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Stock Pigeons

Stock markets around the world react to every news report like pigeons in a park.  Huddled together in one strutting mass they move slowly around, clockwise, until the smallest cue strikes them. Suddenly, there is a small panic and the flock races counter-clockwise in a feathered flurry.  They stop, and then the heads all bob clockwise again for a moment.  After a few scratching moments a blind panic sets in and boom!  Counter-clockwise with a few desperate flaps of wings.

You may think that pigeons are not rational enough to run a financial system.  But if you want to find something in the news to explain the market’s behavior, you might as well consult the mooching birds at the nearest park.  Everything that stock markets are reacting to has been in the news for a very long time – they suddenly decided, for their own reasons, to start taking it seriously.

As today starts, the movement is staying very counter-clockwise.  The pigeons seem to have a purpose.

August is typically a sleepy month for stocks, but this one has been very different.  It is not the news itself that has riled markets, but rather their sudden realization that crises that have been brewing for a long time, such as the European Debt crisis or the US Debt crisis, are very serious.  They’ve even taken to watching unemployment initial claims, reacting to a very small downtick in the one somewhat healthy indicator.

What has changed is that traders woke up and realized how much risk they were carrying.  It is the psychology that is causing the panic for reasons that will not be obvious.  If the pigeon analogy seems a bit harsh, consider this excerpt from J K Galbraith’s work “The Great Crash”, a short book on the 1929 Stock market:

“In the autumn of 1929 the mightiest of Americans were, for a brief time, revealed as human beings. Like most humans, most of the time, they did some very foolish things. On the while, the greater the earlier reputation for omniscience, the more serene the previous idiocy, the greater the foolishness now exposed. Things that in other times were concealed in a heavy facade of dignity now stood exposed, for the panic suddenly, almost obscenely, snatched this facade away.”

The only thing that has changed in the last month of trading is the psychology.  And that may be the most important thing of all.

If you want to understand the underlying problems with the Eurozone that seem to have spooked the pigeons particularly badly, I strongly recommend this Spiegel interview with George Soros.  This crisis has taken a turn for the worse lately, but what is most important is that it has never been dealt with:

The politicians have not really tried to fix any crisis; they have so far tried only to buy time. But sometimes time actually works against you if you refuse to face the relevant issues and explain to the public what is at stake.

Longtime readers of Barataria will note that this is precisely what I have been writing about as the primary concern since early 2009.  The psychology of this moment is merely a reflection of what could have been an appropriate sense of urgency (not panic) when all the elements we have today came together for the first time.

Meanwhile, the park is full of pigeons.  It may seem like an utter waste of time to sit on a bench and watch them bob and preen as they move first one way, then the other.  But their movements are not all that different from those of humans.  The flock has its own personality, something never explained by the attitude of any one bird or anything remotely rational.  But it might also be the reflection of something that happened a while ago.  You never know with birds.

Why are all the pigeons running counter-clockwise?  Because they believe there is safety in a big flock, and today the flock is running that way.  If operating about the same as semi-feral birds bothers you it might be best to question not the direction of the flock but whether it is more secure than being alone – or, at least, how a properly managed group of intelligent animals with access to information and communications might behave differently.

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10 thoughts on “Stock Pigeons

  1. Brilliant, as always. But I don’t think the stock market has been rational for a long time. The bubble really started there in the 90s so I think we can blame them at least some for starting this whole mess.

  2. I’m sure the fact that ‘pigeon’ is a slang term for potential victim of a con artist is not a coincidence.

  3. Anna: Thanks. Yes, the stock market is rarely rational, which is why I avoid commenting on it most of the time. But it’s important in the psychology of the population, for better or worse, even as it reflects that same psychology. Leading and lagging indicator, if you ask me.

    Another great quote from the Soros piece:
    … if a double-dip recession was in doubt a few weeks ago, it is less in doubt now, because financial markets have a very safe way of predicting the future. They cause it. And the markets have decided that America is going to see a recession, particularly after the recent downgrade of the US by the rating agency Standard & Poor’s.

    Dale: No, that is not a coincidence. 🙂

  4. The stock market was down again today and they said on the news it was because no one wanted to hold stocks over the weekend. Wasn’t it back in 2008 that the bad news always came on the weekend? I’ll bet they are thinking the same thing now. But you seem to think that the bad news has already come.

  5. Sheryl: That was a big thing back in October 2008, wasn’t it? Every Saturday brought more bad news. If that is what’s really driving things, I have to say that any bad news that comes this weekend has to be at least somewhat expected at this point. We’re talking about announcements from Europe, basically, which will hardly be a surprise. Dunno.

  6. I really don’t understand the stock market but the pigeons analogy seems like a good one, though it may leave out part of the problem and a potential solution. This Van Jones description of modern trading and what to do about it makes sense to me:

    “…on Wall Street right now, you have people who are literally sitting with their feet up on their desks, sipping a latte, while a computer runs a thousand trades a second, based on algorithms—and makes tons of money. Yet people say, “We can’t tax rich people because we’ll discourage them.”

    We could have a small tax on every one of those lightning trades, and The New York Times says we could pull billions of dollars off of Wall Street to fund massive infrastructure projects across America, and get skilled workers back rebuilding America’s roads, bridges, hospitals, and schools.”

    While doing quick research into how much money this would raise I found this:

    “The Center for Economic and Policy Research predicts that a tax on trades of stocks, derivatives and other financial instruments would curb excessive speculation while generating around $150 billion a year. That would be enough, for example, to fill projected Social Security shortfalls, with dough left over for other domestic and international needs.”

    http://www.thenation.com/article/161257/cut-wall-street-down-size-financial-speculation-tax

  7. Laurie: You’ve hit something that I’ve been punting on because I’m not entirely sure about the figures. The report that The Nation article refers to is here:
    http://www.cepr.net/index.php/publications/reports/the-deficit-reducing-potential-of-a-financial-speculation-tax

    I think they are proposing a 1% tax on all short-term trades to raise $150B a year, but they do not spell it out clearly.

    Hard-core Friedman Supply-Side Conservatives always tell us that a reduction in the capital gains tax creates jobs – often concluding that the rate should be zero. I both agree and disagree with this, figuring that the truth is always in the details and the rate (Zero? Really? Come on!). However, short-term trades, while improving liquidity and performance of the market, do not add anything to growth. Some tax like this should be a “gimmee”.

    However, there is also a lot of merit in tax simplification. This is a complication that may well be justified but I think has to be seen in the context of simplification – which starts with the elimination of a bizarre array of tax credits for all kinds of things that make it possible for many people to evade taxes all together. It’s the centerpiece of the Simpson-Bowles plan and I think it’s where we have to start.

    So I’ve punted on this issue – but you are right to bring it up. There is a terrible “tax” on job creation that comes from the Dollar Standard and the tremendous overhead per employee that comes from both regulation and simple standard business operation. Offsetting that effect by taxing short-term trades as a way to raise revenue seems to return the system to balance.

    I think you have convinced me. If the Democrats develop any guts at all this will probably have to be a part of the package they propose because the revenue is high and the effect on the economy is tiny. I should add this to the list of six items that I put forward as a platform some time ago, along with a few items suggested by commentors at that time. Thank you!

  8. Pingback: American Jobs Act | Barataria – The work of Erik Hare

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