What Does the Economy Have to Do with the Market?

“There’s a lot of risk going ahead of some big bumps. There’s a very big risk that markets have been irrationally exuberant.”

-Nobel Prize-winning economist Joseph Stiglitz


Far be it from me to challenge the 2001 economics Nobel prize winner, but sometimes, indeed, quite often, markets decouple from the economic fundamentals.

I can show you many eras in history when the economy was awful, and nonetheless markets rallied strongly.

There have also been times when earnings did not matter, and profitability was irrelevant. There are times when animal spirits run the show, when irrational exuberance was in charge.

Such is the result of giving two million primates lots of money and keyboards and a belief they can make a living based on numbers and letters moving around — on a screen, in a futures pit, on an exchange floor, or even under a buttonwood tree.

Most mainstream economists — with notable exceptions like John Maynard Keynes, Richard Thaler, and Robert Shiller — have traditionally paid little attention to this reality. To a trader or investor, rationality matters far less than what the tape was doing.

Indeed, prices matter a great deal more to traders than theories or annoying things like “Objective Reality. To a trader, prices ARE the objective reality; to them economic theorists are peripheral players trying to rationalize reality.

I believe you can describe and explain what the market is doing, but in doing so, we must acknowledge Keynes terriblyu accurate observation that “Markets can stay irrational far longer than you can stay solvent.”

I’ll have more on this later in the week . . .


Stiglitz Says Markets ‘Irrationally Exuberant’ About Recovery
Francine Lacqua and Jeremy Torobin
Bloomberg, October 6 2009

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