Hopes and fears wrestle with reality in the financial markets.
The longer I study the financial markets, the more I see an epic battle between
- the rational operation of markets along the lines of classical economic theory and
- naked emotion spread across large groups of people handling large pools of money.
Case in point: this week’s large stock-market declines. Before the markets opened this morning, the Dow was down 5.05% for the week; the Nasdaq was down 5.71%; and the S&P 500 was down 4.44%. Some of these have been in reaction to sustained bad news from the likes of GM and Citigroup.
From where I sit — not handling large pools of money, mind you — it seems crazy that GM’s or Citigroup’s investors would act surprised by their continued bad news.
True, we may not be in a recession by an economist’s definition, but clearly times are tight for many American businesses and consumers, and — just as clearly to my mind — neither GM nor Citigroup has been especially well run over the past few years. (We could add number of other big companies to this list — and yes, I am looking at you, Lehman.) On top of that, even setting aside the effects of speculation, the basics of supply and demand suggest that oil is going to stay expensive for a long time, for values of “a long time” up to and including “forever.”
But people want to hope for the best, especially when it comes to their own money. And they so dearly want things to be better that they’ll take the bet that they’re going to be better, even when that bet doesn’t make sense from a purely rational standpoint.
Which is why we have behavioral economists.
I think things aren’t quite as bad as some pundits, and some politicians, would have us believe. I think things aren’t as good as, say, Secretary Paulson wishes they were. It’s not just that the truth lies somewhere in the middle, but that it roams all over the place, depending on complex interactions of hard numbers (housing starts, jobless claims) and wild emotions which, in my humble opinion, nobody really understands.
I’ve decided to stop being surprised by the fluctuations, and instead to prepare myself for more of them — whether they make sense or not.
~
Related posts:
- American Airlines, Ford Motor, and the price of oil.
- What does the future hold for the Detroit car makers?
- Does Citi need Hurd-style change? Bill Miller thinks so.
~
(Photo of the Amsterdam stock exchange by Petrick2008.)
Category: Economics3 Comments so far
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Fascinating notion - good post. When Mullaly walked into Ford he found that the division heads were NOT telling either each other or the corporation what their real numbers were. To fix that problem he instituted weekly meetings which were no-fault EXCEPT you had to bring the real truth in or get nailed. So his first job was to force Ford to face realities - insofar as they could. That strikes me as general across things - we typically if we follow this stuff at all only have time to check recent headlines. For example Personal Consumption surged last month, right ? Well now - in real terms on a YoY basis it was up only 2.2% vs the prior month’s 1.9%. Sounds good, right ? Until you realize that it was running 3-3.5% in ‘04-’06;and averaged 2.0% Q301 during the last recession. What was your impression ?
Thru long, bitter, painful and expensive experience I’ve learned to pay attention to four factors in the markets: Structural - l.t., deep trends and changes, Fundamentals - how the cycles are moving in economy, industry, markets, Technicals - s.t. patterns and trends and Sentiment - what does Mr. Market and all his minions think; i.e. what stories and delusions are they telling themselves. The first three have been deteriorating, albeit, slowly for 18 months. The latter has been gyrating but, IMHO, just last week went thru a major SEE change where the whole notion of a 2nd half recovery and continued tech spending went on the table for re-consideration.
You might want to consider this survey of the four factors and their evolution since early last fall and the links to the economy: http://tinyurl.com/3rkw28
As for delusions inside the Auto Industry they too have just come to some striking realizations which are destroying some cherished fantasies - SUV/Pickups will sell and we’ll only drop to 15Mil - both historical aberrations. Three Decades of Auto Industry Delusions: http://tinyurl.com/6rqyxx
[...] Hopes and fears wrestle with reality in the financial markets. [...]
[...] Ah, but of course I have a longer answer. Generally, I’m prone to think that the aces of Wall Street (and Sand Hill Road, etc.) have a better view than I do of these things. Holding this view is my stab at humility. But these days that view, ehh, continues to erode. [...]