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Economic Data: An Infinite Loop
James SurowieckiPosted Wednesday, Oct. 20, 1999, at 5:54 PM ETEveryone knows--or at least we're supposed to know--that the market for U.S. stocks today is dominated by momentum traders, day traders, and technical traders, none of whom are paying attention to the underlying fundamentals of the companies whose shares they're buying and selling, and all of whom are putting the U.S. economy at risk by converting the stock market into an elaborate shell game/pyramid scheme.
As it happens, this is wrong. There are lots of momentum traders and day traders and technical traders, but there always have been, and in any case the increased volume on the stock market and the greater number of traders has almost certainly made stock prices more efficient and more accurate indicators of underlying value than they once were.
What's interesting about this, though, is that the same picture is very rarely drawn of the bond market, even though if you talk to (or listen to) bond traders, what you mostly hear is a host of technical information--stuff about the trend of bond prices over the last month or last week, about support levels that bond prices have to hold or break through, and about overbought/oversold indicators that are or are not flashing green or red. And you also get a lot of rapid reaction to things like Alan Greenspan speeches or employment-cost-index numbers. The conventional image of bondholders is that they're conservative, long-term, careful investors. (Why else would you be content with a 6.3 percent yield for 30 long years.) But bond traders are as manic--no, more manic- than their counterparts in the equity market.
This doesn't mean that the bond market is any less efficient than the stock market, though it does seem a bit curious. But what bond traders' reliance on technical analysis--the idea that future price movements can be deduced by studying the patterns of past price movements--speaks to is just how impossible it is to successfully predict a market in which every piece of potential information seems to point in two different directions at once, and in which there seems to be nothing that doesn't count as potential information.
Take today's trade-deficit number. Although it was the third worst in U.S. history, it was still weaker than expected and smaller than last month's trade deficit. That was good news for the U.S. dollar, which rallied, and since bonds have--at least recently--been following the dollar, it might have been good news for the bond market. On the other hand, a weaker trade deficit meant that U.S. exports were up sharply, which means that people were working more and factories were producing more, which probably means higher growth and, potentially, higher inflation. That seems like it would be bad news for bondholders, who hate inflation.
But then you had to consider that imports actually rose 2 percent, suggesting that the American consumer is still buying foreign goods freely and that potential inflation from the weaker dollar (which would drive up the price of foreign goods) hasn't had much of an impact. So maybe inflation is still really just a mirage. But wait. If U.S. exports are up, that must mean that foreign demand is rebounding, and since the slump of the rest of the global economy has helped keep commodity prices down, a global rebound could have inflationary implications. So that could be bad news.
Then you have to divide the import side of the trade deficit ledger into non-commodity and commodity goods, particularly since oil-price hikes had a big impact in the last month. And you probably want to take a look at capital flows, too. And then there's ...
This is all fascinating (no, really, it is), but it is also a Moebius strip, in which it's difficult to tell where anything begins or ends. And we haven't even taken into account that the bond market needs to interpret not only all these numbers but also what impact the numbers will have on the Fed, and then in turn what impact the Fed's interpretation of the data will have on future numbers.
Given all that, it's not too surprising that the bond market preferred to meander around today, basically ending where it began. Set yourself the impossible task of predicting a macroeconomic future, and your head will start to hurt, too.
James Surowiecki writes the financial column at The New Yorker
. The Fraymaster adds:
Many readers responded to Moneybox's views on bond prices and macroeconomic uncertainty:
I liked the article. It made some valid points. It also, once again highlighted the old saying, "All the Economists in the Country laid end to end do not reach a conclusion.” That really is not ragging on economists. There really are too many variables to come up with a definite answer to whether bonds and/or stocks are a good investment.
Trying to come up with forecasts that are accurate has almost as many variables and as likely a chance of being correct as forecasting the weather. Except I think the forecast in this area might be the inverse of weather forecasting as far as accuracy is concerned regarding short term and long-term forecasts. A knowledge of the history of performance over a long period of time coupled with macro changes that have happened or are almost certain to happen make long-term forecasting in the finance area more likely to be correct that short-term--hours, days, weeks, months, and even a short span of years. Weather forecasting though is more likely to be correct over short terms-days, or even hours, than long-term forecasts.
