Felix Salmon smackdown watch, Zero Hedge edition

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.


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