Thursday, December 1, 2011

Animal spirits and the stock market

The recent dramatic surge of 490 in the stock market over the news regarding the Fed and other central banks to lower the cost of banks outside the US to borrow cheaper dollars from their central banks is a head scratcher. First, the liquidity swaps are only related to European money markets and have absolutely nothing to do with the fundamental causes of the debt crisis - too much government spending. Second, it is a short term patch expiring in February 2013. Third, it is another slap in the face of finance fundamentals as taught in our universities. The price of a stock is supposed to reflect the market's long term assessment of the value of the firm rather than a short term temporary action (unless that action has a long term impact). Certainly it is true that the profitability of American internationals are dependent upon European markets. But I have seen little evidence that the resolution of their current liquidity crunch would have a great impact on firm profitability. It is similar to the volatility in the market that learned observers have attributed to the Greek financial crisis. Nonsense. Greece is a rounding error and its default would have little noticeable impact on US financial firms and internationals. It is as though those learned analysts are grasping at straws to come with an explanation as to what is going on in today's markets. I guess they cannot tell the truth which is "I don't know."


Anonymous said...

A favorite quote of mine, "The market can't tell you anything. Half the people in each transaction are wrong."

H.A. Black said...

Or both could be correct. When a deal is struck it is only because both parties feel that it makes them better off and they both can be right (or both wrong). If you buy a car at or below your reservation price you get a good deal. If that price is profitable for the seller, then that is a good deal. However, if neither condition is unmet then no deal occurs. Oc course this is all ex ante and negotiated. Ex post may tell a different story.