The Beginning Of The End ?

The London Paper  –  2 Mar 2007

So they we were on Tuesday morning watching our screens turn blood red with one unspoken question reverberating around the office: ‘Is this the beginning of the end of the good times?’ The Chinese stock market had fallen 9%, the FTSE was going into free-fall and word on the street was that the Dow was going to open down several hundred points. It’s at times like these that you get a beautiful insight into your colleagues, the nature of the markets and yourself. I, of course, found the whole thing tremendously amusing.

On the trading floor the old hands are presenting an image of ‘seen it all before’ nonchalance. Sounding about as convincing as Corporal Jones from Dad’s Army, they’re telling those few people bothering to pay them any attention ‘don’t panic!’ whilst clearly not taking their own advice. The grads have an air of nervous excitement as if some wag has just turned the fire alarm on during the headmaster’s speech. They might not be quite as excited if they knew how many juniors lost their jobs in the immediate aftermath of the ’87 crash. Mid-30’s brokers with young families and huge mortgages have a look of genuine concern on their faces as they realise that if this ‘anomaly’ turns into a ‘correction’ (the polite term for a ‘crash’) then the 2007 bonus ain’t gonna be too hot and that means the villa in Tuscany is going to remain a pipe dream for at least another year. We all know investment banks’ profits have a high correlation with the performance of the markets and so any downturn is about as welcome as a turd in a swimming pool.

The common feeling we all share is one of total powerlessness. We all stare at our Reuters screens like rabbits in the headlights and are all immediately transformed from masters of the universe to impotent muppets. It’s as if the big swinging dicks had just entered freezing water and had shrunk to such an extent that their gender was unclear. This is one of the reasons I quite like these events; they remind the City’s arrogant braying buffoons of the concept of humility – a concept most of them have barely ever heard of.

These events also remind us all what a strange, irrational beast the ‘market’ is. It’s not uncommon for traders to talk of the market as if it’s some wild animal and I’ve heard it described many times as ‘tetchy’, ‘nervous’ or ‘jumpy’. Sometimes when I’m chatting to my trader he sounds like he’s in some Western movie. He’ll expect me to take him seriously whilst he says something like ‘It’s quiet out there … too damn quiet for my liking’ as if a bunch of Apaches are just about to ride over a hilltop.

But he has a point. The market is the product of human emotions and the two principal emotions that we brokers feel are fear and greed. Combine these with a herd mentality and events like last Tuesday’s can happen without any convincing rational explanation. That’s why every time an ‘expert’ tells you where the stock market’s going you should generally laugh in his face and remind him that just before the 2000 correction 80% of US analysts’ recommendations were ‘Buy’. If that doesn’t work a kick to the gonads should shut him up.

Thoughts ?

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