Wednesday, 14 October 2009

On bears, bulls and irrational expectations

In the string of distressing events of the previous week I didn’t manage to find time to highlight the two excellent articles from The Economist – Please do feed the bears and Unrepentant bears – the end is nigh. Not accidentally have they been published after seven months of unreasonable rallies on stock markets. Both are a must for the investors who want to steer clear of herd instinct and mistakes made by many too credulous fellows in 2007. I won’t summarise the content of them, but I’ll share some reflections I’ve had after the reading.

Firstly – why are the ones who bet the declines condemned? Journalists, analysts and commentators boiled down the picture of stock market to a simple rule: green – good, red – bad. No matter how blown up the stock prices are, it’s appropriate to fall into delight over the upward trend. Nobody cares about the underlying of the increase and the possible aftermaths. In the long run the big players start taking profits and puncture the balloon. If the stock indices rise in a reasonable pace, which reflect the state of economy, profits of the companies, increased work productivity and so on, such situation is evitable. But stock exchange is not only a place where the price is fixed and the companies are valued. It’s also a battlefield for speculators who chase the quick, short term profit. They also increase the volatility of the market, mostly visible in the range of consolidation we’re in now. The bears represent the put down voice of the common sense, which tentatively asks about the fundamentals. It’s not a convenient question, it takes the gloss off the gorgeous picture of the market which interminably heads upwards.

There are the ones in whose vested interests are the next rallies. They aim to persuade the others to buy, then when the market drifts up they hold the shares in their portfolios or play on futures market. If they represent investment funds they also seek after higher commission, boast about superb investment results and draw in the naive savers who heat up the bubble at the peak.

But how about governments? Those weren’t only the good macroeconomic data that pushed the indices up. The forecasts could have been lowered so that the real economy could exceed them easily. We owe it to the stimulus packages and loosened monetary policy. The market players flooded with the cheap money (the price of money is… the interest rate) had to invest that money somewhere. The decision-makers chose the stock market cause they had nothing to lose – when the interest rates are high, bank deposits and gilt-edged bond offer a safe return and can make alternative to volatile and rather risky stock market. In a few years we’ll have a perspective which will allow us to assess the measures taken to tackle the crisis. Then we’ll have known if they’d have done more harm than good or the other way round.

To conclude optimistically – I forecast that next week the stocks will tumble, but in spite of those tragic news we’ll be enjoying the sunshine and daytime temperature of at least fifteen degrees (Celsius degrees). 14 October is too early date to be an onset of winter… Sleet and blustery have to get lost!

No comments: