Like everyone else with money in the market, whether directly in shares of common stock or indirectly in mutual funds held in an IRA or a Keogh account, we knew we weren't supposed to get anxious but we did nevertheless when the Dow plunged five hundred points last Friday and threw down another thousand points on Monday.
The market's wild mood swings are unprecedented -- as befits the age of proactive prozac. But a thousand points in a single day! We wondered, (whiskey tango foxtrot under our breath) what happened.
So today we turned as we often do to our old friend Marty Schumacher of Goldman, Sachs, who sat next to us in Rosand's course in Venetian painters, which focused mainly on Titian.Marty took half an hour off his busy desk to down a mug of espresso with us at ten thirty this morning. This is an account of our conversation:
"Help me make sense of this, Marty. It's as if the market forgot to take its pep pills on Friday and repeated the offense yesterday." "That's not bad," Marty said. "We got hooked on easy money from the Fed. Now Mr. Market's afraid that they're going to take the punch bowl away." "But everyone has been saying that the Fed is going to hike rates this year -- a full hundred basis points, maybe more." "True, but when the jobs report came in last Friday, a lot of traders thought of the one word that always spooks the market." "You mean inflation?" "I mean classic inflation, which is what happens when the market digests good economic as bad because of the fear it arouses." "But these losses are colossal, and the swings back and forth, back and forth, but south at the end of the day, are nerve-wracking." "That's why you're not supposed to check your account on such days." "I agree. The best thing to do is nothing. But you have to admit the smell of panic is in the air, and there has to be a probable cause."
"Passive indexing is the culprit," Schumacher said. "Index funds have been all the rage for the last five years, and that's been fine so long as the market was busting new highs every day. But when there's a crash, which is only a fast-paced correction, computer-triggered sales hit ETFs and especially ETNs faster than the speed of a cat thrown out a twenty-first floor window, which hits the sidewalk at a velocity higher than 32.2 feet per second. We even have an equation for it: SCV, surplus cat velocity, sort of the inverse of the dead cat bounce.
"What's worse, the loss gets tabulated at close of business. So it's like velocity times velocity, and everyone is going twenty miles over the speed limit." "That helps account for the ups and downs -- but why both on the same day?" "The cheap money is getting cleaned out, by which I mean the last-minute speculators caught up in January's fireworks, people who need to cover their calls or their margin accounts. Leverage is a high, or it's time to jump off a bridge."
We finished our coffee, and Marty (pictured left) checked his Apple watch and headed back to the elevator. "You know what Emerson said when he was asked what the market will do tomorrow? He said, 'It will fluctuate.'" "That wasn't Emerson, that was J. P. Morgan." "Whatever. Like everyone in Los Angeles has always said, you never know when the big one will come along. But it's inevitable.The earthquake is sometimes preceded by a shake or two, a tremor, and you know what will follow but you don't know when. It could come six days from now, or six months, or six years. Hell, the Journal yesterday reported that the Millennials are as into the market as the boomers didn't get to be until they reached fifty, and way more than Gen X, about whom nobody talks anymore. What can I tell you? Except for Einstein, the market has defied everyone since Newton. But wait and see. It'll be entertaining."
"What do you think is going to happen today?" "The market goes down some more. How about you?" "Well, it wouldn't astonish me if the Dow ends the day five hundred points up." "Really?" "Wait and see." -- DL
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