Ben Stein's article

Discussion in 'Trading' started by walter4, Jan 27, 2008.

  1. Ben Stein: Can Their Wish Be the Market’s Command?

    Published: January 27, 2008

    LONG ago and far away, I was a student of law and of economics at Yale. The economics I found fairly easy, probably because the material was the same as what I heard my two economist-parents discussing around the dinner table all my life. (My parents would literally discuss monetary policy with the meatloaf.)

    But the law was a total puzzle. Here would be one case that went for the appellant, but just a circuit away, or maybe even in the same circuit, there would be another case — with identical or almost identical facts — that went for the appellee.

    I was puzzled. I sat in the Sterling library reading the cases over and over, but still could not get it. Then, one day, out of the blue, my learned brother-in-law Melvin, who had gone to Harvard Law School, asked me if I knew about “legal realism.” I didn’t, but I soon learned.

    “Legal realism” said that the whole common-law system of abiding by past decisions was a fig leaf. What really happened, at the appellate level and probably at the trial level, too, was that judges made up their minds based on their predilections, their biases, which lawyer was their friend, what they had for breakfast that day. (I myself love peach Activia yogurt.)

    Then, because a case that reached appeal always had some legal merit on each side, the judges, or their very young clerks, picked whatever precedent they wished to support their bias and pretended that they were bound by that precedent and could not have decided any other way.

    The scales fell from my eyes, and I went on to finish law school in fine fettle. It was just all show business and personal bias and what’s in it for the judge. That made law school easy.

    Time has passed in a big way. But the lessons of legal realism have always been uppermost in my mind when I think about law or about anything else important: Stated reasons are often not the real reasons.

    Because I usually write about finance, I have come to believe in the theory of what I would call “financial realism,” or what might more accurately be called “trader realism.” Under this theory, on which I have an imaginary patent, traders can see masses of data any minute of any day. They can find data to support hitting the “buy” button or the “sell” button. They don’t act on the basis of what seems to them the real economic situation, but on what’s in it for them.

    Just as a tiny example, years ago a close friend, now deceased, was a trader in London for a big financial house. As he told it, one day I.B.M. came out with stellar numbers. The boss of the trading floor said, “O.K., the guy who’s getting the prize is the one who can make us money selling I.B.M. short.”

    So the traders grabbed for their phones and started to put out any bad thoughts they could dream up about I.B.M. They called journalists, retailers, anyone. They sold huge amounts of I.B.M. short. Soon, they had I.B.M. on the run, made money on their shorts and went to Langan’s to drink champers.

    As I see it, this is what traders do all day long — and especially what they’ve been doing since the subprime mess burst upon the scene. They have seized upon a fairly bad situation: a stunning number of defaults and foreclosures in the subprime arena, although just a small part of the total financial picture of the United States. They have then tried — with the collaboration of their advance guards in the press — to make it seem like a total catastrophe so they could make money on their short sales. They sense an opportunity to trick other traders and poor retail slobs like you and me, and they generate data and rumor to support their positions, and to make money.

    MORE than that, they trade to support the way they want the market to go. If they are huge traders like some of the major hedge funds, they can sell massively and move the market downward, then suck in other traders who go short, and create a vacuum of fear that sucks down whatever they are selling.

    Note what is happening here: They are not figuring out which way the market will go. They are making the market go the direction they want.

    I know this because I know traders. They’ve told me that they love to sell into fear because fear is bottomless — you can make money selling all day, while buying eventually slows because enthusiasm has limits. The amount of money available to large professional traders is so large that they can overwhelm the market, at least for a while, anytime they want. And they like to do it when the market least expects it.

    To my humble eyes, this is what we have seen recently on world markets. Note that the losses in United States markets alone are on the order of about $2.5 trillion in recent weeks. How can a loss of roughly $100 billion on subprime — with some recoveries sure to come as property is seized and sold — translate into a stock-market loss 25 times that size? The answer is trader realism.