(To reply, click here.)
Yes, the financial markets are confusing, baffling and a lot of fun to watch. Will I get hurt in all of the confusion? Maybe! Will I profit from all of the confusion? Maybe! After all, it seems that today I may have made a good choice. Are the day traders, techno-traders and others really watching markets, or are they watching individual stocks that seem to have a big impact on the market when it comes to the influential stocks? Are the day traders, techno-traders and others really listening to the long-term statements spouted by the fed about the maybe's, could be's, should be's and all the other be's, or are they watching the influential stocks and making their moves today based upon what is good for them individually?
I do not know. I do not care. I know that I see the market move, I know what I have in the market, I know that I watch the news, that I hear the fed and I make the appropriate moves for me in the markets that I think will best benefit my investments. Some days I make pennies, some days I make dollars, some days I lose. Today seems to be a good day. Markets close in an hour and a half.
(To reply, click here.)
Every article I read from even the most responsible of market journalists indicates that rising prices is inflation. How about a primer: A sudden increase in money and/or credit chasing a static supply of goods and services dissolves the value of the unit of currency (dollars); the REDUCED VALUE of the dollar bids up prices on goods and services and is the CAUSE of inflation. Years ago kings would try the same scam by clipping the coin of the realm, for which action the people would have him beheaded. Our kings today are the federal government and the Federal Reserve Bank; I guess the people haven't been watching lately.
(To reply, click here.)
I have been a professional bond trader since 1979. I have worked on some of the largest desk in the world. I can tell you this, most of the time WE don't know what's happening! All I can really count on is that there will be someone out there that is sure he knows and then I can sell him this crap I hold before I get my face ripped off.
I find it's very much like playing poker. It's not how good your hand is, it's how much you can surmise of the other guys hands and how much guts they have. It also helps to have enough chips to out bluff everyone else at the table. If they fold first then you get the pot no matter what you had. So if you wanna really sell, place a few comments in the news, lift a few bids, gun the stops, and scare the sheep into a panic. When the flock scatters, pick off enough of the slow, fat ones until you're gorged. Then sit back and wait for the explanations to come in.
(To reply, click here.)
The article made some sense to me, but my ignorance persists. There is all manner of uncertainty which the author described giving potential reasons why people aren't buying bonds. Practically speaking though, when stocks are sold and profits are taken, the money goes somewhere, and presumably some of it goes into bonds or bond funds for income (NOT). Expecting to see big increases in money market values, I didn't. Is the money going into CDs? Cars? Houses? The mattress? Where is the money? Does anyone know (for sure) where the money is going?
(To reply, click here.)
More traders does not necessarily mean the stock market is more efficient. It just indicates that the demand curve has shifted to the right, meaning higher prices at each quantity demanded. You can still have irrational behavior and buying decisions, it's just that more people are involved.
(To reply, click here.)
What else is new? Economics is not a science. Even when we have reams of data, the most up to date theory embedded in our models, and massive computing power, we can either tell a number of equally plausible and contradictory stories about historical movements in the macro-economy, or useless ones about inter-temporal correlations with sun spots or the weight gain of bears in S. Bakal 231 periods earlier. IFF traders are rational they make markets more efficient, unless money grows on trees without losing its real value.
(To reply, click here.)
did this dude never read mike lewis' masterpiece, liar's poker? (buy it here.) Bond traders are snake-oil salesmen. they don't have a clue, but they know how to whip-and-drive and hoot-and-holler. in the words of lewie, the master of them all, "if you guys weren't selling bonds, you'd be driving a truck!"
(To reply, click here.)
(10/21)
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The Fraymaster adds:
Many readers responded to Moneybox's views on bond prices and macroeconomic uncertainty:
I liked the article. It made some valid points. It also, once again highlighted the old saying, "All the Economists in the Country laid end to end do not reach a conclusion.” That really is not ragging on economists. There really are too many variables to come up with a definite answer to whether bonds and/or stocks are a good investment.
