Fool's Errand: The Folly Of Explaining The Causes Of Market Movements

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One of the things we avoid like the plague (and other clichés!) over here at DealBreaker headquarters is trying to explain the markets. Sure, we'll link to an entertaining or surprising analysis. Say, like this one on Gawker from banker-turned-novelist Dana Vachon. But we don't put much stock in the business of journalists explaining why the market did this or that on a particular day. Mostly because the explanations are so humiliating. It's always "profit taking" or "liquidity coming back into the markets" or some such nonsense. Whenever we read this stuff we wonder: Oh yeah? If you're so smart, why aren't you rich?
One former journalist described the problem like this: "The problem is that people are paid to write these kind of stories. It's their job at the paper. And they can't just write the Dow went up because the stock of Company A did this, the stock of Company B did that, the stock of Company C did this. They have to write a theme. Find a pattern. And because the theme is basically imaginary, it means they have to turn on their internal bullshit generators. And it's no surprise that a bullshit generator generates bullshit."
Gary Weiss picked up on a particularly unfortunate bit of market mind-reading from the Wall Street Journal yesterday:

The Wall Street Journal reported a few minutes ago as follows:

Stocks declined sharply Tuesday, with the Dow losing more than 200 points, as weakness in China sent markets around the world into the red, durable-goods data disappointed and uncertainty increased about Iran and Afghanistan.

Now, I'm not picking on the Journal, and I used to write stuff like this myself, but does anyone really know why the market is down just under 2% as of this moment? (Actually the S&P cracked 2% during the time I wrote this item.)
That's the fundamental problem with writing spot news about the markets. Nobody really knows why markets go up or down. It may actually be more accurate to report that the Dow lost more than 200 points because "traders watched other traders watching other traders watching other traders... sell."

Felix Salmon is even blunter in his post entitled " No one knows why the market fell, and it doesn't matter anyway":

Dan Gross gets it. Andrew Leonard gets it too. In fact, any halfways-decent financial journalist gets it, and, if honest, would simply write a story saying "the market went down and we don't know why". But instead we're inundated with "explanations", from an assassination attempt on Dick Cheney (Daily Intelligencer: "Are investors balking because Cheney was attacked? Or because he wasn't hurt?") to a drop in one of the most boring economic series in the US. (Go on – quick – tell me what a durable goods order even is.)

The Wall Street Journal's editorial page notes the dangers of market mind-reading but can't resist it anyway:

Any equity selloff as large as yesterday's will produce a multitude of explanations. Among other culprits, we heard about "overbought" Chinese stocks that were due for a correction, a weak durable goods report, the Kabul explosion aimed at Vice President Dick Cheney (see below), and former Federal Reserve Chairman Alan Greenspan for declaring Monday that a "recession" was possible later this year.
Our own "whodunit" contribution would point to the mortgage-related markets, which sold off nearly as much as stocks. This reflects the cracks appearing in the housing credit markets, especially in subprime loans but with some damage up the income chain as well. Along with emerging markets such as China, this is where the excesses have been most notable. And when Adam Smith does a house cleaning like yesterday's, he sweeps the dirtiest corners first.

Even bolder, David Lat at Abovethelaw thinks maybe he caused the market crash:

As you can see from our Programming Note, we stepped away from the computer at around 3 PM today.
Which is just about the time the Dow Jones decided to take a 200-point plunge. The Dow ended the day down 416.02 points, or 3.29 percent -- in terms of points, the worst day since the market reopened after 9/11. (The S&P 500 fell 3.47 percent, and the Nasdaq fell 3.86 percent.)
Coincidence? We think not. Apparently the stability of world financial markets requires us to keep ourselves planted in front of our computer all day.

So does Paul Kedrosky, and for the same reason:

Whoa, sorry about the market decline. If I had known that spending the day in meetings and on airplanes and generally incommunicado would make the markets tumble like this, I would have stayed on blog sentry and posted reassuring thoughts. Too late now, apparently.

But everyone knows it was really Matt Drudge who tanked the market.