) that are politically apathetic still have a belief that upward-mobility is still possible so – therefore – as the “ruling class” is not inherited its upward-mobility “feature” is a kind of proxy-representative-government system (meaning, the really really really smart successful people are, of course, wealth and SHOULD, therefore, have more political access). This is generally rationalized when their brains create the bullshit story of: “And, we ALL get to vote”.
American’s believe that voting IS democracy. Nothing else matters. The “ruling class” doesn’t really have that much power BECAUSE “voting IS democracy”. Bullshit always wins, which is why sociopaths rule the earth.
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That isn’t to say that we don’t have greatly heightened uncertainty in the aftermath of the crisis. But I regard it as an overstatement to place as much weight as Tett does on uncertainty about government policy (this frankly is corporate carping; if you were to do a spreadsheet and do scenario planning on various environmental factors in play, I strongly suspect that the range of plausible regulatory changes will have far less impact on projected profits, say, than the impact of a dollar or euro meltdown, an eruption of war with Iran, the outbreak of a global pandemic that epidemiologists say is long overdue, the collateral damage of a not unlikely rise in protectionism, to name a few. The reason that businessmen harp on regulations, and the media unwittingly carries their bags, is it is one of the few uncertainties that they might be able to influence).
—
This paragraph is a thing of beauty; too bad it takes more than two seconds to state since ‘truth’ on cable TV must fit inside a strict two second broadcast limit.
re flash crash; here’s an interesting article (w/charts!):
http://www.theatlantic.com/science/archive/2010/08/market-data-firm-spots-the-tracks-of-bizarre-robot-traders/60829/
Been out of the market since 2001!!!! Lost good money during the Dot Com affair and learned the hard way, never again.
Why play the game when it is clearly rigged?
If only we had some of that old time uncertainty, then there would be a reason to invest.
If people start to realize that the ridiculous faith placed in algos, ego, and cmputerized trading is nonsense, I personally count that as progress.
Here’s hoping…
Charles – Well said and couldn’t agree more. Thankfully, the markets blew up before they were able to get the Social Security money into it.
The revulsion in the public is higher than you think. What happens is that there is a sizable chunk of investment money which is still captive into “mandate” money (pension funds, company investment scheme, institutional investors funds), and it is the only one that forms the “sustainable” buying interest.
The managers of this “other people’s money” don’t really care about the safety of their investments : they are essentially interested by their fee income. Ultimately, these investments will be seriously impaired, but the money managers do not care,as they put their own money into safe assets (the most egregious case is the Bank Of England Pension Fund, which switch to 100% allocation in inflation-linked bonds, now THAT is moral hazard !)
The big picture is the real story …
This is a lot more than deeper changes in financial markets. One has to look at the big picture factors (that continually get lost in the detail of individual box thinking and their intentionally created deceptive complexity) to fully see what is going on with distrust in the world …
“Trust retreats with scarcity.”
It is common knowledge — or should be — that throughout history in times of ruler imposed oppression and exploitation a SCARCITY is always created.
It is the SCARCITY, caused by the realization of loss of accumulated wealth and the new uncertain conditions, that causes; societal unrest, distrust and and chaos. Viewpoints and behaviors, under those uncertain conditions of SCARCITY, could always be pretty much characterized as those we see today; “short termism”, “frenzied”, “nervous”, “loss of confidence”, “confused”, “having the jitters”, etc.
An entirely new causative SCARCITY …
The difference today is that we now have an entirely new — a never before dealt with — SCARCITY imposed by the sustainability of the planet. That sustainability of the planet has been compromised in its capacity by shortsighted and selfish decisions of the global wealthy ruling elite.
Realizing the effects of their past excesses, the global wealthy ruling elite, through the deception of the ‘noble lie’, now seek to eliminate the middle class and under class in a global herd thinning exercise that pits one against another in a divisive perpetual conflict to the death. In effect to increase sustainability, and, more resources to them.
