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What does Mr. Market want (and should we even care)?

Posted By Barry Ritholtz On July 13, 2004 @ 11:55 pm In Finance | Comments Disabled

Whenever a new phrase enters into the investor’s lexicon, pay close attention. Given Wall Street’s echo chamber-like tendencies, the continued repetition of a phrase eventually leads to a crescendo. This climax will occur sometime after the maximum impact of the oft-repeated phrase has worked its way into prices already; By the time the herd starts acting on this new idea, the odds favor it will to be at the exactly wrong time. The crowd latches onto new memes when it is too late to have any value to them, save as an emotional salve.

The latest phrase making the rounds is: “The Market wants ___.” Or this thematic variation: “The Market’s not happy with __.

It gets said about Iraq [1], repeated about inflation, reiterated regarding oil prices [2]. The President’s diminishing re-election chances [3] is merely the latest reworked version. Yet even a cursory review of these issues reveals that they have been problematic for many months [4]. The Markets have long since discounted the impact of these into its pricing.

Why the sudden fixation on what Mr. Market [5] wants?

And besides, how much do we really want to pay attention to what the equity markets want? They reflect the collective hopes and fears of millions — hardly the source of thoughtful contemplation. As such, Mr. Market suffers from severe personality disorder. He morphs from a tantrum-throwing infant into a hormone-addled teenager over the course of weeks, if not hours. He’s too impatient to even wait for immediate gratification. Equity markets easily become rife with reckless speculation, the teenage equivalent of their own sense of immortality (pick one: momentum trading or drag racing?).

Is this really who we should be taking our marching orders from?

Indeed, a closer look at what Mr. Market wants reveals it to be untenable: He desires no capital gains taxes, 0% interest rates, endless stimulus. He hates regulation, is big on deficit spending, does not care much for shareholders’ rights. More, more, more: Mr. Market craves multiple expansion, ever-increasing profitability, still higher revenues. He has no problem with accounting fraudjust don’t get caught. He’s happy to engage in warfare, so long as we win quickly with few casualties. He wants certainty about the future, comfort with the present, rosy nostalgia about the past.

In short, Mr. Market wants most everything he can’t have — which is the real reason Bond Markets exist – to be the adult supervision for equity markets.

What Mr. Market wants may impact the short run, but in the long run, it simply does not matter. He will have to adapt to changing conditions – just like the rest of us.

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URL to article: http://www.ritholtz.com/blog/2004/07/what-does-mr-market-want-and-should-we-even-care/

URLs in this post:

[1] Iraq: http://bigpicture.typepad.com/comments/2004/05/terrorism_oil_t.html

[2] oil prices: http://bigpicture.typepad.com/comments/2003/11/oil_prices_appr.html

[3] diminishing re-election chances: http://bigpicture.typepad.com/comments/2004/05/market_adapting_1.html

[4] many months: http://bigpicture.typepad.com/comments/2004/03/geopolitical_te.html

[5] Mr. Market: http://www.buffettsecrets.com/mr-market.htm

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