A large chunk of my over 40-year journalistic career was spent covering economics and financial markets. It was my job to talk to those in the field, from foreign-exchange, stock and bond traders, to top bank economists and strategists. With political economists thrown in.
What follows are purely observations of the dynamic of the stock market crashes I have witnessed and reported on, together with what I currently teach at Universities here in Taipei and elsewhere, in terms of understanding financial market structure.
This is not investment advice. Merely my observations of past market volatility I have witnessed and covered first hand, and some investments that were obvious at the time, and some that were pushed by banks and others that did not turn out for the best.
WHERE DOES THE MONEY SIT
Let’s first understand the dynamic of financial markets in terms of professional vs retail investors.
I, like many of you reading this, are retail investors. We are not sophisticated, we mostly buy or hold with a view/hope, prices will rise. Retail investors’ share of total trading volume rose from just above 10% in 2011 to over 22% in 2021, according to Bloomberg Intelligence.
But the wider picture of your money in the market then extends to your pension fund, your savings in the bank, your bank deposit or any other stavings you keep with an institution. It’s your money. Never lose sight of the fact that market stories, volatility, crashes and rallies are all happening on the back of your money and affect your personal wealth in some way.
Like it or not, we are all involved, and affected by, the political ‘game’ that is playing out globally at the moment, driven by the orange chap in the White House. The reality is retail investors like yourselves have pretty much zero control over what is affecting your money. Unless you decide to trade in or out of volatile markets on a daily basis with the spare money you have and accept the huge danger that involves.
DUMB MONEY VS SMART MONEY
The first thing to understand about sharp market movements, either up or down, is that professional investors have a huge advantage over the vast majority of retail investors.
By and large, retail investors buy and hold on the hope of a rise in price before they sell to realise their profit. Professional investors, with access to more sophisticated financial instruments can play two sides of the market by selling assets they don’t own with a view to covering that ‘short’ position at a cheaper price later - and pocket the difference.
This dynamic is a long standing and somewhat depressing one whereby retail investors who only trade with one weapon, that of going long, are fighting professionals who have two weapons - going long and short. Most retail investors try to fight the market with one hand tied behind their backs as they don’t have the sophistication, or ability, to short the market in a downturn.
During less volatile times retail investors are not privy to high level data and market information, much less risk analysis, or even basic or technical analysis of market conditions.
This is why financial markets tend to have a saw-tooth pattern as retail investors buy-in during good times to push the market higher slowly over time. Then, when something bad happens, the professionals aggressively go short to rip that accumulated wealth out of the market. The sad reality is the flow of money is from retail to professional investors and it happens over and over again when markets top out, for whatever reason.
Make no mistake. Banks and professional investors will have made billions from the lastest downturn in global markets. The losers will be retail investors, pension funds and the personal wealth of individuals, whose investments are not nimble or sophisticated enough to cash in and take advantage of the sharp and savage downturn.
THE ANATOMY OF A BULL MARKET
It is no surprise that financial markets fluctuations, much like life itself, happen in cycles. Gross Domestic Product, ie. The value a nation creates broadly follows an upward trend over time as long as a government is doing its job and creating conditions whereby the people can enrich themselves and improve their standard of living.
Stock markets follow this as, obviously, companies linked to an economy will become more profitable on the back of economic growth. This is when ordinary people buy into stock markets as a means to further enrich themselves, whether through equity funds, pension plans or via direct investment by purchasing shares in a particular company.
When conditions are right, professional investors, I mean the big banks, and institutional investors all start to advise their clients to buy. Using themselves as the brokers to the deals, of course and charging a fee. There are free services but they just sting you on the spread of the asset you are buying or selling, which makes up their commission. It’s not ‘free’.
Once these big investors are satisfied and fully invested, the professionals will allow their research into the open market which is when you will start to see newspaper articles saying this, or that, is a good buy. This is when retail investors jump in to buy the last part of the rally.
The last part of any asset market rally is typified by the high level of retail investor interest. They are all getting in once the professional players are fully invested. It’s the icing on the cake for professional investors who are ready to rip money away from a bull market by dealing fast in the spot market or using futures or options to aggressively short.
I’m going back years, but there was an off-quoted rule of thumb in Hong Kong about the market which went…”When you land at Kai Tak and your cab driver on the way into town tells you to buy the market, or a particular stock…the first thing you do when you get to the office is to sell it.”
It is also well to remember that stock markets only continue to rise if there is money flowing into them. They don’t rise by magic without fresh liquidity. Once a market is full of money, it will stop rising and correct. Huge buying by individuals is usually the last gasp of this liquidy.
PAST MARKET CRASHES
The first stock market crash I covered was the 1987 collapse. From 1986 there was a powerful bull market that started in the summer of 1982 which soared following the so-called Big Bang which was the sudden deregulation of financial markets. This bull market was fueled by hostile takeovers, leveraged buyouts and merger mania. Companies were scrambling to raise capital to buy each other out.
The panic to get out was typified by the inability of investors to sell because systems were jammed and some countries closed their markets to try and prevent more selling. There were cases of brokers being shot by frustrated investors who were unable to escape the carnage.
