Built on Facts

Stocks, Bonds, Boneheaded Headlines

Posted by Matt Springer on June 19, 2009
(7)
More »

I have a friend who is also in the science business on the outreach/educational side of things. Last night he and some other friends and I were out on the town (is that what the kids call it these days?), and he mentioned that he liked this site as it’s been while I’m on break from school. Less math. Which kind of surprised me, I didn’t realize I had been doing it. Maybe I do tend to be less rigorous when I’m not actively doing work. In either case it’s about to come to an end, as in about a week I’ll be back at school teaching and getting some research done. There will be math. (But it won’t be bad!)

Right now though I’m going to riff off a Swans on Tea link for the second day in a row, because it points out something I’ve noticed for a long time.

Finance reporting, I think is an especially egregious offense by reporters. Think about it — no matter what happens in the stock market, the reporters will have some cause ascribed to it. And they’re just making it up. Most days the stock market signal is just noise.

I have been following the various markets with a lot of interest ever since the meltdown, especially the bond market as a pretty solid gauge of how the market thinks the economy will be developing in the future. And that observation is entirely correct: market changes with no obvious single causal event will be reported as happening because of some other thing that happened to be going on at the same time. You’ll see things like “Stocks down on job loss report” just as surely as you’ll see “Stocks up despite job loss report”. Often you’ll see both on the same day. It would be much more honest to say that the job report was one factor of an untold number of others, interacting in a very complicated and unpredictable way.

Here’s one from CNN, up at the same time as I’m typing this:

“The Dow slipped and the Nasdaq gained Friday as investors sought to restart the stalled rally, but showed caution as energy prices and oil stocks slipped.”

Which seems to be a pretty dignified and knowledgeable way of saying absolutely nothing. I suspect that if you interviewed the traders on the exchange floors, none of them would give “trying to restart the rally” as a motivation for their trading patterns. It might be good for them or it might not (if they’re in a short position), but either way the market does not work in a “group selection” sort of pattern. Like biology, it’s all in the individual level*. In fact investors colluding to restart the rally would probably be illegal, as it would be a nice way of rephrasing the old pump-and-dump scam.

Whether by accident or design, the current bond market summary starts off better:

“Treasury prices rebounded Friday ahead of a week full of auctions, government purchase operations, and the Federal Reserve’s two day meeting.”

This is just a straight assertion of fact. Bonds are in fact up, and next week that list of things is in fact happening. To the extent that the sentence asserts causality it may be a bit sketchy, but as it stands it’s a lot better written than the stock market summary.

Physics this ain’t, and of course it’s not fair to look at all of life through the lens of mathematical rigor that physics requires. Nonetheless I think it’s fair to ask for some better writing in the reporting on what is after all a very mathematical endeavor.

*Or the gene level, for the Dawkins fans. I’m not informed enough to hold forth authoritatively on the gene vs. individual selection argument, but I suspect that like the Heisenberg and Schrodinger formulations of quantum mechanics, they’re rephrasings of the same underlying idea.

(7)
More »

Comments

  1. #1 Uncle Al
    June 19, 2009

    If you have any model with positive feedback, you are screwed. Economics sums to perfect interpolation and meaningless extrapolation. Sports do it to great effect. Physics happily embraced a tar baby with string theory, now all happy talk wrapping real world disaster. The archetype of criminal hindsight is social advocacy eager to embrace any but empirical “facts.”

    The world is dirty. It can be locally cleansed to great effect. Centralized housekeeping is mathematically unavoidable disaster,

    http://www.mazepath.com/uncleal/comprom.htm

    Keep your problems small, your people near, and isolate the globally powerful on harmless thrones where they cannot interfere. Bubba Clinton being fellated meant much more to the US than hs wife Clitler burning $100 million “reforming” US healthcare. How is that coming along after 15 years of study and analysis, Hillary, as compared to real world efficiacies of Liebensraum and Aunschluss (also centrally mismanaged)?

  2. #2 Michael F. Martin
    June 19, 2009

    You’re write about the storytelling.

    I think you’re wrong about there not being large-scale correlations.

    http://arxiv.org/abs/0903.2099

    There is growing evidence that markets tend to synchronize spatially dispersed clusters of economic activity.

  3. #3 Eric Lund
    June 19, 2009

    You’re absolutely right about the quality of reporting: Financial reporters are among the worst offenders in the “post hoc ergo propter hoc” department. Unless you work for a Wall Street or City of London firm, you do not need to know at that level of detail what CNBC et al. are reporting, and most of what they are reporting is wrong anyway. (See Jon Stewart’s takedown of Jim Cramer.) These days I tend to favor bonds over stocks as an investment. At least with bonds you have a dividend; most stocks don’t, and most day traders lose.

    As for motivations: You are correct that investors are not (at least not openly; I can’t rule out behind-the-scenes manipulation) colluding one way or another to move markets. But Wall Street has a herd mentality: if somebody is making money with a certain strategy, no matter how flawed, then everybody else has to try to make as much money, or more, by a similar strategy. Anybody who follows a strategy, no matter how fundamentally correct, that results in short-term losses while most have gains gets shunned or fired–as the saying goes, the markets can stay irrational a lot longer than you can stay solvent. That’s how bubbles get blown. I’ve already seen at least three financial bubbles (two in this country and one in Japan) in my adult life, and I’m not even in the business.

  4. #4 Greg
    June 19, 2009

    Might “as” in these locutions split the difference between causality and simultaneity?

  5. #5 Comrade PhysioProf
    June 19, 2009

    These financial reporter assholes fucking piss me off to no end! Is there even a single person on the entire planet that hears their nonsensical gibbering and doesn’t roll her eyes?

  6. #6 CCPhysicist
    June 20, 2009

    An economist I know has long threatened to write a book consisting of contradictory explanations of market moves.

    Unemployment went down:
    Bad! Inflation is coming! (if market went down)
    Good! Recession is over! (if market went up)

    Unemployment went up:
    Bad! Recession is coming!
    Good! Inflation will go down!

    You should have seen the real-time blather this morning and evening about the “quad witching hour” that is the third Friday in every Quarter. The markets did nothing.

  7. #7 Stephen P
    June 20, 2009

    Absolutely agreed about the nonsensical reporting. And if they can’t find even a tenuous connection between a small fall and any external event then it’s described as “profit-taking”, as if this meant something.

    If nothing much happens on a particular day, why can’t they just skip the stock-market report altogether? It’s about as interesting as knowing which buses ran to time in Birmingham this morning.