Wednesday, March 18, 2009

Black magic

I don't pretend to be an economist. But when it comes to the stock market, I think my opinions (read: guesses) are every bit as good as those of the practitioners of the dismal science. I get an image of folks in black robes dancing around a cauldron, muttering spells and throwing in eyes of newt, toes of frog, poisoned entrails--anything to stimulate the economy--and, in their heart of hearts, simply hoping for the best.

Here's an example of what I mean:

"Historically, rallies within bear markets have lasted about two months, or just over 40 business days from the establishment of a bottom," said Andrew Pyle, investment adviser at ScotiaMcLeod in Peterborough. "Based on that, we would appear to be in the early stages of one, although rebounds in a declining market have lasted much less, as seen last year."

We hear this sort of thing all the time. It's like the ticking of a clock, background noise, the sound of breathing. It's a blur of concepts. That expert really seems to know what he's talking about. It's colour commentary on an economy gone sour, part of the play-by-play, Jim Hughson in a three-piece suit.

And it's bunk.

The stock market is a form of gambling, and like other games it's largely about psychology. The economy can do well, but the stock market poorly, and vice-versa--there is a loose association between the two, but nothing is guaranteed. Obviously a healthy economy encourages people to invest, which contributes to an even healthier one, but also to risk-taking, corner-cutting, the invention of incomprehensible financial instruments, and indecent over-exposure, as everyone tries to get a piece of the action. Then someone or something puts a pin in the balloon, and we start all over again.

But the point is, there's no science at the core of any of this. It's a game of chance.

Look at the paragraph quoted above. "Historically" is the first word. I always wince when I see it. If there were really rigid laws to be extracted from the vast complexity of transactions, feelings, circumstances and communicated insanity that is the stock market, that would take all the fun out of it. Wouldn't it? Looking for patterns in history is a mug's game. There are no laws, no patterns, no regularities, just wiseass folks playing various systems, and we all know, or should know, how those work in Vegas.

Rallies, we are told, like sunspots, last for a predictable period, in this case 40 business days after a "bottom" has been "established." It is written. Well, no, actually it's not. We "appear" to be in the early stages of a rally (safe to say after the last six days of, well, rallying), but, as last year showed, it can be less than forty days. And, of course, when the herd begins to believe in recovery, that self-fulfilling prophecy will produce a "rally" that could go on for months or years.

In other words, things may be getting better--after all, the TSX is up 13% or so in the past week--or they may not. The "rally" could be of short or long duration, if in fact it is a "rally" at all (our expert won't commit himself, using the word "appears"), because that's what history teaches.

I can talk like that. Make me a CEO, and keep those bonuses coming. Never mind the nasty threats that Congress is making to all those AIG instant millionaires--a 91% tax will still leave a lot of money to fire up the yachts. Executive overcompensation, in fact, seems to be the only sure thing in these uncertain times.

I admit it: I'm an econopeasant. Rebuttals from those in the know are welcome. Just don't talk like Andrew Pyle.

No comments: