Market crash: are we there yet ?

[PBzeer]

Listening to the radio this morning, I was struck by the similarity between economic and weather forecasters. Whether good or bad news, in economics the operative phrase seems to be, surprised by. Either higher or lower than expected, but rarely, it seems, in line with expectations.

Granted, I don't follow it all that closely, so it may be that I'm only noticing when they are wrong

[wind_magic]

Originally Posted by PBzeer

Listening to the radio this morning, I was struck by the similarity between economic and weather forecasters. Whether good or bad news, in economics the operative phrase seems to be, surprised by. Either higher or lower than expected, but rarely, it seems, in line with expectations.

Granted, I don't follow it all that closely, so it may be that I'm only noticing when they are wrong

I am always very amused by the "reasons" they give for a market move.

I don't know why people do it. I guess at the end of a day when the market has moved strongly in one direction or the other there is a need to correlate it with some kind of information so that it makes sense, like some ancient shaman telling the people the corn isn't growing because the moon is full, or something.

Or it could just be that the truth is so boring - most of the time traders start buying something because they were selling it, and they couldn't sell it any further - and that is the absolute truth. That's why it's possible to pick top and bottoms, because there are certain spots that traders unconsciously agree (chart patterns, momentum, etc) that they will change direction, it's like a game all traders play.

That's also how you know that the "reasons" they give for a market move are complete B.S., because you can often see a change in direction coming a week or two away, and then you trade it, and then they come on the news and say it's because oil went down 0.02$us or some kind of non-sense and you just have to laugh.

[PBzeer]

I've always looked at investments as a form of legalized gambling. Subject not even to the laws of chance, but to whims and trendiness. Be it stocks, real estate or whatever, anything that carries a chance of reward, also carries a risk of loss. And though historically, it's an upward trend, it's certainly not without it's lows as well. From my casual observations, it seems the main cause of fluctuation seems to be an overly exuberant infatuation with the flavor of the month. A lemming like rush that invariably creates bubbles, that eventually must burst.

[wind_magic]

Originally Posted by PBzeer

I've always looked at investments as a form of legalized gambling. Subject not even to the laws of chance, but to whims and trendiness. Be it stocks, real estate or whatever, anything that carries a chance of reward, also carries a risk of loss. And though historically, it's an upward trend, it's certainly not without it's lows as well. From my casual observations, it seems the main cause of fluctuation seems to be an overly exuberant infatuation with the flavor of the month. A lemming like rush that invariably creates bubbles, that eventually must burst.

Yes that is all true.

There are (at least) two distinct differences between trading and gambling that are very important.

One is that it is possible to perceive what is apt to happen next in certain situations, and your ability to perceive those circumstances increases over time as you trade. That makes it possible to see opportunities and to trade them, very few real traders could make a living if they traded randomly, they all believe they are going to make money when they put on a trade. In gambling your chances are at best random, in the markets you can actually increase your chances above randomness, and in some cases even to such a high degree that you pretty much know you are going to make money in a trade (in as much as that is possible).

Another thing that makes trading different from gambling, and this is the most important difference, is that in gambling there is a beginning and an end. You walk up to the blackjack table, place your bet, play the game, and it's over. Then you have to choose to play again, put more chips on the table, play again, and it's over again. Even the most addicted person around at some point has trouble putting their chips on the table if they are losing - they may still put them down and lose everything, but the key is that they have to decide to put their chips down and risk the possibility of losing them. It isn't like that in the market, and that's why there is so much possibility for gain - because there are so many people who are in the market who can passively lose everything, to the benefit of a good trader. The game doesn't end, so they can sit there and watch their savings get cut in half, then get cut in half again, and again, and again, and again, each time hoping that they are going to make back the money they lost as the market moves up almost to the point where they started losing money and then turns around and goes even further away from them. Because people have to actively pick their chips up and walk away from the table it is possible to lose everything, because most people won't consciously decide to stop playing a game that never stops itself, it's very hard for people to consciously decide to cut a loss, because there are few people in this world who will choose to admit they were "wrong". Many people would prefer to lose everything than to admit they made a mistake.

Those two ideas are not mine originally.

There are plenty of market truisms that express those ideas - "Cut your losses and let your profits run" is an axiom of trading, or "You can be right, or you can make money".

[sailaway21]

Originally Posted by chris_gee

No I didn't suggest taxing oil companies additionally. I was responding to Sailaway's dismissal of tax on petrol as a means of reducing demand and promoting efficient use, because it involved tax. The USA is one of the most profligate oil users in the world, but I doubt that the economy would totally fall over if this were reduced. It more likely would lead to greater efficiency.
The issue is if supply is limited and demand grows, then prices rise as they have. Despite the recent fall the price is still up about 50% over a year ago. Some of the fall is due to expectations of reduced demand. Already USA mileage driven has reduced.
In that circumstance excess demand gives higher prices than they otherwise would be. The question then is whether that extra money is better in the suppliers' hands or the people's via government. Not all the windfall of recent years goes to the oil companies - some accrues to the producing countries.
It is a licit function of government to encourage efficient use of oil. To avoid this because the oil companies could use the profits better and it would be unpopular seems shortsighted. In any event relatively high prices seem likely in the future, which will lead to some changes of various sorts. The question then is whether part of this increase goes abroad to producers or stays at home.

There are two problems with this argument.

