Bad Habits: The Greenspan Put

Mandated Markets

The recent research from the New York Fed indicating the close correlation between the Federal Reserve’s interest rate decisions and the movement of equity markets just prior to its announcements has added fuel to the flickering flames of suspicion that the Fed’s actions are designed to support stockmarkets and the super-rich who rely on them, rather than the wider economy. 

It's just as possible, though, that market participants can now force anyone they want to kowtow to their demands.  It seems that politicians and central bankers are no longer in charge of the economy, but that the market – at least as defined by the demented lore of economic orthodoxy – rules by dint of habit.  Which is not OK, not OK at all.

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Frankenstein’s Corporations

Immortal Corporations

Back in 1819 the US Supreme Court, an august group not usually known as a centre of radical creationism, took the unusual step of inventing artificial life. Moreover they then, in a Frankenstein moment, added the proviso that their monstrous offspring should be blessed with immortality.

The object of this life-giving largesse was the hitherto humble corporation, which was suddenly invested with superhuman properties. Unfortunately the lawmakers couldn’t artificially imbue corporations with morality or a sense of justice so having made them indestructible they left the rest of the world to deal with an ethical dilemma that sees companies given human rights without needing, or expecting, to behave so as to deserve them. Back to the courts …

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Blood on the Street

“The time to buy is when there’s blood in the streets”, Nathan Rothschild (attributed).

Micro or Macro?

Normally stock picking investors are interested in the microeconomics of firms; their earnings power, competitive advantage and so on. These factors will, over lengthy periods, determine whether companies outperform their peers or not. In recent years, though, a curious thing has happened: these self-same investors have become more concerned with macroeconomics; the trends and decision making processes within the overall economy.

It appears that investors no longer worry much about the fundamentals of investments or even the wiggly predictions of charts, because they have a much more basic way of assessing the likely trajectory of stocks: political analysis. And the result of this may be that we will have blood running in the streets. Again.

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Moral Hazard, But Thanks For All The Fish

Vanishing Regulators

Regulators spend a lot of time worrying out loud about moral hazard, the problem that occurs when people don’t have to take risks commensurate with their potential rewards. This sort of ignores the point that if moral hazard didn’t exist most of the need for regulators would disappear overnight.

Still, there’s a sneaking suspicion that a lot of the problems investors face are less to do with moral hazard and more to do with the problems caused by behavioural biases that cause organizations to fail to manage information successfully. This so-called intellectual hazard, it’s suggested, lies behind some of the securities industries biggest boo-boos.

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Quality Signalling for Quality Stocks

Exeunt Investor

Making money from trading stocks should be ridiculously easy; after all,all you have to do is buy low and sell high. Which makes it a recurring mystery as to why so many people so often do the opposite. After all if you buy something at £5 and it drops to £4 it’s cheaper, right?

It’s not just with stocks that this problem occurs, although it’s just not so obvious elsewhere because we tend to buy goods and keep them rather than re-selling. Generally when we’re buying something we don’t understand too well we tend to look for signals that tell us whether it’s of a decent quality or not. Often one of the main signals we use is the price, such that a higher price is believed to identify goods of higher quality. Ergo, if the price goes down then that’s signalling something too: in the case of stocks, that we’ve made a mistake. Exit investor, followed by losses.

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