“This is the title of a legendary book written in 1954 by Daniel Huff. In short, it explains to the layperson how they can be misled by the way information is presented, how those serving up the figures can be economical with the truth and to generally be on guard when consuming numbers, charts and graphs. Well, my bells were going off as if I were in the midst of a five-alarm blaze as I read Ben Stein’s piece in yesterday’s New York Times. It is articles like these for which Mr. Huff’s book was written: reader beware. Because if you take Mr. Stein’s figures on their face, you might actually believe his thesis. However if you dig down a few layers and think a little bit, it doesn’t take long for you to realize that what he is saying is the same weak-minded analytical drivel that he has been dishing out with such frequency of late….Mr. Stein’s indictment is both factually inaccurate and actually destructive of the conversations we should be having on how things should be fixed (like, say, the post I wrote yesterday concerning lessons we can learn from the recent crisis). In any event, the article was truly a drivel-fest and worthy of much scorn and derision.

“In short, Mr. Stein’s thesis is that traders push the market around, plant stories with the press, get the hype machine going, and make a ton of money on the backs of dumb retail investors like you and me. Sure Ben, I’m sure every trader out there wishes it were only that easy. Unfortunately it isn’t. Your deep-seated conspiracy theories are coming to the surface again, Ben. There are the little issues of the depth of liquid markets (in terms of being effective in pushing it around except around small moments in time, i.e., the close) and the shallowness of illiquid markets (in terms of how do I get out without giving up all my ill-gotten gains?). The world has gotten very flat when it comes to the liquid markets, and if certain traders are trying to push the market in irrational ways there are always those who are willing to take the other side and push back just as hard. Eventually the market settles where it should based upon fundamentals, but for short periods of time it can deviate for any number of reasons. But to say that a trader’s core strategy is to establish a position, devote massive energy to hype it and then have the ability to profitably exit is a pure flight of fancy. It’s just not that simple. Sorry.”

More at http://www.informationarbitrage.com/2008/01/how-to-lie-with.html

Do you have the fogggiest notion of how big the global debt and equity markets are and how much firepower it would take to move all of them in the same direction for months on end? Stein extrapolates his thesis from traders moving a singe security for one day clearly more than a decade ago in a market that is not its home market. Creating a big intra-day move and creating a move that lasts for months on end across instruments are two different propositions.

The money markets seized up too, so badly that the Fed and ECB had to go to unprecedented measures for them to operate somewhat normally. They money markets are a thin-margin business; the people who trade there (if you can even call it that) are badly paid and into risk avoidance. There is no obvious profit opportunity to be gained from that train wreck and that is where the crisis began. So how does this fit your paranoid world view?

The big dough that can move markets is at the big houses. The idea of the gnomes of Zurich is long dead. Stein would be more credible accusing the Chinese or oil producing state sovereign wealth funds of being behind a global, cross market conspiracy. At least they have the firepower. But everyone know they are conservative and mainly stick to US Treasuries.

The reason that Yves didn’t say more, or need to say more, is the sort of thing Stein puts out is beneath comment. He shouldn’t be wasting his time on someone as painfully and willfully ignorant as Stein is.

I think the closest you came to a rational response was your comment that, “Stock market falls are due to both declines in earnings expectations AND multiple compression.” Of course, that statement implies that there’s a weak association between the two measures. Is the market really that inaccurate?

I think Stein’s on to something. I’ve seen it with my own eyes…

If the hedge funds are in illiquid assets, they may be able to game their results a bit (ie, by calling various brokers for prices and picking the most favorable. But in fact they’d do that if they were selling too). There are also other factors in which funds in firms that run multiple funds get included that can lead to the industry appearing to have higher returns that it does (a big issue is survivorship bias).

How much confidence do you (and should we) have in anyone’s reports about hedge funds’ average returns or net investment positions? Isn’t this stuff highly secret? And even if Bridgewater Associates or someone else has access to the hedgies’ audited financial statements, is there any reason to believe those audited financial statements are any more reliable or transparent than those of the banks? I’m asking out of ignorance, not because I am a conspiracy theorist. Thanks.

In this case, it’s anger misdirected at short sellers.

Watch for Stein to move quickly to the Bargaining phase – if the Fed will only give us another 50 bp cut…

When he embraces the final phase of Acceptance, you’ll know it’s time to go long again.

You say this “may not be everyone’s favorite use of this blog’s space” but for finance amateurs out here (like me), it can be very helpful to see a supposedly “intelligent” article in the popular media picked to pieces and demolished like this.

Thank you Yves.

While dissecting Stein may not be everyone’s favorite use of this blog’s space, I don’t think there is much risk that the attention will encourage him. And in any event, the intent of writing about him is not to try to change Stein’s mind or embarrass him (clearly hopeless) but to do what we can (along with fellow bloggers like Felix Salmon and Dean Baker who are also on this beat) to shame the New York Times into dropping him or at least featuring him less often.

Unfortunately, Senator Dodd taking up Stein’s nutty charges in his Goldman Sachs attack piece last year probably made this a hopeless effort.