Whenever a new phrase enters into the investor’s lexicon, pay close attention. Given Wall Street’s echo chamber-like tendencies, the continued repetition of a phrase eventually leads to a crescendo. This climax will occur sometime after the maximum impact of the oft-repeated phrase has worked its way into prices already; By the time the herd starts acting on this new idea, the odds favor it will to be at the exactly wrong time. The crowd latches onto new memes when it is too late to have any value to them, save as an emotional salve.
The latest phrase making the rounds is: “The Market wants ___.” Or this thematic variation: “The Market’s not happy with __.”
It gets said about Iraq, repeated about inflation, reiterated regarding oil prices. The President’s diminishing re-election chances is merely the latest reworked version. Yet even a cursory review of these issues reveals that they have been problematic for many months. The Markets have long since discounted the impact of these into its pricing.
Why the sudden fixation on what Mr. Market wants?
And besides, how much do we really want to pay attention to what the equity markets want? They reflect the collective hopes and fears of millions — hardly the source of thoughtful contemplation. As such, Mr. Market suffers from severe personality disorder. He morphs from a tantrum-throwing infant into a hormone-addled teenager over the course of weeks, if not hours. He’s too impatient to even wait for immediate gratification. Equity markets easily become rife with reckless speculation, the teenage equivalent of their own sense of immortality (pick one: momentum trading or drag racing?).
Is this really who we should be taking our marching orders from?
Indeed, a closer look at what Mr. Market wants reveals it to be untenable: He desires no capital gains taxes, 0% interest rates, endless stimulus. He hates regulation, is big on deficit spending, does not care much for shareholders’ rights. More, more, more: Mr. Market craves multiple expansion, ever-increasing profitability, still higher revenues. He has no problem with accounting fraud – just don’t get caught. He’s happy to engage in warfare, so long as we win quickly with few casualties. He wants certainty about the future, comfort with the present, rosy nostalgia about the past.
In short, Mr. Market wants most everything he can’t have — which is the real reason Bond Markets exist – to be the adult supervision for equity markets.
What Mr. Market wants may impact the short run, but in the long run, it simply does not matter. He will have to adapt to changing conditions – just like the rest of us.
Good post. I have a few contentions, however.
You write, “[Markets] reflect the collective hopes and fears of millions — hardly the source of thoughtful contemplation.” But markets can also be founts of wisdom, as James Surowiecki points out in his excellent book, “The Wisdom of Crowds”. Markets draw upon diverse sources of information, transmuting them into a quantifiable verdict that is often more accurate than the smartest talking head.
To your credit, however, catchphrases can reduce information diversity, the lifeblood of any properly-functioning market. As unsophisticated investors blindly adhere to simplistic mantras like “Don’t fight the Fed”, diversity of opinion suffers. The extent to which this phenomenon is systematic, and therefore not cancelled out in the aggregate, is open to debate.
Also, your paragraph about markets desiring no regulatory oversight, among other things, is eerily reminiscent of Thomas Frank’s thesis in his trenchant polemic “One Market Under God”. I am sympathetic to this point of view to some extent, but I disagree that the bond market’s role is to rein in its prodigal twin, Mr. Market.
Bondholders have very little sway over management. The discipline exerted by interest payments only kicks in if the debt load is quite onerous – a rarity these days. Even in the event of default, when bondholders are ostensibly foremost in the pecking order, management can still lavish itself with amenities and lessen the value of assets earmarked for bondholders, much like the guests at a raucous hotel-room party trash the place knowing the host will have to foot the bill. It is no wonder David Swensen had harsh words for corporate bonds in his canonical book “Pioneering Portfolio Management”. Finally, the bond market’s performance is actually quite positively correlated to that of the stock market (post-1998 somewhat excepted), suggesting they are driven by similar factors. In fact, a well-known study by academics at HBS argued that the equity risk premium should be relatively low for that exact reason.
The Carnival of the Capitalists Goes Radio Frequency!
Welcome to Carnival of the Capitalists, a traveling event that brings you examples of the best business blogging the Web has to offer. Some of the these posts will make you laugh, some will make you mad — but they’ll…
The Carnival of the Capitalists Goes Radio Frequency!
Welcome to Carnival of the Capitalists, a traveling event that brings you examples of the best business blogging the Web has to offer. Some of the these posts will make you laugh, some will make you mad — but they’ll…
The Carnival of the Capitalists Goes Radio Frequency!
Welcome to Carnival of the Capitalists, a traveling event that brings you examples of the best business blogging the Web has to offer. Some of the these posts will make you laugh, some will make you mad — but they’ll…
The Carnival of the Capitalists Goes Radio Frequency!
Welcome to Carnival of the Capitalists, a traveling event that brings you examples of the best business blogging the Web has to offer. Some of the these posts will make you laugh, some will make you mad — but they’ll…
The Carnival of the Capitalists Goes Radio Frequency!
Welcome to Carnival of the Capitalists, a traveling event that brings you examples of the best business blogging the Web has to offer. Some of these posts will make you laugh, some will make you mad — but they’ll all…
The Carnival of the Capitalists Goes Radio Frequency!
Welcome to Carnival of the Capitalists, a traveling event that brings you examples of the best business blogging the Web has to offer. Some of these posts will make you laugh, some will make you mad — but they’ll all…
The Carnival of the Capitalists Goes Radio Frequency!
Welcome to Carnival of the Capitalists, a traveling event that brings you examples of the best business blogging the Web has to offer. Some of these posts will make you laugh, some will make you mad — but they’ll all…