Tuesday, January 28, 2014

This is Your Strategist Speaking

This is Your Strategist Speaking

When an airplane hits turbulence, many passengers are comforted when the pilot gets on the public address system.  Most often he’ll tell us its nothing to worry about and promise to look for smoother air at another altitude.  We’ve got good reason to be calmed by his explanation because most turbulence is completely harmless, and the pilot has a great deal of control over the aircraft.

As the prices of developing market currencies, stocks, and bond have swooned, the knuckles of many investors are turning white as they grip their arm rests while peering at their computers screens. The 570-point drop in the Dow Jones Industrial Average over the past week has unsettled more than a few stomachs, even though it only represents a 3.5% drop.

At the moment you can’t watch a financial report or read a newspaper without some strategist sagely informing you of the reasons for this bit of financial turbulence.  The differences between the pilot and the strategist are two-fold.  First, the pilot knows what he’s talking about, while the strategist is grasping at straws.  Second, the pilot may be able to do something about the unpleasant bumps, while the strategist is as helpless as you are.

Three weeks ago as 2014 began, most strategists were rather upbeat, and very few had much to say about the Argentine devaluation, Turkish instability, moderating Chinese manufacturing, strikes in South Africa, or the slowing of the Fed’s quantitative easing.   Many emerging currencies have been falling for months, Turkey has been firing and reassigning police officers and judges for awhile, South Africa has had labor unrest for quite some time, and the Fed’s modest cut back in its bond buying program has been well known for months.  It’s hard to imagine that Fed purchases of $75 billion worth of bonds a month was okay for financial markets, but $65 billion is some kind of financial calamity.  Nonetheless, strategists suddenly have the charts, words, and wisdom to explain the market’s recent bout of agita.

There’s so much speculative money chasing stocks, bonds and currencies, it shouldn’t come as any surprise that markets can become unstable without much warning.  There’s probably more psychology than fundamentals buffeting the market.  We like it when those traders drive up prices and make us feel richer, but it’s not so pleasant when they all head for the exit at the same time and drive prices down.

In due course we’ll find put that one or more factors contributed to these unpleasant markets, and some strategists will look prescient. Meanwhile we’re at the mercy of traders and hedge funds who will be looking to make money from the financial turbulence.

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