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Interpreting a market plunge

economist.com

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Re: Interpreting a market plunge

#21

Post by reallymental »

It's really interesting that the yield curve has risen.

There's been a huge amount of negative sentiment on it's flattening, and more talk about the bonds being overbought...

China's sell off [0] was interesting and generated a lot of chatter about the value of the bonds, but it was to serve their interest (S&P lowered their ratings[0]), rather than them acting on some information.

But now, the yield curve has risen even if it's overbought?

[0] https://www.ft.com/content/a1ad3848-ba05-11e7-8c12-5661783e5...

Re: Interpreting a market plunge

#22

Post by imron »

fwdpropaganda wrote: post #12
thisisit wrote: post #8

The bigger concern is on the interest rate hikes. Low rates were expected to help kickstart the economy and prices and wages to increase. What has happened instead is that all the cheap money has caused asset inflation. US companies now have record amount of debt. Too fast increase in interest rates will cause their debt obligations to balloon and lower profitability. Though this will take couple of quarters to fully…

You see, the problem that I have with these kind of "explanations", is that those facts have been around for a long time. Why is it that precisely today (well, yesterday) was the day that everyone decided "right guys, we're selling equities"? The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.

> The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.

How much was fingers on buttons, and how much was just automated trading algorithms?

Re: Interpreting a market plunge

#23

Post by fwdpropaganda »

thisisit wrote: post #18
fwdpropaganda wrote: post #12

Earlier quoted context omitted.

You see, the problem that I have with these kind of "explanations", is that those facts have been around for a long time. Why is it that precisely today (well, yesterday) was the day that everyone decided "right guys, we're selling equities"? The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.

Why today(and Friday)? People track government data to form opinions. and first Friday of the month is very important because of a data point called Non-Farm Payroll or NFP. It is known to cause a lot of movement in the markets. Lot of brokers will tell you not trade during the announcement. You can see a lot of opinions on what was expected to happen on Monday by googling for NFP. Case in point: https://www.cnbc.com…

> Second, it seems you think these decisions are binary - to be or not to be or rather sell or not sell. It's not that simple. Lower markets doesn't mean everyone has sold off all their shares. They just reduce probabilities of their losses by reducing exposure.

No. Obviously when I say "everyone decided to sell" I'm speaking figuratively.

In any case, thanks a lot for that link. Cool stuff, I didn't know about the NFP. So if it was released Friday in the morning, how come the plunge happened only happened Monday? I still prefer my view that a tiny bit of data cause people to expect a drop and get edgy, and at some point they all start selling. ("all start selling", again figuratively.)

This is opposed to a bunch of people having done some ahead of time calculations like "if the NFP comes out about X we sell, if it comes out below X we buy. Oops it's about X, lets sell". I suspect very few market participants behave like this. (Agains, below/above X is figurative. I do understand what a probability distribution function is, what an expected value is, etc.)

So here's one for you. If your reasoning is correct I would've expected to see treasuries down (which indeed was the case Friday). Instead they went up. How do you explain that?

Re: Interpreting a market plunge

#24

Post by fwdpropaganda »

imron wrote: post #22
fwdpropaganda wrote: post #12

Earlier quoted context omitted.

You see, the problem that I have with these kind of "explanations", is that those facts have been around for a long time. Why is it that precisely today (well, yesterday) was the day that everyone decided "right guys, we're selling equities"? The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.

> The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it. How much was fingers on buttons, and how much was just automated trading algorithms?

Why is it that everything these days gets blamed on algorithms? Seems like intelectual laziness to me. "Algorithms did it, there's no sense to it, lets not think too hard."

Re: Interpreting a market plunge

#25

Post by pcnix »

EGreg wrote: post #4

Guys, here is my analysis (which, after reading this article, may shed more light on the matters). We have had an asset bubble due to low interest rates. Because people don't want to keep money in banks. So we have had a bubble in crypto and stocks etc. As interest rates rise - and they will, because the government will need to reload for the next QA or whatever - asset markets will keep taking hits. The question is…

Ah, is there anything about Austrian economists I'm missing?

