A bad sign

by Russ Roberts on October 8, 2008

in Financial Markets

You know that things aren’t going well when the vertical axis for the stock market chart on the front page of the New York Times web page is measured in percent instead of hundreds of points:

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{ 35 comments }

Crusader October 8, 2008 at 1:46 pm

I couldn't care less if a bunch of greed Wall Streeters lose their shirts!

Chris O'Leary October 8, 2008 at 1:49 pm

The problem is that, while they can help with some types of analysis, diagrams like these magnify the visual impact of the negative change by setting the lower range at -3 rather than at the correct figure of -100.

That makes things look 100 times worse than they actually are.

As I discuss in my analysis of Al Gore's book and movie "An Inconvenient Truth", tricks like these are often used by people to strengthen weak arguments.

Edward Tufte covers these kinds of issues at EdwardTufte.com

P.S. I asked Tufte about Gore's use of these tricks, but Tufte is evidently a liberal and/or a believer in the evils of global warming, so he never replied since doing so would hurt The Cause.

kurt October 8, 2008 at 2:08 pm

Chris O'Leary, I think the graph just shows the daily limit in which the market moves, it's not really something sinister. A better graph would put the limits at historic variance levels, so that one can see the volatility in the current stock market.

Chris October 8, 2008 at 2:09 pm

I don't even try to digest any form of media anymore. I just use the internet.

It seems like everyone has an agenda and they'll show "factual" information, but it's just such a manipulated fact that it's pure agenda.

Crusader October 8, 2008 at 2:13 pm

Chris – what do you mean "the internet"? The MSM is on there too. Do you mean original source data like the DJIA website?

Chris O'Leary October 8, 2008 at 3:03 pm

"Chris O'Leary, I think the graph just shows the daily limit in which the market moves, it's not really something sinister."

The intent may not be sinister, but the fact is that this design will tend to make things look much worse than they actually are.

That's an issue because we are dealing with psychology here.

Methinks October 8, 2008 at 4:29 pm

That's nothing. A few days ago (can't remember which day, the days are all melting together right now) the intera-day move was close to 9%.

Chris, the graph merely illustrates increased uncertainty. I don't understand your objection to it. Do you suppose that hiding reality from people by ignoring bad news in the name of psychology is preferable?

Kurt, this is the most volatile market we've seen in at least two decades, I believe. The VIX index is around 60 today. For reference, in the days right after 9/11 and the 1998 Asian currency crises, the VIX spiked into the 40's. In my opinion, the government's endless interventions are adding to the volatility.

T L Holaday October 8, 2008 at 7:27 pm

Chris' (questionable) objection is that the graph shows values wiggling between -3% and +2% instead of 97% (of what?) and 102% (of what?). Chris' suggestion appears to be that the graphics exaggerate the change, and would prefer a graph showing values going from zero to 12,000 (maybe?), thus demonstrating that compared to catastrophic utter destruction, things are peachy.

Oil Shock October 8, 2008 at 9:30 pm

Liberal Media Sensorship

This was the real story behind the bail out – that the fascists on the left doesn't want you to see. From SNL.

DKH October 8, 2008 at 9:42 pm

Personally, I don't mind that things are presented dimensionlessly. That may be the engineer in me, but it drives me crazy that changes in the Dow Jones index are presented as "the largest single-day point drop" or some such. That statement isn't very meaningful.

Chris O'Leary October 8, 2008 at 11:54 pm

"Chris, the graph merely illustrates increased uncertainty. I don't understand your objection to it. Do you suppose that hiding reality from people by ignoring bad news in the name of psychology is preferable?"

The way graphics like these are structured, to the naked eye it looks like a 90% drop and not a 2% drop.

RL October 9, 2008 at 12:24 am

Russ R thinks there's a problem when the "stock market chart …is measured in percent instead of hundreds of points"

But Russ, the market is around 10,000. At 10,000, 1%=100 points.

So I don't see that it matters at all. Granted, it WOULD be a problem if the market were at, say, 20,000.

[Insert innumeracy joke here.]

Lee Jamison October 9, 2008 at 10:44 am

I want to have a serious conversation with some economists on the ever-increasing disconnect between the monetary economy we always see reported (debt, monetary income, money markets, foreign exchange, etc.) and the underlying real-time barter cycle for which all the numbers are a sort of shell game.