It was a similar situation in 1997 when the massive bull market created by the Tiger Economies of Asia fell apart, mainly because governments relied on fixed exchange rates which did not allow for the economic pressure they created to dissipate and in July 1997 the whole thing fell apart and millions were thrown into poverty.
The over-promise of the internet in 2000 created a huge bubble in tech stocks with venture capital pouring in to find websites that never had any chance of making money. I sold a tech-fund I had after it made a 137pct profit over about a year, in December of 1999. My broker told me I was mad for selling it and I should stay invested.
After the massive fall in 2000 when the internet market bubble burst the tech-heavy NASDAQ index fell from around 5,000 to around 1,400. It didn’t recover back to 5,000 until around 2015.
I clearly remember some market analysts were urging people to buy at the lower levels as the market ws a ‘bargain’ but it never really recovered and the index languished for years. I daresay you have heard ‘experts’ telling investors to buy into this latest orange inspired crash.
This is where the old market wisdom of ‘Never try and catch a falling knife’ comes from.
I see echoes of this over-promise now with AI and the billions being poured into it, likewise crypto, but that’s something for another story.
Smart investors never try to catch the very top, or bottom, of any market. If you catch the bulk of a market run you are doing well and missing out on the last 10 pct of a move is the wise thing to do. Any professional investor or trader will tell you there is no such thing as bad profit.
Trying to call a top or a bottom exactly is a fool’s errand and often leads to disaster. Never forget that financial markets run on fear and greed. Take those emotions out of your personal investments and you will do well. Give into them and risk a lot.
I have shares. What am I doing you may ask, given I've witnessed and written about many stock market crashes. In nearly every case, stocks recover relatively quickly and my losses at the moment are significant, but only on paper. I’ve ridden out every stock market crisis since 1980 when I started writing about financial markets for Reuters. I’m doing the same now.
MARGIN CALLS
The one thing retail investors often forget is the dynamic that margin calls have on markets.
If an investor has borrowed money to buy stock, which many do, they secure the loan on the value of the stock. If they buy a stock and it goes up, fine. If it goes down, the lender will ask for a margin payment to cover the difference between the loan and the value of the holding.
If an investor gets hit by a margin call they will be forced to sell the stock to cover the margin call. In the recent orange stock market collapse, forced margin selling exacerbated the downside considerably.
It is this dynamic which causes suicides and bankruptsies during market collapses. Never let greed take over investment decisions. Trade within your limits and understand your maximum loss. Beware of futures or options where it is possible to lose everything because of the way they are leveraged. Taking a 20 pct hit on a stock holding is one thing. Losing your entire investment, or more, is quite another.
UNCERTAINTY IS THE WORST THING FOR MARKETS
Uncertainty is something financial markets hate. I’ve lost count of the number of market analysts saying as much in stories I’ve written over the years. We currently have a hugely uncertain situation as the orange one keeps changing his mind.
Yesterday he was going to war with the world over trade and boasting how world leaders were but panicked when the markets collapsed and backed down on Wednesday by suspending tariffs by three months for everyone other than China.
He claimed that other countries were calling and "kissing my a**" to negotiate tariff rates just before they went into effect. “They are dying to make a deal. 'Please, please sir, make a deal. I’ll do anything sir,'” he imitated a begging foreign leader.
I’d really like to meet anyone who believes that. From a proven liar who is barely able to form a
coherent sentence, it’s a leap to believe any self-respecting country leader would debase themselves like that.
By doing a massive U-turn on the tariffs because he was panicking over the stock market crash, only increases the uncertainty as to what his malfunctioning synapses will come up with next.
The bottom line is no major corporation will move quickly to rebase to the US because the orange administration changes its mind, almost on a daily basis. His actions are not pragmatic, they are driven by panic. His actions are not strategic, they are scattergun.
It’s hugely expensive to rebase manufacturing to the US and takes months, if not years. This is what the orange man wants but some large companies like General Motors and John Deere are already calling his bluff and are happy to wait it out and carry on with plans they already have in place. General Motors to drop 14,000 jobs in North America and close five plants as well, sending a clear message it was prioritizing global expansion over Trump’s nationalist agenda.
Farm machinery manufacturer John Deere has said it will push ahead with plans to move some of its production from Iowa to Mexico. The orange one is clearly furious and has been making all sorts of threats against both companies.
Which would seem to be a wise move given the current administration seems to change its mind almost daily on major US trade policy. You simply can’t run a major company with that degree of uncertainty hanging over you.
Besides, the US mid-term elections are coming in November. There are just too many variables in place for businesses to make long term plans on the basis of the current chaos. Who knows what madness is coming next? Invasion of Greenland? Invasion of Panama, taking Gaza?
Or, indeed, the US, one way or another, abandons this madness and we can all get back to business as usual.
But the chaos looks set to continue and unless you think you can second-guess the orange one, it’s probably best to take a hands-off approach to things. If you are thinking of second-guessing him and putting money into the market, I wish you the very best of luck.
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