Markets are not hermaphrodite, they are female. They are not about abstract intelligence, but more of the emotional intelligence type. So they move along in fits and starts, even though they do value objective data in the (very) long run. Women are very pragmatic and business minded, and markets also end up being rational. But in the short run, they are prone to effervescence. And, to be sure, waiting for rational conduct by the market can give you a hard time. Ask John Hussman.
When moving markets, greed, fear, hope, or denial, come first. Lately, Central Bank intervention has crept up to a consolidated second place in importance. Two decades ago, they weren’t even trading the global market.
There were no POMO desks, and the emblematic NY Fed desk ignored the underlying size of an “E-mini” contract. They only traded treasuries and USD crosses. Now they have incorporated the contract size in their spreadsheet macros. They even get a special discounted brokerage fee for their trading.
Prolific and highly inconsistent Bullard now affirms that they shouldn’t be intervening all the time. He must now think that verbal jawboning can do the job. Maybe, from now on, POMOs can permanently take monday to friday off. ¿Or should we just give each POMO desk member a pink slip?
In today’s market pricing process, fundamentals are a very distant last. They have always been last. The oddity is that they lost the second place to central banks, and are now well behind the first two factors. Decidedly, the keynesian proverb about the capacity of the market to remain irrational, for longer than you can stay solvent, has gone hyperbolic. Keynes would be pleased to know. It vexes most first class financial analysts. Benjamin Graham delineated the issue more precisely:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
You probably don’t understand why the market is selling off, on what should be considered good news. At least for main street. ¿Why on earth are deflation and cheaper energy a problem for equities, weak currencies, or interest rate spreads?
There is a simple answer to that one. Markets are very upset, because everybody hates it when somebody changes the rules of the game without notice. Young and old were assuming that the main four factors sustaining their happy financial life were still there. They had been told that: Continue reading