Felix Salmon smackdown watch, Zero Hedge edition

By Felix Salmon
October 1, 2009
Equity Private has a stinging and hilarious response to my post about the Zero Hedgies, which accused them of being day-traders:

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Equity Private has a stinging and hilarious response to my post about the Zero Hedgies, which accused them of being day-traders:

It is not completely clear what “day trader” means in this context (it is possible this refers to individuals who manage their own portfolios rather than dump their assets into long-only 401k funds like smart, patriotic investors are supposed to) but I have reason to believe that they are generally considered “losers” and otherwise unsuitable degenerates. This appears to be connected to the dot-com crash… I have, therefore, undertaken an anecdotal analysis of our audience to pinpoint other weak points and pools that may contain high concentrations of short-sellers, precious metal devotees, former index fund investors, “retail investors” (I have used 5 definitions of this term to be expansive) gypsies, jews, homosexuals and former members of the band “Air Supply.” Obviously, if word leaked out of these associations our readership would plummet and we may face regulatory sanction or even prison.

She’s right: commenters are not necessarily representative of a site’s overall readership, and I’m sure that there are many smart and important finance and regulatory types who read ZH. A large part of the blog’s function is disintermediation: it comprises market participants talking directly to each other without being filtered by professional (or even amateur) journalists.

But if you follow this particular thread too far, you end up with an even more unsettling conclusion than my original one. Far from reflecting the conspiracy-minded and often-disjointed ramblings of harmful-only-to-themselves retail day-traders, could ZH actually be holding up a mirror to what the market’s really like, once you strip away the artificial polish of the PR departments and the urbane investment-banking types? Are finance types, in general, much more Howard Lindzon than Robert Rubin?

That’s what the wisdom-of-crowds hypothesis says: that if you take a million idiots, all trading with and against each other, yes you’ll get occasional mass delusions, and bubbles and busts, and ad-hoc groupings of vaguely like-minded individuals, like ZH. But somehow, in aggregate, those million idiots will be more right, more often, than any regulatory panjandrum or media pooh-bah. And anybody who’s spent any time with bankers and buy-siders will tell you that there’s precious little correlation between intelligence, on the one hand, and success in the markets, on the other. Yes, there are smart people who make a lot of money, but for every one of those I can show you two equally-smart people who have lost just as much.

It’s kinda ironic that there’s so much bad blood between ZH and CNBC, because in many ways both of them are very good at unveiling the market’s id. Look beneath the pat explanations of the daily market reports (“markets rose on optimism that oil prices might” etc etc), and what you see is a roiling, chaotic mess. It’s something which is almost completely invisible to readers of the Wall Street Journal, while occasional visitors to the Yahoo message boards can be forgiven for thinking that the only people who frequent such places can’t possibly be representative of the market as a whole. But with the advent of ZH and CNBC, it’s getting harder to escape the conclusion that this really is what the market is like, and the sanitized version found in middlebrow publications and mutual-fund reports is at heart a fiction.

I’m somewhere in the middle. On an intraday timescale, I think that noise traders really do set prices and move markets. If you look at markets over a period of months, however, their movements are much more a function of macroeconomic activity, global capital flows, and long-term decisions made by large institutional investors. These things are almost invisible on a day-to-day basis: they’re like gravity, which can happily be ignored at the quantum level, but which is the only thing that matters when you scale up a lot.

So ZH is probably a pretty accurate representation of many people who pay close attention to what the markets are doing on a minute-to-minute or even day-to-day basis. Which is as good a reason as any not to do that.

16 comments

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Felix,
Maybe you’re complicating matters a bit with your analysis?
A certain portion of ZH readers are probably ex wallstreet traders like myself. I think it is refreshing that ZH exposes the manipulative behaviour of wall street, in terms of legal and illegal front running (eg. it is not illegal in FX and Bond mkts), regulator arbitrage and general spin about their business. Been there done that myself for 25+ years. The fact he has the knowledge, wall street trader contacts (and a bloomberg terminal) makes it more believable, even if he (they?) get it wrong from time to time.