The first is that you're taxing an industry that is badly in need of domestic expansion. The entire history of oil, and we go through these peaks about every 25-30 years, is one of under-production and then over-production. that's why we've enjoyed low oil prices since the eighties. The current oil profits should be allowed to go where they usually go during high oil price times-into exploration for more.

The second problem is the idea that we're profligate with our oil. Sure we use a lot of it but, we get a lot done with it. We just happen to be the largest and most productive economy in the world. All that oil fuels an American economy that leads the world in categories that most nations cannot even aspire to. For instance, look at our transportation infrastructure. In Michigan we eat oranges that were hanging on a tree a few days before. Try that in China or India. The perception might be that we're all driving around in our gas-guzzlers burning up the world's supply of oil but there's far more going on than that and industry and most of the economy depend on oil to work efficiently.

Price is the best regulator of oil consumption as well as the only thing that will result in workable, affordable alternative energy sources coming to market. Taxes merely enrich the government which tends to waste a goodly proportion of the money it receives. Specifically, look at all the energy boondoggles we got back in the seventies under the windfall profits tax. T. Boone Pickens wants us to back his wind-power idea; an idea that he acknowledges will never be self-sufficient without government subsidy-and that's before we even run the massive transmission lines that will be needed. Under Chris' plan we'll be subsidizing am unreliable and inefficient source of energy by one of the most flexible energy sources. As observed, price does a very good job of curtailing "profligate" use. I'm surprised that anyone whom has witnessed the government's operation of either the Post Office or Social Security would want them in the energy business.

Increasing the price of oil via taxation is only going to hurt the American businessman and the American consumer-particularly the poor consumer. It'll have a negligible effect on the oil producing nations. If consumption drops significantly, and the price follows it, the oil producing nations can simply reduce production to drive the price back up. They get paid regardless of what we do.

Ironically, it's the nations like China and India that waste the most energy for what they produce. The American economy rewards efficiency-we cannot afford to waste our energy. Getting government further involved in that will lead to reduced productivity and remove the incentive to find more oil. Remember; if you tax something, you get less of it.

[Sailormann]

Much like one's wife asking is my butt too big.

Why would Chris's wife ask if your butt was too big ?

[chris_gee]

It is quite difficult to respond to an arguement that not only did I not advance, but denied advancing.
So point 1 a sales tax is not a tax on an industry.
Point 2 seems to be we are big and use a lot of oil. Ok big deal. So if you are oil dependent is it not possible to be more efficient and if not how will you survive competitively
if demand exceeding supply increases prices?
I made no mention of who develops alternatives and how. Some functions are best left to the market. However some issues like public transport may need planning because of the wider scope.
I agree with one point that subsidised oil in certain countries does not discourage inefficient use.

[sailaway21]

"So point 1 a sales tax is not a tax on an industry."

If I were a farmer and the government decided that it's citizens were too dependent for nutrition on the cheeseburger I'd sure consider it a tax on my industry if they taxed the consumption of cheeseburgers via a sales tax.

Maybe you remember the luxury tax from the 1980's? The one where we were going to soak the rich for purchasing anything worth more than $35K? We did and the rich didn't pay much, they just changed their buying habits to avoid such purchases, so from a revenue generating standpoint it was a flop. But it was a roaring success if your goal was to reduce the number of luxury good providers. We eliminated most of the small sailboat building industry that'd grown up over the previous twenty years of the fiberglas revolution and we totally eliminated the small airplane industry. By something like the late eighties there wasn't a single company left in the US building small planes like Cessna and the like. I guess a couple have re-emerged since the repeal of the tax but the market is hardly flush yet today with builders of small, low margin, affordable sailboats, is it?

Just taxing something as s solution, or towards a goal, has many unintended and usually unforeseen consequences. I'm sure that Ted Kennedy and the Democrats really did not intend to put the small boat businesses under.

"...is it not possible to be more efficient...." Sure it is and aren't you glad we live in a country that is one of the most efficient users of oil, and other energy, on the planet? Who is more efficient than we are?

Public transportation, like "public" anything else, is a phrase that denotes inefficient, undesirable, and usually means that you'd be using anything else if you possibly could. Public restroom comes to mind among others. Here's one that may illuminate upon the benefits of such central planning-just take a brief look at all the light rail systems built within our cities since they became all the rage in public transportation back in the 1970's. None of them turn a profit, all a massively subsidized, both of which we might be able to live with if any quantities of people actually used the damn things.

Alternatives will arise when private industry can make a buck off of them. Some should and would fail if we're smart enough to keep government out of the matter. The market will deal with unproductive and unworkable ideas in it's normal ruthless manner; only government is capable of keeping alive an unworkable idea indefinitely.

Just a minor note on that industry-why would we subsidize solar for US energy when it's not even capable of keeping the northern hemisphere warm in the winter? I suppose there's a market for everything but, in this case, most of the US doesn't seem to be a good candidate.

[chucklesR]

Sales tax on tobacco and alcohol is not a tax on an industry?

That explains the 'logic' of a lot of your postings, wishful thinking.

[Freesail99]

If I were a farmer and the government decided that it's citizens were to dependent for nutrition on the cheeseburger I'd sure consider it a tax on my industry if they taxed the consumption of cheeseburgers via a sales tax.

I have been a farmer for much of my adult life ( vineyard ). In NJ, I am exempt from sales tax, for any thing farm related except building materials.