The Real Testosterone Junkies

I especially enjoy reading things that I disagree with, and that challenge my own beliefs. Strong ideas are made stronger, and weak ideas dissolve in the spotlight of scrutiny. People who are unhappy to read criticisms of their own ideas are opening the floodgates to ignorance and dogmatism. Yet sometimes my own open-minded contrarianism leads me to something unbelievably shitty.

According to Noah Smith:

Zero Hedge is a financial news website. The writers all write under the pseudonym of “Tyler Durden”, Brad Pitt’s character from Fight Club. Each post comes with a little black and white icon of Brad Pitt’s head. On Zero Hedge you can read news, rumors, facts, figures, off-the-cuff analysis, and political screeds (usually anti-Obama, anti-government, and pro-hard money). On the sidebars, you can click on ads for online brokerages, gold collectibles, and The Economist.

The site is a big fat hoax. And if you read it for anything other than amusement, you’re almost certainly a big fat sucker.

That’s a bold claim! Why do I make this claim? Well, in one sense, all financial news is a hoax. Financial news, by definition, is public information — if you’ve read it, you can bet that thousands of other people have too. That means that if the market is anywhere close to being efficient, any information in any article you read will already have been incorporated into the price of financial assets. Reading or watching public information should not, in theory, give you any “alpha”.

If the writers of Zero Hedge really knew some information that could allow them to beat the market,why in God’s name would they tell it to you? If they had half a brain, they’d just keep the info to themselves, trade on it, and make a profit! Maybe then, after they had made their profit, they’d release the news to the public (and collect ad revenue), but by then the news would be worthless. Financial news sites, you should realize, are not in the business of giving you insider tips out of the goodness of their hearts.

As you might expect, it’s not hard to look back at Zero Hedge’s predictions and see that a large number of them are junk. For example, here’s a bunch of posts from 2009 predicting imminent hyperinflation. Hope you didn’t make any trades based on that bit of wisdom!

So how does Zero Hedge get away with this hoax? Barber & Odean (2001) give a big hint. Tyler Durden, whose name and image grace every Zero Hedge Post, is a symbol of masculinity. More specifically, he is a nerd’s imagined vision of what a really masculine nerd would be like. In Fight Club, Durden says: “All the ways you wish you could be, that’s me. I look like you wanna look, I fuck like you wanna fuck, I am smart, capable, and most importantly, I am free in all the ways that you are not.”

In other words, you are a young smart (i.e. nerdy) guy sitting at your computer with rivers of testosterone coursing through your veins. And now here comes Tyler Durden, your generation’s Platonic ideal of pure masculinity, telling you that Real Men Take Risks. At the top of the site, there is a Tyler Durden quote: “On a long enough timeline the survival rate for everyone drops to zero.” In other words, gamble. Bet that you’re the smart guy and not the sucker. Because hey, you’re going to die anyway, so there’s no use hedging your bets. Zero hedge, right?

I wouldn’t be surprised if “Tyler Durden” were actually a bunch of behavioral finance grad students, snickering behind their hands at everyone who takes their site seriously.

This is what passes for financial analysis today? Let’s ignore the obvious fact that Zero Hedge has never pretended to offer investment advice. We should take all financial news with a large grain of salt (anyone who has read the latest uber-bailout rumours out of Europe should know that). Anyone who bases their trading activity on blindly following the pronouncements of one site, or one trader deserves to lose their coat. Blindly following a messiah-figure or (even worse) the herd is a surefire recipe for disaster.

But Smith has got his facts wrong. While there has been no hyperinflation, those who traded their hunch and bought gold — pretty much the archetypal Zero Hedge trade — have not done badly. Here’s the price of gold — contrasted against the S&P500 — since Zero Hedge was born in January 2009:

Drawing a meaty profit and significantly outperforming the S&P500 is hardly what you’d expect from a “big fat hoax”. Certainly, you’d have made a loss, not a meaty profit, from betting with Bernanke’s pronouncement that subprime was “contained”.

Smith is spinning loose psychoanalysis spiced with conspiracy theories and schoolboy misunderstandings in order to generate pageviews. He obviously hasn’t read Zero Hedge enough to realise that “on a long enough timeline the survival rate for everyone drops to zero” reflects the reality that calamities and resets happen, and that — given the level of mess, corruption and perversity in finance today — a systemic reset could be just around the corner. And the last thing i would want to do in the face of a systemic reset — or any kind of large-scale financial calamity (a la 2008) — is gamble. The smart thing is to hunker down and robustify, by minimising exposures to all forms of connective risk and financial fragility . Zero Hedge is not about having no hedges and gambling as recklessly as possible; it is about having hedges against the system going to zero. 

