Tuesday, 14 October 2008

Strange humour in the FT?

Socialist Economic Bulletin has, for strict economic reasons, no views on the short term movement of share prices - theoretically it depends on too many variables. SEB only analyses that US assets are overvalued in real terms compared to some other categories of assets and therefore, over the long term, they will adjust relatively downwards (which can occur via dollar devaluation, falls in nominal dollar prices, inflation or other combinations of processes). For what follows it is also necessary to remember that SEB considers the Financial Times the most accurate mainline newspaper in the country - all sorts of waffle, and ideology, can be tolerated regarding politics but money is a serious thing and capitalism demands accurate information on it.
However, SEB could not help smiling at the following piece of 'optimism' that appeared on the front page of the FT online on 14 October: 'Asia staged a historic rally as stock markets responded to a €1,873bn ($2,546bn) pledge by European governments to shore up their financial sector and the US prepared to unveil its own comprehensive rescue plan on Tuesday. It was the best day for US stock markets since the rebound following the great crash of 1929.'

Anyone who considers that it is a sign of optimism to make a comparison to the stock rebound after the 1929 crash either has a strange sense of humour or hasn't quite studied history enough.
In order to illustrate the point this is how a graph of recent movements in the Dow Jones Industrial Average would have looked on 14 April 1930.

The pattern is clear. There had evidently been a severe fall in 1929. However following this the market was recovering in a sustained way, with a rise that had been going on for five months.
Except that that this is what happened next - it is the view of the same markets as taken on 8 July 1932.

The 'rally' following 1929 was, in fact, the most famous 'dead cat bounce' in history.
Markets, for strict theoretical reasons, never fall or rise in a straight line, Precisely because there are so many variables in the system the 'noise', that is elements which are not directly related to the main trend and which produce short term fluctuations, are always moving around and in the short term can, and do, drown out the 'signal' - that is the underlying trend.
It is, therefore, for theoretical reasons quite impossible to deduce anything regarding short term market movements from fundamental trends. The FT's note of 'optimism' regarding market movements on 13 October is as pointless as would be an attempt from SEB to claim 'pessimism' because of the market falls on 10 October. Only the long term trend will show the 'signal', that is the underlying forces operating, amid the 'noise' which results from the short term fluctuations.
Nevertheless the FT might have chosen a better historical analogy to indicate its optimism!


Bemused Economist said...

It is natural to want to run "optimistic" headlines if you think that the main cause of the crisis is "lack of confidence". The more good news people hear, the more "confident" they will become and the crisis will be solved.

It will in fact be years before we can judge the crisis' true extent. Over those years, we can expect a lot of fake feelgood headlines as short-term rallies are declared as the next great boom. Profound long-term trends are precisely what the capitalist commentators have not understood.

As SEB exemplifies, it takes a socialist to understand capitalism properly!

Alun Griffiths said...

That's true, we know that media and communication are integrated and important economic actors and factors, what we don't really understand though is how much because the world economy is a complex/chaotic system. (Tell that one to the algorithm experts) One whispered comment in a corridor in Frankfurt really could and does sometimes have quite profound consequences elsewhere. (The butterfly syndrome)

This editorial resumé from the F.T.on the 13th October illustrates this nicely...

Nationalise to save the free market

Gordon Brown is not putting capitalism to the sword in favour of the state. He is using the state to defeat the market’s most dangerous enemy: widespread depression

But I can't agree with bemused's last comment, far too optomistic ;-)

The F.T. continues to make good reading though, Chomsky's assertion that it is the most honest newspaper in the world still rings true.

They seem to be a bit "all over the place" today (14th) though

Global markets rally as US launches bank rescue
Oct 14 2008 15:17
Stock markets around the world rallied as the US government confirmed it would invest $250bn directly into the US's biggest financial institutions including Bank of America, Morgan Stanley and Goldman Sachs.


FT.com - Financial Markets News
Overview: Bank bail-out novelty wears off
Oct 14 2008 22:07
Equity markets in Europe and Asia rose while Wall Street slipped lower as investors focused on the outlook for the economy and earnings as the US government moved to inject about $250bn of public money into the banking system


Capital injection plan fails to lift Wall Street
Oct 14 2008 21:42
The fresh $250bn plan to shore up US banks bolstered hard-hit financial stocks yet failed to lift the broader market amid heightened concerns of global economic slowdown

which seems, at first sight, to be contradictory.

Personally I'm also trying to follow some of the tabloids because of the power they have in forming mass public political economic opinion. Metro was good on Monday...


But my favourite headline is still from The F.T. at the weekend...

Prosperity or democracy : which do you want? Christopher Caldwell

an article which seems to havemysteriously dissapeared from the Web site, now there's a thing...