In a new project at Bloomberg I will interview some of Wall Street’s most influential thinkers. I’ll share more details with readers when we get closer to a launch date, but several consistent themes have become clear to me, even at this early stage.

The one I want to discuss this morning is the concept of noise.

Longtime readers of mine will recognize this theme from years ago. “Lose the News” is now almost a decade old; more recently, I discussed how to “Reduce the noise levels in your investment process.”

In speaking with strategists, money managers, economists and analysts one pattern that rapidly revealed itself was the schism between the commentariat and the markets. The noisy, click-hungry, traffic-seeking headlines of the online and TV financial news media often have a very different tone, focus and punch line than what is going in equity and fixed-income markets themselves. Indeed, the divergence between markets and the coverage is a key takeaway from these interviews.

I can’t emphasize enough the problems that investors succumb to due to the human love of narrative (see this and this). We can find smart articles and insightful commentary online, but when taken in its totality it is little more than a cacophony of headlines, conspiracy theories, invalid logical arguments and other distractions. It is impossible to keep up, much less debunk, the never-ending series of myths produced by the noise machine.

Here is a perfect example: U.S. equity markets hit bottom more than five years ago. The rally since then has produced a gain of about 175 percent and counting. During this run-up, the noise has led readers to expect the coming collapse back into the abyss and recession. The Federal Reserve’s zero-interest policy and quantitative-easing program were going to turn us into a third-world nation. That then morphed into how overpriced the equity markets had become, followed by a series of bubble arguments. Then about three years ago, the doomsters began saying the market had reached a top. The bull move was all but over, get out now before the next crash. It’s 1987! No, it’s 1929!

Yet the entire time, the markets have continued to rise.

Why is that? Markets respond to a variety of factors: Sentiment, valuation, liquidity, trend, demand, risk appetite, etc. At any given time, one or another of these, or some combination of them, is dominant.

The noise on the other hand merely reflects whatever meme is popular at that moment. The commentariat often resembles a hall of mirrors, with both good and bad thoughts and ideas getting bounced around and reflected continuously. Only on rare occasions, does the net result correlate with what is actually occurring in markets. Those instances seem like coincidences.

What purpose does all this noise serve? My conclusion after speaking with thoughtful, data-driven people is that its main purpose is to help create a two-sided market.

What noise are you listening to?

 

Originally published here

Category: Apprenticed Investor, Cognitive Foibles, Financial Press, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

4 Responses to “What You’re Hearing Is Noise”

  1. VennData says:

    Paul Kasriel talks about how he stopped reading the WSJ a while back.

    http://www.ritholtz.com/blog/2014/04/enquiring-minds-want-to-know-is-david-malpass-correct-about-fed-tapering/

    I stopped about four years ago. Angry types still forward the opinion pages too me, easy to shred their halfassed screaching about Obama, as easy to lambast as a Fox News pack of impeachable offenses. In spite of its recent flipflop on Obamacare

    http://www.newrepublic.com/article/117306/wsj-obamacare-editorial-supports-aca-fixes-slams-conservative-critics

    It was THE traditional general Business paper, the Murdoch political bias seeps into everything. I wonder how much less the bankers you’re interviewing are reading it. The same news is everywhere.

  2. Rob Dawg says:

    I can think of no better example than the MBIA purchase and refinance weekly number. It isn’t even a “number” as it is so drastically seasonally adjusted. The 4 week moving average might have some value but sadly it is the weekly snapshot that moves markets.

  3. lburgler says:

    You should look into noise as it is related to the newspaper media model and devastated media budgets. If you can’t hire reporters, the only way to fill the empty space between the ads is (1) with garbage, (2) with regurgitation.

    I think the prevalence of garbage and regurgitation created a ripe environment for mob effects/herd formations. If one person writes a sensational headline, and there are ten people waiting to chew it up a little and cough it back out, then it tends to snowball in ways that it previously hadn’t.

  4. NMR says:

    The problem is largely politics supplemented by commercial entities with a product to sell. This noise is then amplified by the media who want to lead with bleed. Unfortunately, you can’t shut the noise off because if you’re going to make reasonably intelligent investment decisions you need to have some sense of what’s going on. The average Joe imho has next to no capacity to sort wheat from chaff (apologies for mixed metaphors). Frankly I couldn’t give a damn.