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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Do Stocks Always Outperform (in the Long Run)?

Funny Futures

The equity premium puzzle is one of the longest standing anomalies in finance: the finding that stockmarket investing outperforms other types of investment by a significant amount. Generally you’d expect the price of shares to rise until this advantage was cancelled out, but this hasn’t happened and has made quite a lot of futurologists look rather silly.

It turns out, though, that the equity premium puzzle may be even more puzzling than it first appears. Basically researchers aren’t exactly sure how large it is, or even if it exists at all. So is the idea that stocks always outperform other investments in the long run just another market myth used to cajole unwary investors into parting with their hard-earned cash?

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Mental Accounting: Not All Money Is Equal

Coherent Holes

Now listen carefully, because this is where the bizarre, byzantine and seemingly disparate behavioural biases that afflict our every monetary movement start to coalesce into a single, coherent whole. Or at least a set of coherent wholes. Or is that coherent holes?

Mental accounting isn’t about the madness of the dark denizens of accounting departments, although that’d be as good a subject as any. No, in fact it’s the strange way that we humans turn the perfectly designed medium of exchange we call “money” into an irrational, segregated and non-transferrable set of silos to which we then apply all the normal battery of biased behaviours, thus gearing up our irrationality to a marvellously unhinged degree.

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Arnott: 40 Years of Bonds Beating Equities

Bonds: Why Bother?

Rob Arnott’s paper Bonds: Why Bother? sets out to succinctly punch a few holes in accepted market norms. What he finds should be sobering for investors in shares who believe that they can gain excess returns for taking the excess risk of holding equities over reasonable lengths of time.

Now a lot depends on your definition of a “reasonable length of time” but as the paper shows that someone holding and rolling over 20 year Treasury bonds would have beaten an investor in the S&P 500 over any time frame since 1979 you'd have to have a very long term view indeed to regard equity investment as a safe thing. In fact bonds have actually beaten equities on the same measure over the last forty years.

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