The Deal and the Dive: Using Occam’s Razor to Parse the Results

I don’t get why people make this so complicated.

We got a deal. Stock market investors didn’t like the deal.

Not surprising: It was a profoundly sh***y deal that ensures somewhere between sh***y growth and a second recession. (I guess stockholders believe in the stimulative effects of stimulative government spending…)

End of explanation, no?*

Except (contra Bill Gross): government bondholders loved it — a flight to safety goosed their wealth circa 10% (real and almost instantaneous), and no inflation in the foreseeable future (possibly quite the contrary). Rockin’!

* There are lots of other (remarkably contorted) explanations out there, but one of the stranger ones: the one-week, 17% dive starting when the deal happened was actually a result of equity investors all of a sudden getting super concerned about all the (supposed) rampant regulation under Obama. Cause, uh…there was a big sudden change on that front. Or…they just hadn’t noticed it before, and now that the deal was cut, they didn’t have anything else distracting them. Or, now that their confidence had been boosted, they…oh, I don’t know.

Update: Pre-emptive response to “Look! They gained confidence so government bond prices went up!” If the confidence fairy were at work, bonds and stocks should have gone up. So that explanation makes no sense. Unless — the deal increased confidence in government, while decreasing confidence in the private sector. Is that what you want to argue?








4 responses to “The Deal and the Dive: Using Occam’s Razor to Parse the Results”

  1. JazzBumpa Avatar

    The alternative explanation is that the debt limit deal and the downgrade have absolutely nothing to do with market activity.

    There is good news and bad news every day. Pundits can always find something to connect a move to. But they have to ignore everything that doesn’t line up. Sometimes they get lucky, and a big move happens along with a big news story — by coincidence.

    The bond move is clearly a flight to safety, and the stock decline is clearly a flight from risk. But markets move to their own rhythms, fueled very largely by emotion. Assigning exogenous causes to market moves is a highly suspicious, and possibly specious activity.


  2. Asymptosis Avatar

    @JazzBumpa “The alternative explanation is that the debt limit deal and the downgrade have absolutely nothing to do with market activity.”

    Very true. Could have just been the market sloshing around. But sometimes the timing, and the magnitude of the presumed cause, makes a coincidence seem profoundly unlikely. In this case: major (shitty, growth denying) budget deal in the midst of a weak economy. Bonds immediately spike, stocks tank. A guy’s gotta wonder…

    I’d just add that technical analysis (waves, etc.) is seen by many as equally specious…

  3. Big Sis Avatar
    Big Sis

    You’re ignoring the gorilla, which is the EU. Either the Euro will fall apart, or Europe will go through a forced march to being a integrated political, economic unit. And the latter seems, well, unlikely. But basically, the only way countries like Greece, or even Italy, can manage is if they are able to have a monetary policy that fits their economic circumstances. And that ain’t going to happen under the ECB. And if/when the Euro falls apart, that will be a BFD.

    I’m quite sure that I’m not the only investor in the world who is basing decisions based on this simple (and widely understood) observation.

  4. Asymptosis Avatar

    @Big Sis
    Yeah but the only big news on the eu front before the slide was the Ecb announcing big bond buying support.