Trying to come up with forecasts that are accurate has almost as many variables and as likely a chance of being correct as forecasting the weather. Except I think the forecast in this area might be the inverse of weather forecasting as far as accuracy is concerned regarding short term and long-term forecasts. A knowledge of the history of performance over a long period of time coupled with macro changes that have happened or are almost certain to happen make long-term forecasting in the finance area more likely to be correct that short-term--hours, days, weeks, months, and even a short span of years. Weather forecasting though is more likely to be correct over short terms-days, or even hours, than long-term forecasts.
(To reply, click here.)
Yes, the financial markets are confusing, baffling and a lot of fun to watch. Will I get hurt in all of the confusion? Maybe! Will I profit from all of the confusion? Maybe! After all, it seems that today I may have made a good choice. Are the day traders, techno-traders and others really watching markets, or are they watching individual stocks that seem to have a big impact on the market when it comes to the influential stocks? Are the day traders, techno-traders and others really listening to the long-term statements spouted by the fed about the maybe's, could be's, should be's and all the other be's, or are they watching the influential stocks and making their moves today based upon what is good for them individually?
I do not know. I do not care. I know that I see the market move, I know what I have in the market, I know that I watch the news, that I hear the fed and I make the appropriate moves for me in the markets that I think will best benefit my investments. Some days I make pennies, some days I make dollars, some days I lose. Today seems to be a good day. Markets close in an hour and a half.
(To reply, click here.)
Every article I read from even the most responsible of market journalists indicates that rising prices is inflation. How about a primer: A sudden increase in money and/or credit chasing a static supply of goods and services dissolves the value of the unit of currency (dollars); the REDUCED VALUE of the dollar bids up prices on goods and services and is the CAUSE of inflation. Years ago kings would try the same scam by clipping the coin of the realm, for which action the people would have him beheaded. Our kings today are the federal government and the Federal Reserve Bank; I guess the people haven't been watching lately.
(To reply, click here.)
I have been a professional bond trader since 1979. I have worked on some of the largest desk in the world. I can tell you this, most of the time WE don't know what's happening! All I can really count on is that there will be someone out there that is sure he knows and then I can sell him this crap I hold before I get my face ripped off.
I find it's very much like playing poker. It's not how good your hand is, it's how much you can surmise of the other guys hands and how much guts they have. It also helps to have enough chips to out bluff everyone else at the table. If they fold first then you get the pot no matter what you had. So if you wanna really sell, place a few comments in the news, lift a few bids, gun the stops, and scare the sheep into a panic. When the flock scatters, pick off enough of the slow, fat ones until you're gorged. Then sit back and wait for the explanations to come in.
(To reply, click here.)
The article made some sense to me, but my ignorance persists. There is all manner of uncertainty which the author described giving potential reasons why people aren't buying bonds. Practically speaking though, when stocks are sold and profits are taken, the money goes somewhere, and presumably some of it goes into bonds or bond funds for income (NOT). Expecting to see big increases in money market values, I didn't. Is the money going into CDs? Cars? Houses? The mattress? Where is the money? Does anyone know (for sure) where the money is going?
(To reply, click here.)
More traders does not necessarily mean the stock market is more efficient. It just indicates that the demand curve has shifted to the right, meaning higher prices at each quantity demanded. You can still have irrational behavior and buying decisions, it's just that more people are involved.
(To reply, click here.)
What else is new? Economics is not a science. Even when we have reams of data, the most up to date theory embedded in our models, and massive computing power, we can either tell a number of equally plausible and contradictory stories about historical movements in the macro-economy, or useless ones about inter-temporal correlations with sun spots or the weight gain of bears in S. Bakal 231 periods earlier. IFF traders are rational they make markets more efficient, unless money grows on trees without losing its real value.
(To reply, click here.)
did this dude never read mike lewis' masterpiece, liar's poker? (buy it here.) Bond traders are snake-oil salesmen. they don't have a clue, but they know how to whip-and-drive and hoot-and-holler. in the words of lewie, the master of them all, "if you guys weren't selling bonds, you'd be driving a truck!"
(To reply, click here.)
(10/21)