    The losses in the stock market since the highs of October 2007 are about 14 percent. This predicts — very roughly — a fall in corporate profits of roughly 14 percent. Yet there has never been a decline of quite that size for even one year in the postwar United States, and never more than two years of declining profits before they regained their previous peak.

    In other words, traders are sending stocks down by a fantastically larger amount than is warranted by a recession or the losses in subprime. How and why does it happen? As someone said in the movie: “Forget it, Jake. It’s Chinatown.” It’s just Chinatown in trader-land, where money is made and there is no perspective.

    So when you see the market gyrating wildly downward and hear some pundit saying it’s because of this or that data or this paradigm or that ratio, remember trader realism. The traders move the market any way they want, any way they think they can make money, and then they whisper a reason to journalists later in the day. Then the journalists print it or say it on television, and the amateurs believe it. And the traders snicker.

    These traders, not economists or securities analysts, can turn the world upside down, make governments tremble, give central bankers colitis and ruin the lives of ordinary men and women saving for their children’s college education or their own retirement. In America today, it is the traders, not the politicians or the generals or the corporate bosses, who have the power.

    This is what has become of the America of Thomas Jefferson. Lucky for the traders. Sad for the rest of us.

    And one thing’s for sure: With the traders running things, it won’t be a good time for amateurs until the traders cry “Switch!” and the market starts to rise.

    Ben Stein is a lawyer, writer, actor and economist. E-mail:
  2. This correlates to my post earlier about Ben Stein and his theories on traders.

    I still think that individual organizations such as hedge funds and investment banks cannot influence the market for an extended period of time. Massive short or long positions taken by a single entity will obviously drive prices their way for a period of time, but unless they have created fear or optimism in the markets, there will be no one to pick up the bag when they try to offload their positions, which will obviously drive prices the other way. However the recent surge in etfs and availability of level 2 data would compound the situation Ben Stein believes in.

    Of course according to Ben Stein then, the markets are just a massive pyramid scheme with the last person joining holding the bag, until the scheme comes along.
  3. he is living in disneyland. of course hedgefunds can move a moarket for a very short time or a stock but the free fall in equities is due to the market going through its version of pms. seriously,the market is telling traders where it needs to go,not the other way around. if ben stein traded rather than use a 1960's style of picking stocks,he would be humbled much less by the markets.
    is mention of IBM is interesting,although he mentions they delivered stellar results,there had to be more of a reason for everyone to short it. perhaps Ben Stein does'nt understand what the word "guidence" means? i suppose he still resorts to backward looking p/e ratio's? perhaps IMB ran up 20 points in 2 weeks and sold the news? Ben Stein is leaving out some very important variables in order to make the pieces fit his dilusional puzzle.
  4. maxpi


    I think that Stein takes a much longer view of markets than most. He authored a book with some very good advice for somebody that was buying and holding for retirement, it involved some averaging down with some very long term market timing and should be good for anybody starting out with several business cycles in front of them to build up a retirment account...

    I sort of agree with his article above in that I realized early on that markets are as if driven by some overreacting big brother personalities... they overract to news good or bad.. whether it is a grand and dark scheme as Stein seems to say or just the personalities of the overreacting eldest children types I don't know. The subprime thing has driven the markets straight down with seemingly no end in sight but I would be willing to venture a guess that by the end of February things will be rosy once again and the subrime thing ignored largely, the eldest children have a short attention span really....
  5. AAA30


    Ben Stein = Balph Eubank
  6. Ben Stein is a tool box and always has been a tool box.
  7. Opra


    Interesting, but how would he explain $billions of write-offs and write-downs by the giant financial houses that have hundreds of traders in their employ?
  8. Trying to sail against the wind is a #1 prime goof. Ask me how I know.

    People like Ben say things like "you can't time the market", and stuff like that. Well, I hate to say it, but I've been living proof before of what happens to people that buy and hold. For whatever reason that human nature defines, they manage to get sucked into fantasies at the tops, and give up in fear at the bottoms, so what the heck is wrong with recognizing those flaws, and finding ways to make money from it rather than losing.

    Bear markets don't end after every rate cut, and I can see from the interest rates that the other Ben is running out of points to cut.