Tuesday, March 20, 2012

Foresight in Hindsight

At least our day-to-day economic indicators go up and down entirely based on rumors and expectations. Yesterday an Australian mining giant, BHP Billiton noted that Chinese orders for iron ore were weakening. Hysteria whipped across the world immediately. The value of the Australian dollar fell. Why? I’m told that the Australian dollar is an early indicator of the Chinese economy’s future performance. Notice the circularity here. It’s not that the Chinese economy has tanked; no. It’s expected to tank; and when it does, the Australian dollar will (presumably) reflect that; therefore sell that damned Australian dollar now, before it has time to signal that China is starting to tank. Wow! The New Zealand and Canadian dollars also immediately lost value—these countries being big traders with China. Crude oil also slipped in  price—after all it is China’s demand that keeps the price up. Commodity futures prices dropped as well.

The longer a person’s or institution’s time horizons, the more intelligently each will behave—but that applies to long-term views. The reflex behavior of markets to indicators, hints, indeed to mere omens of change is driven by something rather low—the same urge that brings ducks to the edge of the pond when someone appears holding a paper bag. Everybody tries to guess the future and act a few nanoseconds earlier than anybody else in anticipation—not of real events, exactly, but of the anticipated mental reactions of other traders. And this is called sophistication. It is before this superior duck-style wisdom that we bow and scrape and look up in admiration at the Lords of the Universe.

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