Posted by pjfny | Report as abusive

If you wrestle with pigs you both get dirty but the pig has more fun. That’s all anyone needs to know about markets and about arguing with ZHies. Please give us more like the Ivory Coast post, that was interesting, this is just getting into tit-for-tat and it’s playing into their hands. Dress it up all you like about serious introspection into the state of financial journalism but you’re being goaded.

“Are finance types, in general, much more Howard Lindzon than Robert Rubin?”

Why would anyone be or act surprised that traders recruited because they have the very qualities which make them suitable to be traders then proceed to exhibit those very qualities in excess if allowed to do so?

“the sanitized version found in middlebrow publications and mutual-fund reports is at heart a fiction.”

Isn’t that version just for spinsterly aunts and has it not always been so? Books written in the 1800s spilled the beans on the nefarious tricks of bankers and ‘the stock market’.

A serious point that I wouldn’t wish to deny is that the underworld creatures that inhabit the markets have suckered US moms and pops with ‘investing’ their retirement $ in the very place they should not be and that happened for all the reasons we know (lack of an alternative secure retirement funding, regulatory capture etc). A cultural phenomenon having to do with too little education about the world beyond US shores, too little study of history, and too much flag-waving koolaid.

Posted by SP | Report as abusive

The fact that CNBC and Zero Hedge are so similar is the real *source* of their “bad blood,” as you put it. They are both competing for the same audience, and they both know it.

Hey, TED, one thing is certain – they sure aren’t competing for your “audience”.

Posted by QDS | Report as abusive

Felix, EVERY interpretation of complex phenomena is ‘at heart a fiction’.

Posted by BigBadBank | Report as abusive

I think ZH just called you a bigot. A hint that your recent increase in snarkiness might be testing the limits ?

Posted by jonners | Report as abusive

@QDS — You are absolutely right. Thank God. Heaven knows I couldn’t stand to lose all my Ron Paul, goldbug, and wingnut advertising dollars to them.

Ban blogging now! It serves no social utility.

Posted by Dogma | Report as abusive

Felix Salmon misses the point entirely. The point Marla was making in her post (once you scroll down to the end) is that the readership of zerohedge includes the who’s who in financial, banking and regulatory circles because Tyler Durden & Co. raises serious questions regarding complex issues that tend to be glossed over by mainstream financial journalists who don’t understand the issues involved and don’t question what they are told by corporate PR departments and the Fed’s spokesman. The fight club theme and conspiratorial overtones attract some of the tin foil hat crowd, (no argument there) but the quality of the content and the level of sophistication of analysis is first class. Is there an ideological bias? Definitely. But,

The problem with dismissing a viewpoint as cynical is that it often doesn’t answer the question as to whether the attitude is warranted. A perfect example would be the curious case of Goldman Sachs and Textron update to ‘convition buy’ within weeks of a bond offering to be arranged by none other than- you guessed it- GS. With all due respect, Mr. Salmon, how many petitions have you filed to the SEC alerting them to potentially manipulative activity on the NYSE Euronext? How many FOIA requests have you made, and how many hours do you spend scouring declassified files or piling into the obscure footnotes of Fed publications to reveal the deeper dynamics of the capital markets?

Posted by Don Fernando de Vistabella | Report as abusive

Dear Felix the narcissist:

I’m very concerned about our readership of late. In the wake of recent publicity I want to call your attention to a few figures that I believe might spell doom for Zero Hedge. Doom. Pure and simple.

I know what you are thinking, but I want you to forget for a minute that crap about the statistical illegitimacy of wielding a single commenter (or even an anecdotal few) against Zero Hedge as a measure of a population that numbers over 100,000 readers. That falls right into the “fact trap” as I call it. Facts trap us. They limit us to a particular demographic and make us slaves to topics we cannot control any more than we can control the facts. Our anemic growth since January is proof of that. What is important in today’s media is anecdotal data. It is richer, deeper, (once we add our fluffy prose) and fits better in prime-time print with glossy pages. One well-told story about a fringe commenter is significantly more penetrating than a regression of our entire audience. Further, it commands the interest of a wider range of readers (particularly those uncomfortable with numbers or charts). We are losing the publicity battle in the mainstream press here. True, efforts to assail our content and long missives (often error plagued) targeting some of Zero Hedge’s messengers have yielded little fruit, but this new approach, attacking our readers, is frightening and dangerous. You see, apparently “day traders” make up the majority of Zero Hedge’s audience.