When we talk about loan markets freezing up, housing bubbles, etc. what we are really discussing is promises masked as values not being able to match with their underlying barter expectations.

The same is true of long-term promises like Social Security. In that case the promise is that our children, grandchildren, ad infinitum, will work to create goods and services in real time which they will hand over to others to consume. When one looks at the underlying barter transaction this proposes to impose on the population of the future it is beyond preposterous.

Can economists explain a way out of this fantasy-turned-nightmare without resorting to further monetarist fantasms?

Martin Brock October 9, 2008 at 10:59 am

I usually watch money.cnn.com for "market news". Here's the current Breaking News item:

"Stocks open higher amid rising hope that the government will continue taking steps to breathe life into the economy."

Basically, CNN always spins any observation this way. Every event somehow is a sign that someone wants the government to do something. It's like explaining every changing the weather with Global Warming.

And the broad indices are already trading lower after briefly rising earlier today.

Sam Grove October 9, 2008 at 11:00 am

We must develop a highly automated economy.
Robots for everyone.

Martin Brock October 9, 2008 at 2:50 pm

Real automation is not a lot of independent robots making stuff for us, not remotely. Real automation typically allows half as many people to produce the same output, and the more productive workers often are more highly skilled than workers they replaced.

A more productive economy loses more when the workforce shrinks or shrinks relative to demand for its output, because each worker leaving the workforce effectively takes twice as much productivity with him. A more productive economy does not make it easier for a large group of workers to stop working and continue producing, unless the exiting workers weren't very productive before exiting. The unproductive short-timer is probably a reality to some extent, but the more disciplined older worker probably is too.

Martin Brock October 9, 2008 at 3:46 pm

A more productive economy does not make it easier for a large group of workers to stop producing and continue consuming.

Sam Grove October 9, 2008 at 11:54 pm

It was a bit of a joke.

Mark Wonsil October 10, 2008 at 10:21 am

Here's a bit of a joke my brother made up:

The Japanese financial markets were stunned yesterday when panicked depositors caused the Bank of Origami to fold.

Sam Grove October 10, 2008 at 10:48 am

Opening the paper this more, I see more 'bad' news on the stock markets.

I think this is all to the good.

The market is providing the much postponed feedback of malinvestment and the citizenry can see that the experts attempting to manage the economy haven't a clue.

Meanwhile, various news sources keep putting Ron Paul on to comment on the proceedings.

Martin, I awoke this morning contemplating, among other things, about the opportunities of the retirement of the baby boomers.

There shouldn't be any problem feeding everybody, but people in retirement will demand services:

Geriatric medicine
in home care
travel
pet care (older folk dote on their pets like younger folk dote on their children)
financial advice & management
home maintenance services
hospice
etc.

Sam Grove October 10, 2008 at 11:14 am

The FED has been dumping money into the economy. Expect severe inflation.

John Smith October 10, 2008 at 12:24 pm

Using an analogy:

The Stock Market is the heart of the economy. When the graph shows a strong heartbeat the economy is robust, likewise, a poor heartbeat translates into a weak economy.

Of course the Stock Market heart can be ‘Jacked-up’ and therefore one gets a false reading from the display monitor which shows a vigorous heart rate.

Martin Brock October 10, 2008 at 5:31 pm

There shouldn't be any problem feeding everybody, but people in retirement will demand services:

I agree, but everyone else sees these opportunities as well. We think about selling things to them, but that's not where the greatest untapped opportunity lies in my opinion. The greatest opportunity lies in organizing them to work part-time providing things to us and to one another, because they'll not be able to retire as fully as they expect.

Find a way to organize them to work 20 hours a week, doing interesting work, from and around their homes, even on the road as they travel, to supplement their Social Security checks. They needn't earn very much, because they'll want the business, the being busy rather than idle. Many will even pay to stay busy and interested, so if you can organize some of them to busy themselves this way even a bit profitably, they'll thank for it.

Fortunes will be made this way, and I believe the boomers, myself included, will be better off this way than in more conventional retirement. Succeed in this sort of venture, and you'll never want to retire yourself either, so everyone's a winner.

Sam Grove October 10, 2008 at 8:13 pm

Are there SS related regs that tend to discourage SS collectors from working?

Lots of retired people take up RV living.