Ironically, Smith is accusing entirely the wrong segment of the financial world of wild recklessness. While there are surely many day traders who lose their coats on the pronouncements of analysts (especially the Crameresque stock-picker — something which Zero Hedge has never done), the real danger is surely the testosterone-Red Bull-and-cocaine-fuelled TBTF trader or 21-year old PhD-wielding quant working for a bailed-out bank with an implicit taxpayer backstop on zero-interest government money. The level of moral and financial hazard is simply staggering, and of course this has bred much reckless behaviour; from the evident criminality of manipulating LIBOR, to Corzine’s destruction of MF Global (and theft of customer funds),  to the absurd market-cornering London Whale’s speculation using customer deposits, to the off-balance-sheet activities of Kweku Adoboli, to Goldman’s quote stuffing. And — I am sure, much much more — these are just some of the scams and scandals that are known; there is much more darkness beneath. Zero Hedge has been a powerful journalistic force and clearinghouse in bringing the light-of-day onto these corruptions and criminalities, something that Smith seems entirely ignorant of.

No day trader or goldbug stacking gold eagles has ever blown up the nation’s pension fund, but the protected TBTF banks funded by earth-shattering leverage and taxpayer guarantees have again and again endangered retirement funds, and lost their clients’ fortunes.

It is not unusual on Wall Street to see massively leveraged double or nothing Martingale trading strategies where traders take a position and push leverage and counter-leverage to create a favourable outcome. In theory — with unlimited funds — such an approach always wins, but in reality this approach usually ends in traders running out of counter-parties or running out of leverage, and ending up with a massive loss. It’s picking up nickels in front of a steamroller, and is of course made much easier thanks to the new and manipulable world of high-frequency trading.

It’s ironic (and jaw-dropping) that Smith castigates Zero Hedge as the home of testosterone junkie traders when in fact the vast majority of Zero Hedge writers and readers are angling for better regulation of high-frequency trading to prevent market manipulation, an end to nickels-in-front-of-steamrollers strategies (the best way is to end the taxpayer guarantees so that traders who blow up the system will reap the consequences), and the return of Glass Steagall (or similar) to keep depositors’ funds out of hyper-fragile shadow intermediation chains and the derivative casino.

The financial system is being regulated by clueless schmucks — many of whom would also castigate Zero Hedge as a “big fat hoax”, while ignoring grift and degeneracy within the financial establishment and the TBTF banks. In the face of such grotesque incompetence who can blame market participants for wanting a hedge against zero?

38 thoughts on “The Real Testosterone Junkies

  1. I have been waiting and expecting the “economic showdown” on the internet for sometime now.

    To see it finally happening, to me, is a step in the right direction. The Krugman vs. Keen economic boxing match was awesome, with Keen clearly pointing out the flaw of not including the role of credit in a macro economic model.

    Thanks, Aziz, for being part of the fight. We cannot solve the problem (too much debt, fiat money, government intervention in markets,…) without first admitting that we have said problems.

    PS The next 24 hours will be fun to watch. I predict Noah getting is rear handed to him.

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  3. In fairness to Smith I would agree with the statement that Zero Hedge fosters a cult like status, especially among the younger poster. Comments are limited to short quips and juvenile slandering. Do they announce every TIP they get? That is why you can’t use a GMAIL or HOTMAIL account. They like to know where you work. If it is not run by the FBI CIA or Government, they could be guilty of INSIDER TRADING.

    However Zero Hedge has posted some interesting articles and criticism of the current system.

    “Azizonomics” for intense Geopolitical, Macroeconomic and Futurist analysis. You are a legend John.

    Zero Hedge for entertainment and bleeding edge financial news. I usually filter the doom and gloom and look for hints such as Gold POSSIBLY being included as Tier 1 zero Risk capital. I am following BIS policy very closely.

    “Confounded Interest” for USA Real Estate economics which drives consumer sentiment which drives the world. It is also good for a laugh. I call it a Mad Magazine for the financially savvy.

    BTW Gold is range bound, and I wish I took the advice of the financial crackpots 10 years ago. Usually crackpots are very astute. There is a fine line between genius and insanity.

    • Buddy,

      No doubt that many of the young posters on ZH act juvenile.

      I would argue that out of all the segments of society, the youth will be the ones most negatively effected by the ongoing financial problems.

      They say that “inflation benefits those who receive the money first”. If we begin to equate this saying to not only to social or ethnic class, but also along generational lines, it would make sense that today’s youth have much to be upset about.

      An example could be an 18 year old Greek youth. Through no fault of their one, they are entering an economy that has been messed up their parents and grandparents.

