Fortune Teller Troubles

Nothing's so cold
As closing the heart when all we need
Is to free the soul
But we wouldn't be that brave I know
--Toad the Wet Sprocket

It has long been held that the stock market is an effective forecasting mechanism. Because investors are motivated to process information in a forward-looking mindset, the aggregate result has often been an eerily accurate discounting of the future. Stock prices have commonly anticipated salient news 6-12 month ahead of time. Like magic.

Mr Practical argues pursuasively that the market's capacity for accurately discounting information is no longer what it was. I think he's correct. To me, it boils down to the extent to which markets operate freely. Market decision making requires probabilistic assessment of risk versus reward. When policy makers intervene in market activity to bail out losing decisions, such as the Bear Stearns (BSC) situation, the perceived need to assess risk decreases. Over time, complacency blunts the edge of effective risk assimilation.

As such, market intevention should serve to distort collective market decision-making processes. If, for example, interventions that are presumed to prop up prices actually don't work, then the aggregate discounting mechanism may be way off.

Given the degree of intevention we are currently witnessing, the market's crystal ball has likely clouded considerably.

no positions