09 May 2010

The stock market and the Schlieffen Plan

The stock market incident of 6 May 2010 reminded me of the Franco Prussian war of 1870.

Hang on...hear me out:

In 1870 the French and the Prussians went to war over the trivial matter of the succession of the Spanish throne.

Indeed it was such a trivial matter that the French doubted there would be a war.

The Germans didn't.

In 18 days the Prussian army mobilised 380,000 soldiers into effective combat units and marched west. The French mobilisation on the other hand was tentative, poorly planned and poorly executed. The result was decided before the first shot had been fired. The German armies, concentrated, supplied and supported swept away their brave, well trained but disorganised opposition in every battle, besieging Paris within two months. The legend of Teutonic efficiency and martial skill was born.

The war brought home to every European power the lesson that planning, aggression and rapid mobilisation and execution were the new keys to success. Delay was fatal.

44 years later, the French and Germans went to war over an equally trivial assassination of the Arch Duke of Austria-Hungry by a nobody from Bosnia.

It was hardly a cause to plunge Europe and eventually the rest of the world into a war that would last more than four years and consume nearly 40 million in dead, wounded and missing. However, the premium on rapid mobilisation with the hope of attacking an unready enemy was too high for any power to wait around while cooler heads prevailed. Within a month the Germans had unleashed their Schlieffen Plan looking to repeat their previous rapid campaign. However, the allies and France in particular had learned from the past and had mobilised as instantly and effectively as the Germans, halting the axis push at the first battle of Marne. The First World War had begun.

The crash in August 2008 was a bit like the 1870 war. Companies and investors were slow to react to the growing threat of the crash and before anyone had really taken any action Lehman Bros, Northern Rock, Bear Sterns and dozens of other banks had collapsed and the rest of the market were squealing like stuck pigs for a government bailout.

For all the talk about financial reforms since then, there have been no substantial changes to the practices on Wall Street, in the city of London or any of the other world financial markets, with perhaps one exception.

Bot trading programs now, more than ever before, handle buys and sells for many of the big players, allowing them to make decisions and execute trades faster than humanly possible. And it appears they are programmed for a dump and run scenario.

Like the French in 1914, it seems the big investors are not about to wait around for all information, or even for a coherent picture to develop in the face of a crisis. At the first sign of trouble they have standing plans to ditch stock and flee to safe harbours like dollars and gold. I kind of think that’s what happened on 6 May.

When the market got the jitters on that day, even though there seemed no reason for it, the bots executed their pre-programmed missions....get the investors the hell out. The Dow Jones plunged nearly 1000 points (that’s about a trillion dollars in share value) in less than half an hour. It then recovered in an equally inexplicable manner.

The event is of itself not significant, but what it may tell us about the state of mind of the big players is. Perhaps it indicates that the big players know what I suspect: the stock markets are massively over priced. They know that the despite the talk about the resurgent US economy, there has been no real increase in jobs or economic activity.

They know that the US deficient has grown about 30% since 2008 to stand at nearly $13 trillion and is now so high the US Federal Reserve doesn't have the capacity for another bailout.

I’ve mentioned before the crisis in Greece. The realists in Europe know that issues in that country also plague the rest of the PIIGS – Portugal, Ireland, Italy and Spain. They also know the UK is set for severe spending cuts which will likely cause recession

I’ve discussed how the Chinese economic miracle seems to be built on exports to the US and a massive property bubble; both seem unsustainable. Without China’s growth the World economy is in deep crisis.

The system is buckling. The markets are waiting for a signal to dump and run. When it comes, I believe it will trigger a second and greater crisis than the GFC. 6 May was something like a dress rehearsal.

Perhaps this is the way Sir Edward Grey felt at the start of the First World War: The lamps are going out all over the World, we shall not see them lit again in our lifetime.


  1. Interesting analysis Mr Toad -- yes it does seem as though the high rollers are nervously hanging around for "just one more roll of the dice" before taking their winnings off the table. The "Greater Fool" game of musical chairs is now at fever pitch. Soon it will be over and society is going to take a big round red pill -- suppository style:


    My favourite part of Thursday's "flash crash" was when the TV news ran the "human error" line; that the markets lost a trillion in market cap because a Citibank trader hit "b" instead of "m" when entering a sell order. "Move along, nothing to see here."


    Perhaps the "human error" was in assuming that people are still buying it. The grand casino is closing down -- please head for the exits in an orderly fashion.

    So what comes next Mr Toad? Hyperinflation and people growing their own veges?

  2. Even if the financial world collaspes, the elements of the real economy will still be intact. There will be as much oil, steel, water and housing after the US defaults as before.

    So, I wouldn't put down a deposit on the last of the V8 interceptors just yet.

    I think it will result in a general fall in the standard of living in the West and pensions and superannuation will be cactus. But I don't see you defending your outback settlement from the Lord Humungous any time soon.

  3. Interesting. I would have enjoyed it more if you'd found a place to mention Von Manstein's push through the Ardennes (this time it worked).

    Anyway, can I point you to the charts and an interesting development that is unfolding. If you have a look at the All Ords over the last, say, five years and take a simple moving average of say 200 days you will see that when the market has closed below that line it is time to dump and run. The last time it happened was the GFC. It has just happened now. Add to that the following. The US TARP (US$700 Billion) was passed in Oct 08 and the market continued to slide for the next 6 months bottoming out in March 09. The ECB bailout of government debt is about the same magnitude (750 Billion euros). We may be in for a repeat of that slide all the way back to the March 08 low. Whilst I don't plead causation, there is an interesting corellation. Hence, time to get out of the market and park your money in cash.

  4. Could an impending worldwide financial crisis be beneficial to humanity as a world in terms of reducing carbon emissions?

    I have previously read this depressing document:
    It makes a link between economic depression and reduced emissions.

    I'd just like to know what your take on that is.