THE AP TWITTER CRASH: THE VALUE OF KEEPING ONE’S COOL

4/24/13

There was much reporting, and handwringing, yesterday and this morning, including a front page article in the Wall Street Journal, regarding yesterday’s “Twitter Crash.”  In the space of about 65 minutes yesterday, the Dow lost and regained 145 points, and the markets lost and regained $200 billion of value, due to a false tweet that there had been an explosion at the White House that had resulted in President Obama’s being injured.  Yours truly was at lunch (Walker’s Charhouse in Naperville…great place.  Check it out.) at the time and missed the whole thing; had I not been a news enthusiast, I would not have noticed that anything had happened.

A group called the Syrian Electronic Army, which is allied with President Bashar Assad and wants to draw attention to what it considers false and one-sided reporting on the conflict in Syria.   (See?   As eclectic as this blog is, there is a connection, albeit often a contorted one, between the topics on which I write.  See, inter alia, my 4/11/13 piece   SYRIA:  GROUNDHOG DAY FOR AMERICAN FOREIGN POLICY.)  The group apparently hacked into AP’s Twitter account and broadcast, if that is the right verb, the offending tweet.

Don’t misunderstand me; I am not saying that this was an innocuous act, that such market manipulations are healthy, or, certainly, that the Syrian Electronic Army and its tactics are at all laudable.   But was there any harm done here to investors?   No, unless those investors were making a rebalancing move, or taking or unwinding a long term position, during that hour in which the markets took their roller coaster ride, and even then there could have been some benefit to such investors.   The whole thing started just after noon Chicago time and was over by just over 1:00 Chicago time, a miniscule window for long term investors. 

The only people who were hurt were traders.   Again, don’t misunderstand me.   Though, as most readers know, my days of trading like a scalded dog are over, I applaud those with the skill, the courage, or, in some cases, the recklessness, to be traders; our markets need them to provide the liquidity that makes the markets function.  (But do see my post, reproduced below, that originally appeared on 8/22/12 on the now defunct Rant Finance.)   However, when one decided to trade, and potentially cash in on the outsized rewards that trading can entail, one assumes the outsized risks of trading.   Among those risks are unexpected events like a group of Assad enthusiasts hacking into the AP Twitter feed.  Indeed, the very definition of risk (with which I admittedly have a problem, but that is grist for another mill) in the finance textbooks is the possibility of unexpected outcomes.

So it was not at all a good thing that a bunch of tech savvy miscreants with a political axe to grind could eliminate $200 billion of value for a few minutes and some traders got hurt in the maelstrom.   But traders are big boys and girls, or at least ought to be big boys and girls, and should realize that taking such risk is one of the costs of being in a position to reap big returns.  Genuine investors were not hurt by the market whipsaw; indeed, many, like yours truly, missed the whole thing.

Of course, there is a lesson here for investors.   As I have both intimated and said on numerous occasions both here and in other forums, the best thing to do in times of market panic, or apparent financial panic, is nothing.  Remain cool, stick to your plan, and keep your emotions in check.   See my 4/15/13 post, GOLD:  YES, I’M SCARED…BUT I’M STAYING.

PROMISED 8/22/12 RANT FINANCE POST:

HOW MUCH LIQUIDITY DO WE NEED?

8/22/12

This morning’s (i.e., Wednesday, 8/22, page A12) contained an article by Lillian Lin entitled “China’s Graduates Face Glut.”  In the article, recent college graduate Wu Xiuyan, expressing her understandable disappointment at the job market for grads in China, is quoted

“My classmates and I want to find jobs in banks or foreign trade companies, but the reality is that we can’t find positions that match our education.”

Such problems are, as many of you know from personal experience, worldwide and I sympathize with Ms. Wu and her colleagues.   But that’s not the point of this post.

Ms. Wu’s comments reminded me of something that Jack Bogle, one of the two guys for whom I always turn up the sound on CNBC; the other is Art Cashin.   Most of the time, I turn up the sound for Rick Santelli, but I digress.   Mr. Bogle, the founder of Vanguard and a true titan of the financial world, appearing on CNBC about a week ago was, as is his wont, decrying what he (and I) consider the excessive trading in securities.   As Mr. Bogle says, there is far too much trading and not enough investing going on.   Even though I write for this trading site, I wholeheartedly agree and have adjusted my financial behavior accordingly, but, again, I digress.

When Mr. Bogle made this comment, one of the trading guys who regularly appears on CNBC (It might have been Jon Najarian, but I’m not sure.) countered, reasonably, that that what Mr. Bogle looks askance at as excessive trading provides liquidity to the marketplace and thus serves a vital function.   Mr. Bogle agreed, partially, but then added something to the effect of, and I can’t quote because it was a few weeks ago, how much liquidity do we need?

Mr. Bogle’s comment is, as are most of his comments, profound.   We have put a lot of money and, more importantly, a lot of human capital into the financial industry, broadly defined, in this country.   One of the major roles of the financial industry, and virtually the sole role of the trading segment of that industry, is to provide liquidity to what otherwise would be parched markets.   This is a vital role, but is it so important that the best and brightest minds, or at least a huge portion of the best and brightest minds, go to Wall Street in this country?   Yes, markets need the capital and smart people necessary to keep them liquid and deep; that is one of our competitive edges as a nation.   But do we need as much capital, and as many bright people, committed to trading as we do?

The markets seem to be telling us that we don’t.   Note the reduction in both jobs and compensation on Wall Street in the wake of the latest financial debacle at least partially concocted by the people who have dedicated their lives to providing liquidity to our markets.  One suspects that these reductions are not cyclical, but secular; they are a signal that too much of our financial and human capital has gone into finance and not enough has gone into, say, engineering or medicine.

Now note the observations and the travails of Ms. Wu.  As China has gotten richer, more of China’s best and brightest have decided that “banks or foreign trade companies” (i.e., providing liquidity to the markets) would be a lucrative and otherwise worthwhile place to spend their careers.   But perhaps the market in China is directing these fine minds away from the Chinese equivalent of Wall Street.

There is another point here beyond the argument that too many of our resources are going into keeping our liquid markets overly saturated.  In this case, the market seems to be telling us that we have over invested in trading and under invested somewhere else.   The market works.   One hopes that the likes of Messrs. Obama, Romney, and their fellow “public servants” who deem themselves worthy of telling us all how to conduct our lives would realize that the markets work.   But one also hopes to win the lottery, I suppose.