      • I love ZH, but ZH’s comment section is all snarky one-liners, with the occasional gem and the occasional long post of strong analysis, and a fair amount of wacky stuff. To be honest, I kind of see why some people find it offputting, but sometimes I find it really useful, and you do get some reasonable debates sometimes.

        • Yeah, my good looks.

          By the way, I enjoyed the thread you had with Noah on his site. You were very nice to each other. I’ve been following his blog for a while. He reminds me of a young Paul Krugman.

    • ZH let me register with a Gmail account… Anyways, I agree on the comments, it’s usually not worth more than perusing a thread and there’s a lot of offensive/bizarro stuff. In any event, ZH has been ahead of the curve many times since I started reading it last year, they see through the bullshit and though I don’t agree with all their analysis/calls, I do appreciate their take on matters, especially their irreverent, sardonic wit.

      As far as I can tell, Mr Smith’s an academic, so my advice to him would be to spend a year or two in the trenches of the market, spend a year or two publishing analysis and trying to figure out just what the fuck is happening, and then I’m sure he’ll appreciate the point of ZH a little more.

  4. “While there has been no hyperinflation, those who traded their hunch and bought gold…”

    What does this mean? If there has been no inflation why did gold go up? Is it because of expected inflation? If so why have the long term treasuries gone thru the roof during the same period? Why is this not priced in TIPS?

    • Depends how you define inflation.There has been inflation of various prices, the CPI, the PPI, of the monetary base, of M2. None of these fit the definition of hyperinflation, though. There has been deflation of certain prices, too.

      My explanation for gold’s value at the moment is mostly based on the fact that it’s the only semi-liquid asset with negligible counter-party risk, which is a little different to it being a “hedge” against inflation:

      • I think I agree with that, but I am not sure 🙂 What does it mean to be liquid? You mean you can use it in daily transactions and settlement? Or do you mean a short-term safe investment vehicle that can be liquidated with low transaction costs?

        If the latter then that explains the realtive returns of gold with respect to the treasuries. When I looked at the correlation between US 10 year and gold prices, I found that the correlation varies over time but is positive on average and varies significantly with VIX. So when there is market uncertainty, there’s a flight to safety, and safe assets include both treasuries and gold. The inflation story seems to make no sense when you look at actual prices.

        • Deniz,

          /* If the latter then that explains the realtive returns of gold with respect to the treasuries.*/

          I think the latter is true. You can liquidate gold very easily with low transaction costs (if you are smart enough to find the right buyer and don’t buy numismatic coins LOL) .

          Have you considered the work of Barsky and Summers ?

          You can also consider reading The Many Values of Gold.

          In summary, gold does an outstanding job during periods of high uncertainty and we are going through such a period. Deflation and Hyperinflation are practically twins, it is simply a matter of whether the fear of running out of dollars turns into a fear of dollars becoming worthless.

  5. And also because it’s become a haven for … Austrian … kind of BS.

    That says it all. I have much more to say, but won’t waste my time. The expounding in his post is of such low quality that I’d judge it unworthy of rebuttal. But maybe that’s just me (I don’t read very much outside of very carefully selected sources).

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  9. Your piece seems to assume Noah Smith is either mistaken, misguided, or ignorant. Come off it. There is only one possible explanation for such a scurulous, misguided attack against Zerohedge, particularly as any casual read of the site would clearly show that the things Smith says are untrue. That reason has to be corruption.

    • I don’t buy that at all. I’ve been reading his blog for a while, and while I vehemently disagree with him here, he does produce some entertaining and interesting analysis.

      In this case, I think he is being sensationalistic for pageviews. Which is something I have done from time to time too.

      • They are all sensational. LOL

        Do a piece on how Gun ownership makes the US less free. Guns are very controlled in Australia and because voting is compulsory we can sack the bastard politicians very easily. That is freedom.

        • I disagree with the assumption that Noah Pinion 😛 deliberately chose not to uphold the highest standards of journalism for the purpose of getting more page views. After I read his post, and his updates, to the best of my knowledge, in my opinion, he truly thinks there’s value in his logical constructions. And Aziz went out of his way in the pursuit of the principle of charity, by actually answering points that Noah didn’t even make, instead answering to what a financial analyst/trader with a lot of experience might hold against Zero Hedge.

        • Buddy: Gun ownership makes the USA less free? If a wrote a piece on that (I don’t actually agree, but I hone my logic skills by writing arguments against my own views) I would be guaranteed 100 comments and a massive flame war! But it would be pretty cheap — better I stick to Marxism.

          Andrei: Well, I am just pleased that Tyler published my explanation of what Zero Hedge is.

        • US citizens don’t realise how free Australia is. I spent 3 months in the USA before 911 and I can tell you, Australia was so free, I felt like the USA was a Nazi state. Then!

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