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Sunday, November 22, 2015

Wanna Be a Market Pundit?

If you want to be a market pundit, you need to explain why markets are doing what they are doing.  To the average person, this would seem to be complicated.  But it's not once you get the hang of it!

The last 2 weeks offer an excellent example.  Two weeks ago, the employment report for October was released; and it was much stronger across the board than expected.  Stocks were expected to rise but instead dropped sharply and continued to drop the following week.  Explanation?  CNBC pundits made it perfectly clear (after the fact):  the surprisingly robust employment data pushed the odds of the Federal Reserve increasing rates sharply higher, thereby increasing economic uncertainty.  And uncertainty is the one thing that markets are fearful of! 

The horrible week ended with the 11/13 Paris terrorist attack, and markets expected the sell-off to continue unabated.  What happened?  Last week stocks had one of the best weeks of the year?  Could it be explained?  Ask CNBC if they had any problems finding people to whom it was perfectly clear (after the fact). Their explanation:  the Fed was going to increase rates and finally uncertainty would be reduced.

The sad part of this is that the pundits believe that they are actually imparting valuable information.  Unfortunately, their audience may come to the same costly conclusion. 

As Nassim Taleb stressed in The Black Swan, pundits in the financial world are adept at creating a plausible narrative for events after they happen--making them seem obvious after the fact but notoriously poor at forseeing big changes in markets.

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