The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Layers of an Onion

12/08/2018

Many years ago, the mentor of Warren Buffet was Benjamin Graham.  He taught:  “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Colleges teach us that the stock market reflects both current economic conditions and future expectations.  It weighs economic data.  Today, the economic data is strong and healthy.

So, when is the market not a weighing machine?  When it is a voting machine, obviously!

Overlaying the stock market is a sensitivity to both political and geopolitical changes.  We see big swings in the stock market around elections, when wars breakout, or even Presidential tweets.  These events overlaying the market represent the voting machine that Mr. Graham recognized.

But, neither the voting nor the weighing explain the increasing volatility.  Moving 800 points on the Dow in a single day is neither voting nor weighing.  It is non-human manipulation by computerized programs or algorithms, who are free to run amok.  Billions of dollars move in nanoseconds — faster than any human mind can comprehend.  Some analysts believe half of all trades are made by these machines.

 As an individual investor, shouldn’t I be allowed to invest my money however I like — even letting computers invest my money for me?

No!  Not without substantial additional regulation and soon!  Too much money managed by computers will easily hurt too many people.

If you think about peeling an onion, the core is the economy and is quite healthy  The next layer is geopolitics and is quite annoying.  The outer layer is technology and is quite scary.  It is this outer layer that is making the market so volatile.  It needs more regulation and needs it now!

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