Wednesday, December 12, 2007

Squealing Away

This morning's bold central bank announcement will be seen by some as a capitulation, by the Fed and its counterparts, to yesterday’s negative knee jerk reaction to the Fed’s ¼ point rate cut decision. To see the announcement as such is na├»ve. Picture the scene: the Fed members sat around last night wringing their hands in woeful lamentation wondering why Wall Street just doesn’t understand us? Nonsense.

The decision this morning is part of the next phase, a series of steps designed to create the game that will be, the Magic Formula*. Like a pig stuck in an investment fence, however, some “investors” want the game that was to be restored asap while this Fed wants the game that will be to emerge*. To understand the difference between the two is to understand the tug of war that erupts every time this Fed chooses not to go back to the game that was via a bailout of bad behavior.

The principal reason why certain “investors” want to reestablish the game that was has much less to do with their crocodile-tear concerns re the real economy and the threat of a recession and much more to do with one simple, logical fact of human nature: When many have made a fortune playing the game a certain way, when their trading systems and information networks have generated seven, eight, even nine-figured incomes, they will do everything in their power to restore what was using any and all means possible, including those like-minded shills in the media.

Investment Strategy Implications

This Fed is attempting to walk that fine line between the real economy effects of the credit squeeze, the moral hazard consequences of a bailout, and the risks that inflation eminating from the global growth story poses. Therefore, it is advisable that real investors, those interested in making investment decisions with a time horizon beyond the next media sound bite, try to best understand the global macro context that policy decisions are being made in. It is also advisable not to become consumed in the moment (what behavioral finance experts call the “availability heuristic”, also known as “recentness”**) at the expense of the larger context as noted in yesterday’s simple stock market balance sheet.

It may be upsetting for some to hear but this far from perfect Fed does know something.

*see blog posting “Searching for the Magic Formula”, November 29
**see blog posting “Just How Smart is the “Smart Money”, May 29

1 comment:

Anonymous said...

There are no unbiased commentators in this business, Vinny. Everything written or spoken attempts to advance ones agenda one way or another. We agree the chagrin expressed (a "pout" if there ever was one) over the Fed's recent move was triggered by a perceived loss of advantage by certain players.