Tuesday, June 16, 2009

Rationalizing Versus Rational

Commodities and stock markets are 'puking', as traders like to say, after the US Treasury secretary and UK chancellor said that it was too early to call 'green shoots'. The fact that economists, traders, analysts and bloggers have been saying this for weeks appears to have eluded the market until now. The herd mentality took commodities and stock prices up purely based on the whole green shoots sentiment. (If recovery is nigh, buy buy buy. If the economy goes to Hell, sell sell sell.) The Financial Times reports today that financial analysts are baffled by the recent behavior of the markets and that it contradicts the 'efficient markets' theory. I disagree. An efficient market is one which does what the participants want. If they want to believe that the credit crunch is over and Hummers will again rule the road, they will buy oil. If they don't, they won't. The fundamentals rarely enter into it anymore. The fact that oil has been massively oversupplied has had almost no impact on prices over the past three months. If the market thinks that the banks have turned a corner and are now safe, sound and financially viable they will buy financials. If they don't, they won't. The fact that banks still own some seriously dodgy assets? Again, it has little to do with it. Efficient? Yes. Rational? Not on your life.

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