I believe we are on an irreversible trend toward more freedom and democracy — but that could change.

Friday, January 25, 2008

Market plunge & economic stimulus package

Markets are driven by millions of investors acting out their fears and hopes. As such, there are very few cases in which large market moves can be traced to specific events. There was certainly no doubt about the 9/11 market drop, but for the most part, it's impossible to walk the cat back and determine the chain of events that influenced markets.

However, we now have a prime suspect in the market drop this Monday. Apparently, one man's folly followed by institutional selfishness that may have greatly amplified what was originally a mild market fluctuation.

NYT reports:

As panic swept European markets on Monday, word spread that a big hedge fund was in trouble and dumping stocks.

Someone was selling, all right — Société Générale. The French bank was frantically unwinding an estimated $75 billion of bad bets on European stocks placed by a rogue trader, Jérôme Kerviel.

Société Générale rushed to unwind those trades during Monday’s market plunge, and trading in those futures contracts soared to record levels. The bank’s abrupt reversal contributed to a decline that snowballed into an avalanche of sell orders around the world, some traders said. The ensuing turmoil helped prompt the Federal Reserve to orchestrate the surprise cut in interest rates announced Tuesday.

“I have little doubt that Société Générale’s unwinding of those positions absolutely pressured indexes worldwide,” said Barry L. Ritholtz, chief executive of FusionIQ, a New York-based investment research and money management firm. “And wouldn’t it be embarrassing if the Fed had to make one of the biggest emergency rate cuts ever because of some rogue trader?"
What remains unexplained is why Société Générale kept the scandal under wraps till Thursday, when the affair came out. Profit, or rather, in this case, limiting losses seems to be the cause. It does appear at this time that the bank was running a secret operation to liquidate its maney loosing positions on Monday and Tuesday.

If that were to be the case, the CEO and the board of Société Générale certanly have a lot to answer for.

In the meanwhile, the Federal Reserve and its Chairman Ben Bernanke look like a bunch of idiot day traders and the American taxpayer is likely to pay for the recovery package to the tune of $160B dollars.

It does not take a genius from Management des Operations de Marche of Lyon graduate (Jérôme Kerviel Alma Mater) to figure out where Americans will send the money from the economic stimulus package. It will go mainly into energy (heating/gas/etc...) and Walmart (cheap crap). That's why OPEC and China are most excited about this turn of events. How is that for being dumb? That's your government in action and rare cross-party lines cooperation.

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I am a cantankerous man living and working in the Silicon Valley where reading books is an abomination that is virtually unheard of, frowned upon and may be detrimental to one's career. I avoid censure by never conceding that I ever read or owned a book in my life. If anyone accidentally glimpses my scant proficiency in any subject matter, I immediately accredit it to having glanced at DrudgeReport that day.

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