I previously discussed some of my thoughts on the energy sector, which looks oversold even in the context of the sudden bear market we have found ourselves in. In a nutshell, I believe that Saudi Arabia will not be able to sustain the current oil price war against the Russians and U.S. shale producers, for both economic and political reasons. I also came across a recent Yahoo Finance interview with Warren Buffett (Trades, Portfolio) where he addressed this very issue - here’s what I found most interesting.
Too much information is not a good thing
The first thing Buffett said was that the reason why the stock market is so volatile is because it offers quotes in real time:
“If markets are going to be open second by second, they are going to react to news in a big-time way. It’s not like the market for real estate or farms.”
In other words, the ability to get updates on your portfolio in real-time makes investors react to news events in a way they wouldn’t if they were unable to get a price for their holdings instantaneously. This actually gels with an opinion I have held for some time and that may seem controversial: the proliferation of zero-commission brokerages and the ease of market access facilitated by modern technology has been net negative for ordinary investors. Allow me to explain.
While these innovations have certainly increased market "efficiency" - at least in the sense of narrowing spreads and increasing liquidity - they have arguably led to more rash decision-making by ordinary investors, precisely because it has become so easy to deploy and withdraw capital to and from the stock market. By prioritizing ease of access, we have enabled the emotional and irrational part of our brains to take over.
Historical comparisons
Buffett was asked to draw a historical comparison between the panic that we have seen over the last few days and other such incidents. Of course, he mentioned Black Monday of 1987, when many of the New York Stock Exchange specialist firms (the market makers) went broke over the course of one day. But to him, the much more scary incident was in 2008, when the money market funds, containing $3.5 trillion worth of uninsured cash deposits, threatened to break.
“You had 35 million people on Sept. 1 [2008] that weren’t worried at all about their money market accounts - on Sept. 15 or 16, they were all panicking. You have $3.5 trillion in market accounts that were regarded as the equivalent of bank deposits.”
In this case, former Treasury Secretary Hank Paulson made the unconventional decision to use money from the Exchange Stabilization Fund, a vehicle that had nothing to do with money markets, to restore order to the money markers. What can we learn from this piece of history? Extraordinary times call for extraordinary measures. We have already seen an additional $1.5 trillion flooding into the interbank repo markets, as well as a total of 100 basis points in interest rate cuts (neither of these measures have managed to stop the bleeding). What’s next? Both massive fiscal stimulus and potential equity purchases by central banks are very much on the table. After a decade of uncharted monetary waters, there is no sign that we are about to turn back.
Read more here:
- Energy Is Being Crushed By Both Supply and Demand, but Will This Last?
- Howard Marks Is Buying on Coronavirus Fears
- More Investing Advice From 'Market Wizards'
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