Thinking Through the Short-Term Narratives
Editor’s Note: This What We Are Thinking About (WWATA) Memo was initially published for AEI Premium readers in December 2020. The ideas shared then seemed especially relevant today, so we are publishing this in front of the paywall.
We think it passes the week-old newspaper test: “To be completely cured of newspapers, spend a year reading the previous week’s newspapers.” – Nassim Taleb.
Have you ever stopped to think about how you process the daily information around you? We receive economic news information all the time. Today, that information channel is on almost constantly, but it certainly wasn’t always this way.
Think back 10 or 15 years to how often you looked at stock or grain prices and compare that to today. Back then, we might have gathered that information from the back page of the business section of our local paper (Who gets those anymore?) or the Wall Street Journal’s money and investment section. Occasionally, when something changed a lot, we might read a story about what was driving those changes in the newspaper or make a phone call to our local elevator to see what was going on.
Today, information is everywhere. We get price quotes texted to us or look them up on our phones in real-time. The good news is that this access to prices and markets has helped remove some of the inefficiencies of markets and greatly increased price transparency.
But along with this access to information comes something else that is arguably less useful. I’m talking about the constant streams of analysis and commentary trying to make sense of very nominal price movements – why something went up or down 0.5% today, or even why it is up this morning or afternoon. I believe that this process of trying to rationalize the very short-term, half-daily, or daily moves in most markets is not especially helpful.
Why? Because most of these price movements are essentially background noise, driven by small changes in market sentiment or just random movements. By trying to rationalize all these little moves, we stretch logic’s limits and end up desensitizing ourselves to the real news that is happening around us.
This brings me to a cartoon I first saw in one of Howard Marks’s memos. As the person is sitting there taking in the news, the reporter provides the on-point analysis: “Everything that was good for the market yesterday is no good for it today.”
This really hit home with me. Think back to the last time you heard, “The market is up today as interest rates slipped lower.” That makes sense, right. Then think of a time when you heard, “Interest rates were lower today, but the market fell as investors worried that the economy might be slowing.” The same thing happened, interest rates fell, but it apparently had a different effect on the market. Like the person watching the evening financial news in the cartoon, we are left to conclude that “nobody” has any clue what is driving markets – do lower interest rates help or hurt?
As you know, the answer is complicated. In the long run and “other things equal,” most of us would agree that lower interest rates are supportive of asset prices. However, all this talk in the short term makes us question and wonder what is going on.
So, what do we do? Just turning off the news is probably not the solution. Instead, I think it is important to remain aware of the situation and not put too much weight on the “noise” that is generated by trying to explain the short-term moves in any market.
In the end, all the access to information, news, commentary, and ideas is a wonderful thing. Yet we have to be educated consumers of this information. If you’re like us, it’s easy to fall into the trap of floating along with the narrative of the minute. We’ve found that most often this isn’t helpful in our decision-making. We will leave you with a link to Henry Blodgett’s column that offers 16 meaningless phrases that make you sound smart on CNBC.
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