Folks are (again) demonstrating an overriding tendency to suspend disbelief on a couple of important points. In some cases, that suspension of disbelief stems from self-interest/self-preservation and in other cases, it seems to stem from an inability to conceive of just how insane things are inside the Beltway.
On the latter point, you’ll be forgiven if you’re having a hard time wrapping your head around what’s going on in the White House. But while you’ll invariably be forgiven, maybe you shouldn’t be granted such a reprieve. Sure, the Trump presidency has now become so surreal that trying to catalogue all of the myriad absurdities is impossible. But it shouldn’t have gotten to this point. Common sense dictated that making Donald Trump President would be a disaster of epic proportions and his campaign trail rhetoric and policy “platform” erased any doubt about how things would ultimately turn out if, by some accident, he managed to win.
Countless economists, political scientists and D.C. veterans warned that America was about to make a historic mistake the magnitude of which depended almost entirely upon whether Republicans would have the backbone to push back against Trump’s worst impulses. Well, as it turns out, not only do Republicans not have a spine, even some of America’s most decorated generals have chosen to resign rather than risk something dramatic in the interest of rescuing the country.
So, here we are. The government is in free fall. Trump’s administration is an unmitigated disaster. It’s a train wreck. A dumpster fire. And here’s the thing, I’m a rare breed when it comes to critiquing this. I’m a political scientist by training who is not, in any real sense, politically active. I don’t moonlight as a Democratic activist, my political rants are delivered via pseudonym to an audience that is only “large” by “cult following” standards and in case you haven’t noticed, I don’t chase clicks. Some of the titles we use here for posts are so ambiguous that they have virtually no chance of surfacing in Google results for any search term. I dare say that if (God forbid) we had “President Cruz” right now, there might not even be a “Politics” section of Heisenberg Report and if there was, it would be focused squarely on political theory, not current events.
Getting back on track, some of the various market missives I’ve unfortunately stumbled on this week suggest that some folks are shell-shocked into a state of denial. If you don’t think part of the market rout is attributable to Donald Trump’s descent into madness, then you are suspending disbelief. America is devolving into an autocracy. He’s a despot, period. It’s as plain as day and he reiterates it every, single day on Twitter.
It’s a testament to myopia and greed that U.S. equities performed so well in 2017, during January of 2018 and also in Q3 of this year. Anyone with any sense knew the clock was ticking on this time bomb, but everyone was so blinded by the necessity of chasing the gains that invariably followed from record corporate profits and buybacks (both facilitated by the tax cuts), that people convinced themselves that myopia and greed weren’t actually myopia and greed. Now, the chickens have come home to roost.
So, that’s one example of suspension of disbelief. The other example (and this is the case where an inability or unwillingness to accept reality is motived by self-interest) is the ongoing effort in some corners to deflect “blame” from modern market structure when it comes to explaining volatility and diminishing liquidity.
This suspension of disbelief is rampant in the quant community and is also readily observable among those who for some reason believe it is their sworn duty to pretend that the epochal active-to-passive shift has no deleterious side effects.
It is unquestionably the case that changes in modern market structure are contributing to volatility and exacerbating price action, sometimes on the upside and sometimes on the downside. We’ve been over this literally hundreds (if not thousands) of times in the short history of this site. The idea that the proliferation of systematic/programmatic trading and the general robot-i-fication of market making/ trading is a development that is, at worst, free of consequences and side effects, and at best, a wholly positive revolution, is so wildly implausible that the only possible explanation for anyone who foists it on the investing public is that they have a vested interest in it.
It’s hilarious to watch the quant community respond to mainstream media articles that cite sellside analysts who attempt to track the behavior of, for instance, CTAs and vol.-control strats. The tweets (from quants) are delivered with something that approximates religious zeal, and in some cases border on i) slander vis-à-vis attacks on the sellside and ii) outright bullying with regard to broadsides against reporters.
Unfortunately, that kind of blowback from people who are – let’s face it – shamelessly looking out for their own interests and hoping to stave off the inevitable when it comes to more regulatory scrutiny, sometimes wins the day and presto, out come articles like “Humans, Machines and Markets: Stocks Going Crazy Is Nothing New“.
That’s by Elena Popina and Sarah Ponczek, two Bloomberg reporters I do not know and have never spoken to. But, I do read their articles on a fairly regular basis, and they generally do a good job. That linked post, though, is a just a retrospective on historical market crashes and as the title suggests, the overarching point seems to be to deflect blame from quants.
“One thing that makes it tough to lay blame for the meltdown on machine-based traders is the many past instances when markets fell just as hard without their help”, Popina and Ponczek write, on the way to showing a bunch of charts which illustrate historical instances of market crashes that played out before the proliferation of HFTs.
“The Crash of 1929 is one big example”, they note, as if anybody had been making the argument that the Great Depression was caused by robots.
That article might as well have been called “Here’s A Strawman: You’re Welcome Cliff.” And wouldn’t you know it…
Do note how hilarious that is. So that is Cliff, someone who fancies himself (and may actually be) a genius, tacitly suggesting that because markets have crashed before, quants can’t possibly be contributing to recent crashes.
Much like: because there have been bad storms before, climate change can’t possibly be contributing to massive hurricanes. Or: election rigging was going on long before social media, therefore it makes no sense to worry about whether Facebook might have contributed to the rigging of the 2016 election. Or, extrapolating into the future: we replaced half the cars on the road with autonomous vehicles and there were some subsequent accidents, but because cars were crashing way before robots were driving them, we shouldn’t ask if autonomous cars are dangerous.
You get the point. And look, it’s not just Cliff. In fact, if you can get past the inherent cowardice of Cliff’s unapologetic trolling of the sellside and bullying of reporters, he’s actually kind of endearing in a perverse way. After all, I do my fair share of unapologetic trolling and bullying, it’s just not directed at analysts and reporters. Cliff is at least entertaining and I’m a guy who’s predisposed to loving a smart ass.
Far worse than Cliff are the self-righteous quants who harbor pretensions to profundity and whose public ridicule of sellside analysts and reporters is couched not in overt sarcasm and condescension (like Cliff’s tweets), but rather in terms that suggest something akin to actual malice borne out of an underlying, unspoken suspicion that maybe critics are right. I wouldn’t count Cliff among those folks, although he does retweet some of them.
Anyway, this rambling missive has gone so far off track that I actually had to delete the first three paragraphs and rename it. This was originally going to be called “God Bless The Golfers and Bowlers” and I’ll write that later.
The point here is that when you think about what’s happened to markets in December, don’t delude yourself about the extent to which chaos inside the Beltway and algos contributed. Use some common sense. Don’t suspend disbelief. Things just are the way they are. As Trump would say: “Deal with it.”