Oh, yuck. Another terrible day on the stock markets. Down 588 points. This is ruining my summer. It was bad enough that the summer in Sandpoint was wrecked by massive super forest fires in Washington state and Idaho, filling the air with a wretched brown haze, wreaking havoc in my lungs, destroying our spectacular view. It was bad enough that my wife, the goddess of goddesses, has been sick for the last month and barely leaves her bed.
But now, The Crash. It has cost us Steins too much money — at least in the short run. In the long run, it will be fine because Mr. Buffett will snatch up stock and companies at bargain prices and make us Berkshire Hathaway holders a bit of money. Also in the long run we will be dead. So, in the afterlife, money won’t matter. (Or maybe it will!)
Anyway, the media is filled with the most hilarious reasons for the Crash. The main one floating about like that brown haze in Idaho is that weakness in China is going to kill the U.S. economy, and in particular that devaluing the yuan will hurt the U.S. economy.
Let’s look at the facts: The U.S. economy is an 18.4 trillion dollar a year GDP monster. Exports to China comprise roughly $110 billion of that. In other words, exports to China are about 6/10 of 1 per cent of the U.S. output. If weakness in China caused them to fall by an astounding 20 percent, which would be unprecedented, that would only cause a temporary shortfall of about $22 billion in exports, which is barely more than 1/10 of one percent of GDP.
Yet the stock markets of all listed companies in the U.S. have fallen by more than $2.2 TRILLION in value in one week.
How can you explain that? Easily. It’s the traders, stupid. The market is not moved by Ma and Pa Kettle at home selling a few thousand shares when they see news about China on their TV. The market is moved by immensely powerful traders, banks, endowments, pension funds, hedge funds, who trade billions with the push of a button. They make these trades not because of news headlines. They do not make these trades because of the phony stats coming out of China. The big boys do not trade on macro news at all.
They trade because they make money on the trades. As my old pal Steve Greene said, it’s because some guy in lower Manhattan scratches his nose and says, “Time to drive the market down, boys. Call in CNBC and tell them our analyst sees weakness in cement in China.” So they sell in overwhelming quantity, and then the other traders see the momentum and pile on like school kids piling on in a fight when one kid is down. And then the media people make up reasons for the trades — China is weak, the Fed will raise rates, Japan is teetering — and the trades go on.
This is in finance the precise equivalent of when judges make up phony legal precedents for decisions they reach just because they feel like it.
When will it end? When one day that guy wrinkles his nose and says, “Boys, time to move that sucker up. Spread some news about how mid-size Chinese firms are strengthening or some other nonsense.” Then the market stabilizes and moves up and the media people all say, “Wow, look, the China economy is strong. So this correction is over. We heard it through the grapevine.”
That is how it really works. I know those traders. I know how they operate. They are machers, as we say in Yiddish. People who make things happen. Markets are not moved by economists. They are not moved by statisticians. They are not moved by theories. Example, the markets used to go down when oil went up. Now, the traders sell when oil goes down and say it’s a sign of weakness in China. But next time they’ll buy on cheap oil and say it shows the U.S. consumers will have more purchasing power so the economy will grow.
Markets are moved by human beings, armed with computers, who move the markets any damned way they think will make money for them. Markets predict nothing. They know nothing. The people who run them just know how to make money and then make up reasons for it besides their own greed.
Check it out. Does it make sense?
Meanwhile, pray for an end to the wildfires in the Northwest. Those are great people there in Sandpoint and Priest Lake. They deserve better. We all do.
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