Why You Should Not Treat the Stock Market Like Gallup
I know, I know, I just linked to Dan Gross's column. It was like, one post ago. Five inches down the page. Guilty as charged. But I wanted to quote this bit without shoehorning it into a separate argument. So here's your second Dan Gross-generated excerpt of the day:
What's more, the theory of bond vigilantes rests on the notion that the stock and bond markets function as a sort of daily tracking poll, rendering a thumbs up or thumbs down on the efficacy of President Obama's economic plans. If you watch CNBC, though, the market seems capable of showing only its disapproval. All the yahoos who shrieked about the "Obama bear market" when stocks struggled in the first quarter of 2009 haven't turned around and declared an "Obama bull market" even though the S&P 500 has rallied 37 percent since March.
Both the Fergusonians and the Krugmanites (of whom I count myself one) err in reading too much into short-term fluctuations in bond prices. There's so much more at work. Randall Forsyth of Barron's explains a technical reason for the short-term spike in 10-year and 30-year rates. Banks and financial institutions that own mortgages hedge their exposure to refinancing by buying and selling Treasury bonds. When mortgage rates start to rise, as they've done in recent weeks, institutions do the opposite and sell. "While mortgage investors previously had bought noncallable Treasuries to offset the risk of their mortgages, mortgage investors have unwound that hedge, selling their Treasuries," Forsyth writes.
Finally, the notion that the market is telling us something—anything—ultimately rests on the erroneous assumption that financial markets represent the collective wisdom of rational actors processing information efficiently. There are plenty of cool-minded forward-thinking investors in the markets. But there are also a lot of lunatics, fools, sharks, widows and orphans, government actors with ulterior motives, algorithmic traders, greedy speculators, and whack jobs. The markets resemble the Star Wars bar scene more than they do the economics faculty lounge at Princeton.
See? That was worth it, right?
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