Think You're Smart? Markets Are Laughing
Once again, the markets prove that nobody knows nuthin'.
Following a bit of oil-driven turmoil the past few weeks, financial markets took off on Wednesday and Thursday. The Standard & Poor's 500 Index had the biggest daily back-to-back gains since March 2009. Underinvested fund managers, short-sellers and even long-only, fully invested money managers worried that they didn't have enough global equities.
Once again, Mr. Market has confounded so many of the world's smartest investors.
Capital markets are thought of as a mechanism for buying and selling long-term debt or equity-backed securities, but that definition falls short. Mr. Market is a philosopher, a patient teacher to those who come to class aware of the wisdom on offer. The lessons for those who pay attention to this graduate-level philosophy class are rich, deep and highly counterintuitive.
As you read the many predictions for 2015, do you remember how many strategists were forecasting a collapse in crude oil prices at the start of the year? That’s right, precisely zero.
Recall the beginning of 2014, when 72 out of 72 economists were anticipating higher rates and lower bond prices. How did that work out?
As we noted a few years ago: “Pundits may hate uncertainty -- it tends to makes them look foolish -- but markets harbor no such bias. In fact, markets thrive on uncertainty. It is their reason for being.” Look at any collection of forecasts, and try not to laugh too hard.
Look, I am not referring to the usual errors and biases to which you are subject. That you are a mass of wetware malfunctions, off-label usages and failed heuristics is a given. Instead, I refer to the false narratives you concoct to rationalize what is happening as way to get through your professional day. Your reality is an artificial construct, your sense of self is a miasma of chemical reactions, your world is full of false beliefs and erroneous assumptions. You are a massive biomechanical errata-creating device.
Whenever I hear the phrase "uncertainty," I can't help but snicker. Most of the time you live in a fantasy world of your own making. You imagine you understand what is happening. You pretend you know what is to come. You actually believe you have control over future outcomes. All of this is, of course, utter nonsense. Yet you exist in denial until events force you to confront the fabulist within.
Uncertainty is misunderstood. It only ends when you admit that you know little, have no idea what is to come next and have absolutely no control over future events. And that scares the living daylights out of you. Your coping mechanism is to start spouting some of the usual nonsense about uncertainty, rather than admit the truth.
This was the choice offered in the film, "The Matrix": You can swallow the red pill or the blue pill. The blue pill maintains the illusion of control. Very few of you opt for the red pill, preferring the comfortable fantasy over harsh reality.
Those of you who continue to insist you can even remotely forecast what might happen next continue to reveal incredibly foolish, thoroughly disproved beliefs, despite an overwhelming avalanche of evidence that you haven’t the slightest idea what the future holds.
There is a Yiddish expression that loosely translates as, “Man plans, and God laughs.”
Mr. Market finds it hilarious that you even think you have a clue about what is unfolding before your very eyes. Hindsight consistently demonstrates beyond any doubt that you don’t.
Have a happy and safe new year.
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Barry L Ritholtz at firstname.lastname@example.org
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