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Yves Smith “On Traders Behaving Badly and Cognitive Bias”


Yves Smith of Naked Capitalism is doing “the Lord’s work” and asking for traders who have specifics on the various market manipulations shady trading behaviors perpetrated by Wall St. funds, banks, etc. to come forward and blow the whistle. The timing of her request is somewhat an effect of Jon Stewart’s recent battle with Cramer (See the more recent appearance and discussion from Jon Stewart vs Jim Cramer or the original Stewart spat against CNBC that started it all), which made very public an interview Cramer had done back in 2007 where he talks frankly (and yet not specifically enough as Smith points out below) about how funds would manipulate markets for profit.

Very interesting stuff, and since we’ve seen no successful persecution of this behavior, I have little reason to believe that future regulations will stop it. What does that mean? It means that investing in the markets is an incredibly risky business for laypeople as you are unavoidably swimming with the sharks.

The Jim Cramer chatter precipitated by his Daily Show appearance included some links to an infamous interview Cramer gave in 2007, where he discussed how he would, as a hedge fund manager, push the prices of stocks he was short down via the futures market. It was arguably a public admission of market manipulation.

What was most striking about this incident was how quickly it was forgotten.

Now, of course, one can cynically say, that’s what traders do. And there have been times when I’ve had the vast misfortune to be watching the ticks (I hate trading, I put on very few trades, and I sweat them all and second guess myself hugely) and have seen more than once some end of day action that was clearly tape painting (and my pro investor buddies saw it the same way).

But nobody seems offended at the notion that the markets aren’t safe for mere mortals, just the sharks, even the whole US investing mythology touts how transparent, open, and well policed US securities markets are.

That’s one level of heinousness.

As long as banks are playing with other people’s money, and the higher ups have plausible deniability, they have no incentive to rein this stuff in, save maybe a token case here and there so they can pretend they really were on top of things. And I’m being charitable and assuming the higher ups were not actively enabling it.

So why isn’t there more understanding of and outrage about this? After all, this is the heart of the looting that went on. If firms will tolerate (or even encourage) overly aggressive behavior that appears to generate profit, it isn’t just the nominal miscreants that are at fault, but the whole chain of command all the way to the top (after all, just as in the Jett case, they profited and therefore had reason not to probe too hard).

So here is my theory: the details are not specific enough for the public to see it as real. And if they can’t formulate a picture, they can’t believe it happens all that often (after all, if it did, surely it would be in the Wall Street Journal).

That is an example of a cognitive bias called the availability heuristic. If we can have examples, the more concrete the better, the more likely we are to believe that a phenomenon is valid (that is why anecdotal evidence is more persuasive than it ought to be).

Go back and look at the Cramer tape. It’s actually brilliant. He is not very specific! There is no “when I was short X stock in 2004, I did F, T, and H and the price fell by $Z and I made $100,000 in two days.” It’s all murky, to the point where Henry Blodgett, in parsing the transcript, had to insert words at quite a few junctures to make what Cramer say make sense to him (and note I in reading the transcript would have inserted different words). That’s why this incident never really stuck to Cramer. It all came off like knowing innuendo, but he didn’t present a smoking gun.

So unless we have a Pecora commission, or a lot of ex-traders and trading managers coming forth with particulars, the great unwashed public is not going to know enough of what happened to know where to direct its diffuse but well warranted anger over having been had.

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Jon Stewart vs. Jim Cramer


Just watched the showdown between Jim Cramer and Jon Stewart from The Daily Show on Comedy Central last night. It’s worth watching if you’ve kept up with the back and forth and the original CNBC takedown by Stewart (See Jon Stewart Throttles CNBC).

I enjoy Stewart’s ongoing crusade against network television. He has similarly gone after CNN (Crossfire) for being more about entertainment than about reporting. Stewart is clearly in a better position to throw stones as he can pull apart the mistakes (and there are many) of the mainstream media; however, he is doing hard reporting. That it gets the networks up in arms is a testament to Stewart’s progress.

Having said that, I think there is a bigger picture that is widely being overlooked. That is that media outlets usurp individual authority on a very subtle and sinister level. Many Americans outsource their own analysis and thinking to these talking heads on tv. Ultimately, it is the Americans who put their trust in Cramer, who go to Fox News for “facts” and come away with more opinions, and who fail to take responsibility for their own behaviors and perpetuate their own victimized demise.

So even as I like how Stewart is going after the networks, I think the fingers should be pointed elsewhere — at the American people.

It is for that reason that the below clip, which is from around the 17 / 18 minute mark of the Hulu/Yahoo TV 21 minute snippet from last night, is fantastic.

Secondarily, I think Cramer’s explanation of how they were essentially duped into thinking 35:1 leverage ratios were okay is spot-on — at least, it fits extremely well with the business cycle argument that excess credit leads to seemingly prosperous or booming times. These booms more-or-less trick investors/businessmen/entrepreneurs into believing that things are fundamentally sound and returns will continue going up in perpetuity. Nothing could be farther from the truth, and beyond the infomercials that try and tell you otherwise, we human beings should realize when someone is trying to sell us snake oil!

So here we have some actually solid television programming — on a tv station that is centered around laughs.

JON STEWART: Honest or not, in what world is a 35 to 1 leverage position sane?

CRAMER: The world that made you 30% year after year after year from 1999 to 2007 . . .

STEWART: But isn’t that part of the problem. Selling this idea that you don’t have to do anything. Any time you sell people the idea that, “Sit back and you’ll get 20% on your money,” don’t you always know that that’s going to be a lie? When are we going to realize in this country that our wealth is work? That we’re workers. And by selling this idea that, “Hey man I’ll teach you how to be rich!” How is that different than an infomercial?

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Jon Stewart Throttles CNBC


Jon Stewart absolutely destroyed CNBC last night on The Daily Show. The first half of the bit (Approximately the first 4 minutes) goes on the offensive against Rick Santelli who was supposed to be a guest on the show before he “bailed out.” Santelli is one of the few rational, intelligent, and authentic personalities on CBNC, frequently going against his peers’ opinions. Even so, he is still on CNBC. Since CNBC is basically a rah-rah cheerleading outfit for Wall Street, Santelli’s attack on mortgage payment subsidization (See Santelli’s Chicago Tea Party) makes him an easy target.

So that is funny, but it isn’t the best part. Stewart goes on to illustrate just how wrong CNBC has been throughout the emergence of the recession / bear market / depression / bubble bust. He does it with video clips from CNBC that pump Bear Stearns, Lehman Brothers, Merrill Lynch, Wachovia, AIG, Bank of America, and General Motors (GM). He takes jabs at Fast Money and Squawk Box — “Reasoned financial reporting that combines the raw speed of fast money with the intelligence of a box of parrots. You just had to know how to listen!”

He has clips from Wall Street executives (i.e. John Thain) where they say essentially “everything is ok!” And what takedown of CNBC wouldn’t be complete without clips of Jim Cramer? So he nails that, too.

“If I’d only followed CNBC’s advice I’d have a million dollars today provided I’d started with $100 million dollars.” How do they do it?”

And to cap off Stewart’s hilarious piece, he ends with a gut-busting clip from an interview between Squawk Box‘s Carl Quintanilla and Ponzi-criminial Sir Allen Stanford that you just have to watch yourself.

Well done Jon Stewart!