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Monday, November 17, 2008
Gnome-o-gram: The Indiana Jones Economy
Mutt: Well, what's he gonna do now?So what's been happening with the stock market recently? Some observers have been calling the recent sell-offs and volatility an “Obama Market”, but that seems like nonsense to me. Markets discount information known to them in advance, and for more than a week before the election, the Obama President contract on Intrade was trading above 90%, and it never dipped below the 70s for more than a month before the election. So, I believe Obama's winning was priced into the market well before the election. (And hence it may be valid to attribute part of the pre-election sell-off to the expectation of his being elected.) But after the election, there haven't been any shifts in economic policy from the Obama camp which would justify the market pricing in different expectations. It seems to me that what's happened over the last couple of weeks is the realisation that Treasury and the Fed, like Indiana Jones, are just making up stuff as they go along, and have no coherent model or plan of action and have, in fact, not even followed the plan for which the US$700 billion was voted. That's what I think the market has been pricing in, and why we're seeing enormous swings both up and down on a daily basis. Just take a look at the CBOE Volatility Index; this can be taken as a measure of the extent to which investors, with their own money on the line, believe that there is no coherent policy in place to respond to the grand deleveraging now underway.
Marion: Hah! I don't think he plans that far ahead.
Posted at
23:49
