[CounterCorp] FW: [Corp. Watch] The stock market is NOT a barometer of the economy

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Begin forwarded message:


> Can Their Wish Be the Market’s Command?

>

>  By Ben Stein

>

> (NY Times, Jan. 27) -- Long ago and far away, I was a student of  

> law and of economics at Yale. The economics was 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.

>

> 	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 that supported their bias and pretended that  

> they were bound by it 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, 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, traders can see masses of financial 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 was a trader in  

> London for a big financial house. As he told it, one day IBM came  

> out with stellar numbers. The boss of the trading floor said,  

> “O.K., whoever can make us money selling IBM short [by betting the  

> stock will fall] gets the prize.”

>

> 	So the traders grabbed for their phones and started to put out any  

> bad thoughts they could dream up about IBM. They called  

> journalists, retailers, anyone. They sold huge amounts of IBM  

> short. Soon, they had IBM on the run, made money on their short- 

> selling, and went to Langan’s to drink champaign.

>

> 	As I see it, this is what traders do all day long -- and  

> especially what they’ve been doing since the sub-prime loan mess  

> burst upon the scene. They have seized upon a fairly bad situation:  

> a stunning number of defaults and foreclosures in the sub-prime  

> 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 media -- 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  

> all day by selling, whereas 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 U.S. markets alone are on the  

> order of about $2.5 trillion in recent weeks.

>

> 	How can a loss of roughly $100 billion on sub-prime loans -- with  

> some recoveries sure to come as property is seized and sold --  

> translate into a stockmarket loss 25 times that much? 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 post-war U.S.,  

> 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 sub- 

> prime loans. 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.

>

> _____________________

>

> CORPORATION WATCH: Shining a Spotlight on Corporate Pathology

> Send feedback or article suggestions to: editor at corporationwatch.org

>

> ---------------

> (Corporation Watch is not affiliated with CorpWatch or its "corp- 

> watchers" list)