Sam Grove October 10, 2008 at 8:15 pm

They like to take classes too. I met someone with a business plan to offer computer classes in retirement communities.

Martin Brock October 10, 2008 at 10:49 pm

Are there SS related regs that tend to discourage SS collectors from working?

There were. They've been largely removed. If you're over 65 (or whatever your age of eligibility for full benefits will be), work doesn't affect your benefits.

They like to take classes too. I met someone with a business plan to offer computer classes in retirement communities.

I'd be more interested in employing those who can and wish to work with computers or provide them tools to employ themselves. Develop tools they can use online to provide a valuable service. They're older than you. Don't think of teaching them. Think of providing a resource that they can use to teach or otherwise to serve others.

Here's an example that comes to mind. Automatic voice recognition is one of the holy grails of artificial intelligence research, but after loads of investment, computers still suck at it outside of very restricted domains. Human beings on the other hand are phenomenal at it.

So you want the proverbial automatic typewriter that takes dictation and writes your letter, that thing you saw on Star Trek decades ago and thought you'd have by now. Here's how you might provide it.

You browse to dictation.com and start speaking. The web server automatically selects a few interpreters from among many online and transmits your voice to them. All reply by typing their interpretation of what you said. The web server either 1) transmits all results back to you and allows you to select your preference or 2) constructs a single reply from all of the replies and transmits this reply back to you. 2) is much easier than the full-blown recognition problem.

Or maybe you get one interpreter at a time. If you don't like him or he doesn't like you, you keep trying. Eventually, you have a dozen interpreters you like, and one of them likely is online when you want one. The server automatically delivers your preference when possible.

The interpreters sign on whenever they like and work as long as they like from wherever they happen to be.

I once proposed a system like this for face recognition. Recognizers would specialize in sets of faces interesting to consumers of the service, like airport security. Governments have invested a lot of money in automatic face recognition, but computers suck at it too, while six year old children excel at it.

With face recognition, you want to provide workers faces to specialize in recognizing, measure their accuracy with periodic requests for recognition and provide some filtering, so that a person specializing in Asian females doesn't receive pictures of black males. The filterers are self-organized workers too.

Hundreds of people might specialize in the same faces, but only a few specializing in each face would be signed on at a given time, as workers would sign on at their leisure, though they'd know when demand for their set of faces is higher and payments thus greater.

Sam Grove October 10, 2008 at 11:50 pm

I thought of something similar offering reward for spotting suspicious activity on security camera feeds.

This is a reasonable activity for many handicapped persons.

They like to take classes too. I met someone with a business plan to offer computer classes in retirement communities.

I'd be more interested in employing those who can and wish to work with computers or provide them tools to employ themselves.

One thing leads to another. Make some money offering training in computer skills, then link them up to exchange opportunities.

Many small jobs can be transacted via the internet. A 'small job' market. Like an 'eBay' for a variety of tasks.

Mesa Econoguy October 11, 2008 at 2:44 am

Ok, drawing back to the post title, this was an incredibly shitty day/month so far for market “progress.”

Lazy fare has brought us far from lazy government.

Methinks & I are currently embroiled in this mess, which is about 3 moves away from complete disaster. I do not say that lightly. I was on the CME floor in 1997 when Niederhoffer blew up, SPUs were limit down on the open, and the shit really hit the fan.

This is worse. Interbank lending is done. Government has done nothing.

Right now we have a combination of 1) a very large vessel being thrown about in a sea of destructive volatility; 2) those who can, clinging to the deck of this rocking ship, and 3) massive turbulence augmenting the side-to-side ship moves, throwing many overboard.

This shit is yet to hit the fan.

“I don’t know how we’re going to get of this one.”

Mesa Econoguy October 11, 2008 at 2:48 am

“…out of this one.”

Typing volatility.

Mesa Econoguy October 11, 2008 at 5:43 am

Here is my fear:

This market decimation is already being used as an excuse for interventionist horsecrap policies.

President Obama will be an economic disaster:

We’ll get nanny socialists dictating “green power needs” and “ minority green power hiring needs” and “left-handed environmentally friendly minority solutions” needs and “Association of Trial Lawyers of America hardship funds” and “Sierra Club Jimmy Carter memorial statues” and mucho other stale 70s leftovers.