True, it is not completely clear what “day trader” means in this context (it is possible this refers to individuals who manage their own portfolios rather than dump their assets into long-only 401k funds like smart, patriotic investors are supposed to) but I have reason to believe that they are generally considered “losers” and otherwise unsuitable degenerates. This appears to be connected to the dot-com crash. I really have no solid data to back this up, but, you see, data makes no difference. This is the insidious nature of this attack and we must respond quickly. I have, therefore, undertaken an anecdotal analysis of our audience to pinpoint other weak points and pools that may contain high concentrations of short-sellers, precious metal devotees, former index fund investors, “retail investors” (I have used 5 definitions of this term to be expansive) gypsies, jews, homosexuals and former members of the band “Air Supply.” Obviously, if word leaked out of these associations our readership would plummet and we may face regulatory sanction or even prison. This is not all. I have also discovered several other categories of undesirables infest the ranks of our readers, contributors, our tipsters, and those with whom we regularly correspond. These include:

Buy-Side investors (for instance, major hedge funds). Zero Hedge regularly fields tips, hints, compliments, critiques and the like from dozens of brand-name buy-side firms weekly. The addition of our hot-line has only intensified the flow of these sorts of tainted communications. We must immediately replace this pool with an agreeable group of other “financial journalists” with whom we can meet late mornings and discuss reactions to our most recent stories about other financial publications and how to cover and spin those reactions among our journalistic mutual-admiration cult.
Short-Sellers. Zero Hedge regularly communicates with the heads of two highly unpatriotic “short-bias” funds. The potential exists that we may be charged with high-treason if these communications came to light. I recommend we destroy all evidence of these communications and replace them with fabricated emails to and from Fox Business.
Principals and those with actual P&L responsibility at high-profile hedge funds. Zero Hedge regularly communicates with the principals of over a dozen hedge funds which would be recognized as “famous” in financial circles and “highly dangerous” elsewhere. Even the most conservative count of these (that I have done back-of-napkin just now) would put their collective AUM between $75-$100 billion. Taking the firms of non-principal level individuals we regularly correspond with or talk to into account would easily triple this figure. Talking to those with the ability to actually direct funds is madness. We must instead shift our communications to so called “policy-makers” and the press-offices of various big-name firms along with their public relations personnel. This is where the most critical market news is to be found. We must join the race to get the first hint of the next press release to “scoop” our peers. This, in turn, will finally get our calls to the official appendages of large firms returned. In this way we can repeat in four ways the content of a lone press release in a single article, substantially decreasing our workload.
Legislators. Zero Hedge regularly corresponds with the staff (senior and otherwise) of a number of Senators and twice as many U.S. Representatives. Our off-line comment to these individuals, by their own admission, often colors hearing questioning and other legislative testimony- sometimes nearly word for word. If we are not careful, we could actually be associated with these upstart “reformers.” We must replace these discussions with pleadings to the White House’s press secretary- the real source of appropriately toned news in the country.
Bankers and Traders. What limited logs we keep of Zero Hedge’s web traffic are filled to the brim with the “who is who” of financial firms including every large investment bank worth mentioning and at least 100 hedge funds. I am sorry to have to tell you this includes Goldman Sachs. We must immediately replace these hits with random surfing from the Texas Correctional system.
I don’t need to tell you how damaging it would be if our other readers were to learn that they are in the company of hundreds if not thousands of people who manage hundreds of billions of dollars professionally- and probably a large number of investors who run their own portfolios for more than the allotted 10 hours required to pick this year’s mutual funds. Some of these people will even claim that Zero Hedge is “mandatory” daily reading for them if pressed by the FDIC. (Also, I recommend we redirect all web traffic from the FDIC, SEC, Fed, Treasury, the White House and related institutions to http://www.disney.com so as to provide a more serene content set and to avoid alarming these institutions- though we should make sure to block any access to “The Black Hole”. This only accounts for about 2-4% of our current traffic).

Given this dire threat to our existence, continuing to concentrate on our content is madness.