Re: Interpreting a market plunge

#26

Post by simonh »

fwdpropaganda wrote: post #23
thisisit wrote: post #18

Earlier quoted context omitted.

Why today(and Friday)? People track government data to form opinions. and first Friday of the month is very important because of a data point called Non-Farm Payroll or NFP. It is known to cause a lot of movement in the markets. Lot of brokers will tell you not trade during the announcement. You can see a lot of opinions on what was expected to happen on Monday by googling for NFP. Case in point: https://www.cnbc.com…

> Second, it seems you think these decisions are binary - to be or not to be or rather sell or not sell. It's not that simple. Lower markets doesn't mean everyone has sold off all their shares. They just reduce probabilities of their losses by reducing exposure. No. Obviously when I say "everyone decided to sell" I'm speaking figuratively. In any case, thanks a lot for that link. Cool stuff, I didn't know about the N…

> So if it was released Friday in the morning, how come the plunge happened only happened Monday?

It started on Friday and accelerated on Monday. Adjust the chart to 5 days. Note the significant dip down right at the beginning of Friday 2nd followed by an all-day slide.

https://www.google.co.uk/search?q=dow+jones+chart&oq=dow+jon...

Re: Interpreting a market plunge

#27

Post by simias »

willvarfar wrote: post #3

I can't see this economist article - the usual paywall. But this short snippet by the BBC explains that the market anticipates that interest rates will rise as wages rise faster than expected - http://www.bbc.com/news/av/world-us-canada-42955578/us-marke...

The article mentions that but half dismisses it by saying that nobody can know for sure:

>The swoon set tongues to wagging, about its cause and likely effect. There can be no knowing about the former. Markets may have worried that rising wages would crimp profits or trigger a faster pace of growth-squelching interest-rate increases, but a butterfly flapping its wings in Indonesia might just as well be to blame.

Re: Interpreting a market plunge

#28

Post by w0utert »

fwdpropaganda wrote: post #24
imron wrote: post #22

Earlier quoted context omitted.

> The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it. How much was fingers on buttons, and how much was just automated trading algorithms?

Why is it that everything these days gets blamed on algorithms? Seems like intelectual laziness to me. "Algorithms did it, there's no sense to it, lets not think too hard."

I don't believe algorithms decide the direction of markets, but it's pretty clear that they amplify effects triggered by real-world conditions. HFT trading is just a way to make money, and things like large market swings, high trade volumes etc. provides interesting exploits to do exactly that. You could call it 'intellectual laziness', I would call it Occam's razor.

Re: Interpreting a market plunge

#29

Post by EliRivers »

HODL, right!

I am, anyway. The standard advice ("Buy low-cost index funds with dividends reinvested, keep buying on a regular basis, let it ride and don't worry about the plunges and the peaks") told us this would happen, and here we are.

How to interpret it? I'd go so far as to ask should we interpret it? They get paid for coming up with reasons why things happened (after the fact, I note, although the Economist has hardened up and just said "nobody knows"). We [1] get paid for leaving our pennies in low-cost index funds with dividends reinvested for a decade.

[1] Apologies for the generalisation; I needed a bigger word than "I"

Re: Interpreting a market plunge

#30

Post by cm2187 »

EGreg wrote: post #4

Guys, here is my analysis (which, after reading this article, may shed more light on the matters). We have had an asset bubble due to low interest rates. Because people don't want to keep money in banks. So we have had a bubble in crypto and stocks etc. As interest rates rise - and they will, because the government will need to reload for the next QA or whatever - asset markets will keep taking hits. The question is…

Because of low interest rates and QE, which is the elephant hidden behind the rates. And they haven't really started unwinding QE (the reduction so far is homeopathic):

https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

And the problem is: either they aggressively retire QE and the combination of withdrawal of liquidity and rising interest rate is going to create an enormous pressure on stocks, either they keep the balance sheet as it is and we enter into the next recession with the monetary tools already at 11, with very little room for the Fed to react without resulting in massive inflation.

I think the current asset bubble has to burst, it's going to be painful for investors but this is the only responsible thing to do.

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