And you’ll be maxed out at 1.9% annual GDP growth, just like Italy, but with crappier high-end cars.

Sam Grove October 11, 2008 at 1:46 pm

Government has done nothing.

By which I hope you mean: government has accomplished nothing.

Actually, I think the bailouts sent a signal of impending inflation via credit/currency expansion, thus signaling investors they should go to commodities which will be driven up in price by the concurrent devaluation of the dollar.

The bailouts were terrible actions by the government.
The message is clear, the wealth that people thought would be there when they retire is unlikely to be there because of malinvestment.

By postponing the necessary corrections, government actions extend the problem.

Martin Brock October 13, 2008 at 5:10 am

We’ll get nanny socialists dictating “green power needs” and …

I'll wager that none of this stuff remotely approaches the trillions we've squandered on the "war on terror". The Bushniks have set the bar so low that almost any "solution" looks like a high flier.

… the wealth that people thought would be there when they retire is unlikely to be there because of malinvestment.

Right. But we haven't even begun to acknowledge this fact. The first and last chapters in the malinvesment story, given our unprecedented expectation of retirement, is a failure to invest adequately in labor. And I don't mean investments in school buildings and teacher salaries. I mean that we raised too few children. "Investing" heavily in education at this point is like building all these houses for all the children we never had.

We can reorganize resources however we like now, but we'll still have too few of the most valuable resources in the mix to generate all the goods that retirees expect to consume as they subtract their own production. Sure, we've raised productivity, but baby boomers themselves are the more productive workers, and they're the ones expecting to retire for unprecedented periods.

After twenty years of investing heavily in "growth", while avoiding costly "malinvestments" like children, we're now following the advice of our wise financial planners and shifting our "investments" from "growth" to "income". This shift explains the rising demand for "securitization", all the mortgage backed securities, all the bonds leveraging our corporations to the hilt and the CDOs "diversifying" these bonds and the default swaps "insuring" them.

But we can't explain the predicament this way, so we'll blame "the government" for tricking us into building so many houses and extending so much credit to so few credit worthy borrowers, then we'll "protect the investors" by printing lots of money for them.

The chickens are coming home to roost but finding their nests empty, so they're looking around desperately for scapegoats. Is "the government" to blame? Yes. It encouraged us to believe that buying entitlement to rents imposed on the next generation is more valuable than producing the next generation. In other words, it gave us Capitalism, and Capitalists of every stripe now scramble to rationalize their folly.

Sam Grove October 13, 2008 at 12:51 pm

That's Capitalism? I always thought they were largely Socialism as in Medicare, Social Security, etc.

It all goes back to the fundamental that government is but a manifestation of human behavior and motivations and has provided a dangerous tool of illusion.

Martin Brock October 14, 2008 at 5:03 am

"Capitalism" is a word. It means what it nominal proponents actually do. "Socialism" is no different.

When I was much younger, I discovered a book titled "Anarchism" in my high school library and then decided myself a Proudhonist. Since Proudhon was nominally a "socialist" in his time, I also wore this label for a while, though I knew that Proudhon championed private property and other individual liberties, opposed a state planned economy, tried to create a private bank extending credit secured by labor (ultimately forbidden by the French state) and was a sometimes bitter rival of Marx.

Later, I accepted the conventional wisdom that "socialism" described state ownership of means of production and state planning, so I dropped this label in favor of "mutualist" and "libertarian", originally claimed by American Proudhonists like Benjamin Tucker who also self-identified as "socialists".

Still later, I dropped "anarchist" in favor of "minarchist" and "classical liberal" for reasons I've discussed here, and I became a more conventional "libertarian" in the modern sense, though not a Rothbardian or a Randian. I never accepted "conservative".

Nowadays, the folks self-identifying as "Capitalists" are neo-liberals and neo-conservatives, both effectively championing global states and the incredibly massive state interventions we've witnessed for decades. The most powerful emerging economy now routinely called "Capitalist" is a Communist Party dictatorship. That's the reality of "Capitalism" today. My preference for some other usage is irrelevant. I might like "socialism" to describe Benjamin Tucker's libertarianism too, but as a practical matter, it doesn't.

Sam Grove October 14, 2008 at 1:36 pm

Ah well, those self same 'Capitalists' also from time to time champion 'free markets' as well, though they also make it obvious to the discerning that they don't know what that means.

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