We cannot continue to be, simply put, the only forum where these degenerates can find raw, unvarnished discussion and analysis on financial markets. We cannot always get it right and this dooms us to allegations of “rants” or “paranoia” or “conspiracy.” In addition, when we do manage to catch a story, and get the underlying issues spot-on, issues which had not theretofore seen the light, we fill the cups of our critics with material on which to report. Our work keeps them in play. If we were only to stop this practice they would be forced to return to covering the appearance of conflicts of interest by Ben Stein, or the importance of pornography in the economic recovery. You will notice that this “cup overflow” effect has been true for High Frequency Trading, Flash Orders, the recent AIG scam, documented evidence of past gold manipulation by the Federal Reserve, the Citi short squeeze, half a dozen insider trading cases and countless other nuances of finance no one else would otherwise bother to cover. Trusting our readers to sift the content that matters to them is clearly playing into the hands of our enemies. It also thins the ranks of important journalists and upstanding members of the financial community like Dennis Kneale. This sort of approach only results in quotes like this one from Daily Kos:

Note that I’m linking to Zero Hedge here, not because I endorse the editorial theme of the blog at all, but because they are the only place I could find that carries the original document in toto.

I know you will realize we cannot exist without the support of sites like Daily Kos. We need to stop publishing documents that cannot be found elsewhere.

I feel forced to add that readers (and our critics) have begun to detect something of a shrill, annoyed tone to our prose, even a dry cynicism. They clearly sense what can only be described as a collective disgust with the manner in which financial “markets” have descended into absurdity. It does not take a genius to perceive this. It marks us as malcontents and therefore makes our facts and figures irrelevant. Adopting a mild, pleasant tone and masking any negative angle is essential to our image at this point. To this end, and through my back-channel connections at CNBC, I have secured the cooperation of a doctor willing to prescribe us Thorazine™ suppositories in quantity.

You will also notice that recent coverage has attracted the anger of our readers and others. The allegation that this coverage is the same tired, personality-based “journalism” that is presently failing CNBC, produced by the same carrot and stick, flattery and threat investigative methods (I gather they teach these “how to handle a source” lessons in the first semester of Journalism school) that make a mockery of the fourth estate is likely to make mainstream outlets angry with us. We cannot allow this. You will recall that we ignored similar urgings of certain reporters recently. Allow me to refresh your memory: “Thanks for all the off-the-record help on that piece from before. By the way, to pay you back, I’ve decided to write about you now. Of course, it might not be so flattering without your help. How about you let me tell your side of the story? Give me an exclusive and you might be able to get your word out in my story maybe. It is not too late and you might as well since I’m doing the story anyhow. Our photographer wants to meet with you. A story about the larger team? The dozen or so senior staff and forty plus contributors? About your work and how you do it? Booooring. Look, it is up to you how you end up looking in print and the kind of story I write. Hello? Hello?”

I’m not sure we should have hung up so quickly on that one. We could have totally had our moment in the sun and inflated our egos if we hadn’t blown that. I really wonder, at this point, if merely going back to work to educate a bunch of evil “day traders” is in the best interests of the site.

Yours in Readership Purity,

Marla Singer

Posted by Davis | Report as abusive

Oh my Felix. You’re really stirring up the hornets nest with this one. Expect several thousand psychos to harass you endlessly now….

Posted by Robert Paulson | Report as abusive

“I really wonder, at this point, if merely going back to work to educate a bunch of evil “day traders” is in the best interests of the site.”

Sound like, if that site really needs to persist for some bizarre reason, that they really need a Tanta to keep things real. Tanta Vive!

If you’re such hotshots, go cure a disease. Slimy oozing parasites.

All you need to know about Zero Hedge is that someone there was a fan of racist crackpot Hal Turner.

Posted by Jon H | Report as abusive

I believe the industry insiders who tip ZH do so in order to use ZH (and its uninformed mob) as useful idiots. They win if they can get the ZH crowd to knock down their competitors a peg or two.

In private they probably laugh at the gullibility.

Posted by SL | Report as abusive

Some Simple Premises:

The ignorance of the masses is an essential ingredient that supporting rigged casino we call Wall Street.

The weaker the press coverage of this rigged casino the better.

Those who seek to expose the tricks of this dubious trade are enemies.

Those who dare to question the bona fides of Wall Street and the health insurance industry are crackpots and fringe luntics.