The market reaction to the Fed chairman’s reiteration of his
long standing and much publicized position on the continuation or otherwise of
quantitative easing is not puzzling to us. In our view, most investors do not
believe what they already know. “I knew it” is probably the most often used regret phrase in history of mankind.
In his recent blog post BoB Mcteer, former member of FOMC
put this succinctly. We feel quoting from that works well for us:
“Writing about unknown unknowns would be more interesting, but I
don’t know what they are. Instead, I will focus here on some unknowns that have
been bothering me. Most have to do more or less with the efficient market
hypothesis, whose logic I find compelling and whose exceptions I find
confounding.
Most recently, Chairman Bernanke, in his last two post-FOMC
press conferences, said what most people in the markets expected him to say and
what the logic of the situation called for. Given the still weak economy the
present degree of quantitative easing ($85 billion of security purchases per
month) would be maintained, but, if the economy strengthens sufficiently, that
pace of purchases would be tapered down in the next several months and, when
the economy is healthy enough to be on its own, the purchases would be ended.
Short-term Interest rates would remain low some time after that. While one of
the medicines would be reduced and eventually withdrawn, the economy would be
much stronger before it happens.
First, I have a hard time understanding why the markets take
that sensible approach so negatively, especially since it’s been articulated so
frequently in the past. Second, why does it take two days to move the markets
to their new, more appropriate, levels? Actually, it’s four days: two after
each press conference. Do the first two days not count because the market
subsequently regained some lost ground? And why does the advance after the
first two not presage an advance after the subsequent two and thus render it
moot?
Efficient markets help explain why active investors have a hard
time beating the market and why most usually don’t. Yet, a still-huge financial
sector has a vested interest in clinging to the notion that homework and skill
can lead to repeatable success, whether they believe it deep in their hearts or
not. But, what happened to the rule of buying on the rumor and selling on the
news. That makes sense, but day after day we see markets appear to be surprised
by the obvious or the telegraphed.
I’ve always been fascinated by the fact that smart,
well-educated, well-trained professionals aren’t necessarily better investors
than dopes like me who assume that each stock is already priced to reflect all
knowns. It does make life easier, however, to assume that others have done your
homework for you. It’s like choosing your lane on the freeway. You can
maneuver in and out of lanes to enhance your relative position, but as often as
not you end up about where you would be if you stayed in the same lane. The
others do your lane-switching work for you.
Chairman Bernanke must be tearing his hair out. He offers to
help as long as it’s needed and to quit only when it’s not and we respond with
sell, sell, sell.”
Thought for the day
I'd rather regret the things I've done than regret the things I haven't done.”
- Lucille Ball (1911-1989)
Word of the day
Drawl (v):
To say or speak in a slow manner, usually prolonging the vowels.
(Source: Dictionary.com)
Shri Nārada Uvāca
Who said water does not have a color?
It appears it does have color and a name also.
In an attempt to capture lucrative weather forecast market, private forecasters debunk IMD claim that the water that poured over North India was monsoon water. They claim that monsoon is yet to arrive in north India.
It seems government is at serious risk of losing another monopoly. We may soon have a weather regulator and rules for FDI in weather forecasting!
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