Friday's Market Action Jolts But This May Be More Jolting
Friday saw just about every asset fall in what you might describe as a "jolt" to the recent complacency that has marked markets lately. We'll skip the various "explanations" of why prices plunged, since virtually every such explanation of daily movement contains nothing of value. The media simply make stuff up to create stories. Remember that and you'll save yourself minutes if not hours of reading. Better to read a good book or watch a good movie than read such sludge.
However, let's make two notes about the action:
First, if the theory that credit conditions are tightening around the world is true, we could be seeing the first harbingers of an eventual credit crisis. And remember that 2008 was the result of a credit crisis. So such a harbinger doesn't bode well for our financial future.
Second, we have to remember HFTs - high frequency trading operations - can cause enormous volatility. These outfits create algorithms that guide computer-driven trading. These algorithms typically look to take advantage of short-term price swings. If prices hit or pass certain thresholds, that creates a kind of mini-trend up or down, the algos fire up and massive trading ensues driving prices in the same direction. People make lots of money doing this.
Of course, that doesn't necessarily preclude the possibility that the initial drop in price could be a harbinger of a potentially building credit crisis. It just exacerbates the initial response to it. Remember too that since many hedge funds are highly leveraged, a fall in price of significant positions can trigger margin calls, causing the funds to have to come up with cash to meet those calls. At that point, the funds will sell other assets to raise cash. And when they sell, they surely don't want to sell the plunging asset whose price plunged to trigger the margin call, because that would only cause the price to fall further, causing a further margin call. So they look to sell an asset that's basically unrelated to the plunging asset. That could explain why "everything" plunged - stocks, bonds, precious metals - at the same time.
But whatever the degree of jolt Friday's unpleasantness caused you (unpleasant because you likely lost a slug of dough unless you were all in cash), when it comes to jolts, this story frankly takes the cake. It's the revelation that the Defense Department's recent audit revealed a "missing" $6.5 trillion. Yes, you read that right: $6.5 trillion. We've always known that the DOD's books were cooked, and that no one appears to bear responsibility, but this is ridiculous and outrageous, isn't it? If the entire economy's GDP sits at $16.5 trillion, that means that the DOD's missing money represents an amount over one third of the value of the entire economy!
So what do we do with this information? Do we pound our fists on the table? Write our congressmen? Pick up our pitch-forks and attack the Pentagon? Frankly, I've got nothing to offer here. We've become so accepting of outrageous behavior and outright criminal activity by the members of our ruling elite, that the DOD's outrage will likely pass unnoticed after an initial firestorm. No investigation, no accountability, nobody fired. I hope not, but wouldn't be particularly jolted if that's what happens.
However, let's make two notes about the action:
First, if the theory that credit conditions are tightening around the world is true, we could be seeing the first harbingers of an eventual credit crisis. And remember that 2008 was the result of a credit crisis. So such a harbinger doesn't bode well for our financial future.
Second, we have to remember HFTs - high frequency trading operations - can cause enormous volatility. These outfits create algorithms that guide computer-driven trading. These algorithms typically look to take advantage of short-term price swings. If prices hit or pass certain thresholds, that creates a kind of mini-trend up or down, the algos fire up and massive trading ensues driving prices in the same direction. People make lots of money doing this.
Of course, that doesn't necessarily preclude the possibility that the initial drop in price could be a harbinger of a potentially building credit crisis. It just exacerbates the initial response to it. Remember too that since many hedge funds are highly leveraged, a fall in price of significant positions can trigger margin calls, causing the funds to have to come up with cash to meet those calls. At that point, the funds will sell other assets to raise cash. And when they sell, they surely don't want to sell the plunging asset whose price plunged to trigger the margin call, because that would only cause the price to fall further, causing a further margin call. So they look to sell an asset that's basically unrelated to the plunging asset. That could explain why "everything" plunged - stocks, bonds, precious metals - at the same time.
But whatever the degree of jolt Friday's unpleasantness caused you (unpleasant because you likely lost a slug of dough unless you were all in cash), when it comes to jolts, this story frankly takes the cake. It's the revelation that the Defense Department's recent audit revealed a "missing" $6.5 trillion. Yes, you read that right: $6.5 trillion. We've always known that the DOD's books were cooked, and that no one appears to bear responsibility, but this is ridiculous and outrageous, isn't it? If the entire economy's GDP sits at $16.5 trillion, that means that the DOD's missing money represents an amount over one third of the value of the entire economy!
So what do we do with this information? Do we pound our fists on the table? Write our congressmen? Pick up our pitch-forks and attack the Pentagon? Frankly, I've got nothing to offer here. We've become so accepting of outrageous behavior and outright criminal activity by the members of our ruling elite, that the DOD's outrage will likely pass unnoticed after an initial firestorm. No investigation, no accountability, nobody fired. I hope not, but wouldn't be particularly jolted if that's what happens.
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