Surely the Market is Smarter Than That

Are we going to make the same mistakes that we made from 2000-20007? Surely not!

Surely the market is smarter than that. Surely it knows how this is all going to end. Sadly, the market doesn't think in terms of smart or dumb (and apparently it also struggles with foreseeable long term consequences). It is more properly a place where people come to place their bets on the next 1 month, 2 months, 3 months or, heaven forbid, 6 months. How else would you explain an avg. portfolio turnover rate among professional money managers of 125%, or the growing attraction of short term momentum strategies. The myriad of market actors - all with different perspectives, all with different incentives - are collectively conditioned by one pavlovian treat. Money. Most market participants know that we haven't solved our long term structural problems, and that major issues loom. But, they have to play the game. And so long as the game is going up (because the Fed and govt are providing the treat), they've got to go along with it. Once again, it reduces itself to a game of musical chairs with everyone betting they are quicker than the other guy. We know how that ends.

It is therefore not surprising that I am really conflicted. On the one hand, I can see the market wising up to the false signals and artificial imposts, and after attracting the last of the bears in, taking us down to a real gut-check level. On the other hand, it also wouldn't surprise me if we simply had a little consolidation, before taking the next leg up in another upcycle (ie. business as usual). I think both scenarios are about equally possible, with a slight nod to the latter because of the current momentum in the system.