Chapter III.
Greenspan Conundrum and Bernanke Global Saving Glut.
Paragraph 5:The State of Long-Term Expectation.
However, the penchant of humans for quirky, often irrational, behaviour gets in the way of this conclusion. A discontinuity in valuation judgement, often the cause or consequence of a building and bursting of a bubble, can occasionally destabilize even the most liquid and flexible of markets.I do not have much to add on this issue except to reiterate our need to better understand it."
Globalization and Innovation.
At the Conference on Bank Structure and Competition,
sponsored by the Federal Reserve Bank of Chicago, Chicago, Illinois
(via satellite)
May 6, 2004
Abstract:
This Paragraph kills that idiotic belief that Market predicts the future.
Here I am going to shoot one of the bases of the support for the ideology of capitalism. It says that market have a predictive capacity. People should be aware of the fact that markets don't have expectations, people do and markets don't.
This anthropomorphism of market is a puzzle. How many times have you heard the market is buying or the market is selling: market doesn't buy or sell, for every buyer there is a seller and for every seller there is a buyer. Did we hear that the market has lost $1Billion? Market does not create money and does not destroy money it does not make or lose money; it transfers money from the buyer to the seller point. Market does not create or destroy assets it changes their prices.
In order to have expectation Market should discover a price that clears the demand and offer both today and tomorrow. It is mathematically impossible.
If Markets don't have expectations they don't have predictive capacity. They simply clear today's demand and today's supply.
If the Market does not fund a venture, it correctly predicts that, because it didn't provide it with money it will never succeed.
A striking example was the price of bonds in 1981 and all the period that followed. The yield on the 30 years US Treasury Bonds was 14.50% around which put what Alan Greenspan calls justly the so-called forward rate for overnight money in 2008 at about 14.5% when this rates today are at 0.00%. For predictive capacity the weatherman does better everyday!
One researcher at the FED even found predictive capacity in the yield curve for recession. That is right when the FED keeps the yield curve inverted it causes recession. If someone points a gun at someone else with the intention of killing him, he can correctly predict that the man is going to die. We call him a murderer though not a prophet.
Market does not reward innovation: if something is a true innovation people don't understand it, there is no demand for it and Market can't price it. Innovations are about Ideas they are beyond the capacities of Market.
Market rewards only technological improvement.
This belief in the predictive capacity of the Market is so entrenched in the American ideology that a security agency has imagined a Market for terrorist risk. For some reason the aggregation of the opinion of people who had no idea about security multiplied by the size of their portfolio would correctly predict a terrorist act. That is ludicrous. In the end they didn't do it, not because it was inefficient, it was just immoral! As far as Market goes, a terrorist that plans a widespread attack can short the stock market or buy puts and unobserved make much more money.
So it might come with a shock for some: Market is not God!
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