Market beliefs about a fund’s portfolio can be wrong yet still drive fire-sale pricing.
Evidence
Assets that LTCM was believed to hold in large quantity became impossible to sell at anything other than “fire sale” prices. Beliefs about LTCM’s portfolio were sometimes incorrect or exaggerated: after the crisis, LTCM was approached with an offer to buy six times the position it actually held in Danish mortgage-backed securities (Meriwether interview). Nevertheless, presumptions about its positions were accurate enough to worsen its situation considerably, and as September went on, and LTCM had to divulge more information to its counterparties, those presumptions became more accurate. — Donald MacKenzie, An Engine, Not a Camera, 1061
Categorization
- QUESTION: Worth tracing how belief accuracy increases as information disclosure rises — the mechanism by which a rumor-driven spiral feeds on itself.
- XREF: connects to: Unknown size of scheduled portfolio sales, not the sales themselves, caused market shock. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 883; Investor redemptions, not trader conviction, forced hedge funds to unwind losing positions — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1046; Share prices reflect guesses about others’ opinions, not intrinsic value — Yanis Varoufakis, Technofeudalism: What Killed Capitalism, 995 (+3 more)
Broader Connections
- Share prices reflect guesses about others’ opinions, not intrinsic value
#expands(0.85) — Yanis Varoufakis, Technofeudalism, 995 - The market is an inescapable belief-structure one cannot step outside
#expands(0.80) — Fredric Jameson, Postmodernism, or, The Cultural Logic…, 483 - Viewing market prices as the flaw, not the model, drove prices down
#complicates(0.75) — Donald MacKenzie, An Engine, Not a Camera, 1157