It is the SCARCITY then that causes the anxiety and distrust.
SCARCITY can be eliminated by eliminating the wealthy ruling elite, their compromised governments, and their sell out media (they own the Financial Times), and working towards sustainability. Compounding the problem is the SCARCITY of time. The window of opportunity is rapidly closing.
Deception is the strongest political force on the planet.
“the fact that journalists are still chipping away at this nearly three months later is not a good sign”
The search for the flash crash just means journalists and the govt have yet to find an explanation other than the obvious which is algo trading puts a floor on prices. This continued effort will be as useful as OJ’s search for Nicole’s killer.
Let’s also not foget the 2Q(?) results of Goldman, JP Morgan, et. al. where they made money every single business day.
We all know in our guts that simply is not possible unless the game is rigged. Go with your gut!
“The difference today is that we now have an entirely new — a never before dealt with — SCARCITY imposed by the sustainability of the planet. That sustainability of the planet has been compromised in its capacity by shortsighted and selfish decisions of the global wealthy ruling elite.”
Isn’t this the truth!
The world has totally conflicting interests right now in trying to “support U.S. consumption” and actually encourage consumption by emerging markets. Everybody is competing for the same stuff, and the world is flat.
It doesn’t help that our “free markets” leave the US without any kind of long term plan to counter these forces, and simply rely on short term selfish behavior to run the country.
Or like you said, maybe it is the ruling elite that are pitting everybody else against each other to the point of extinction.
Investor confidence? Trust? Hello? Where did it go? Try looking under “Magnetar” or perhaps “Abacus”. If its not there, try looking under arbitrary and punitive SEC rule changes on a Friday afternoon. Its hiding in there somewhere.
The frog and scorpion fable was great. Thanks for that. Great catalyst to discussion. I found it a bit distressing. Maybe because of its dark fatalism. Fatalism (read: predictions) work with meta-narratives but break down at the individual level. The constant in economics (as opposed to the mythological contants of “all things being equal” or rational actors, or the unchanging nature of traders) is uncertainty. We make the best with the information we have but a mechanized version of the economy is very dangerous. The fable would have been a better comparison if the two had changed their ways but, upon reaching the other side, were trampled by a herd of elephants out of nowhere.
“Modern trading firms seem unable to change their nature, even when their conduct is self destructive.”
Self-destructive?
It all depends on your time-frame. For most traders and executives, just a few years of out-sized compensations are enough to set you up in untold comfort and safety for the rest of your life and those of the next 7 generations.
So, who cares if the firm blows up in the process, your investors wiped out, and US tax payers left to foot the bill?
So, sure, it would be better if you can keep the racket going for a few more years, then a few more, then a few more. But worst case, everything explodes below your feet earlier than scheduled but you still get to keep any “hard-earned” money you made before that.
As self-destruction goes, sounds like a good deal to me …
For a number of years, I have been focusing on Shiller’s 10-yr real PE as a general indicator of over-valuation, normal valuation, or under-valuation. Historically, you could measure the time it was over 20 in weeks and it would then end badly. However, since 1999 the US stock market has spent much of the past decade over 20. It is now back over 20 after the 2009 low of 12.
Long-term investors are now beginning to realize that the short-term traders and the Feds have rigged the system to try to support unsustainable levels. This disillusionment will probably require a few more years to become complete, at which time there will likely be a generational low that will be as famous as the 1932 and 1982 lows. I don’t know what the level of the Dow will be at the low, but it won’t be close to 10,000.
The trusting nature of investors is slowly being ground down and crushed despite the stock market cheerleaders and the Fed.
The stock market system is moving to where CDS’s etc. were in 2007. A few big players buying from each other except now they believe that they have 100% government backing. This will not be pretty and regular investors are figuring this out. The only thing supporting this market today is 0% financing from the Fed and high-frequency trading. Both of these can turn on a dime. How much longer will the Greenspan put hold sway?
can you start using using bigger font its getting hard to read