It is not easy to be precise about where the virtuous cycle ends and the double-counting commences. Sometimes there is overlap, and sometimes it’s all the same. Yesterday’s market, for example, may have contained a bit of double-counting. One of the drivers behind the 170-point rally, supposedly, was business sentiment data that was released around the beginning of the trading session. The referenced survey, conducted largely in the weeks leading to Election Day and official QE-2 messages, very probably reflected the positive vibe that was already in the airwaves (and the market) about that time. Both the election results and subsequent central bank activity were anticipated, discussed, and in no small part responsible for a substantial and prolonged market upswing leading into the October weeks. For the market to surge anew, today – as a result of surveys that were taken approximately at that same time – is to behave as though the original run had not occurred.
Of course, some of the confusion I feel may have to do with causality. The powers that be have in the last several months of policy making and high frequency trading turned causality on its head and upside down. It used to be that the market reflected underlying economic conditions. With QE-2, it is explicitly hoped for the reverse: that the economy will begin to reflect the market instead. And with high frequency trading now constituting some 70% of daily volume, there isn’t much thought to causality per se, or really to anything, but there is rather an ongoing reflex action based on immediate momentum. It seems as though – with monetary policy and machine trading now dominating the market’s pricing mechanism – efficiency is not quite as advertised. Each day I entertain graver doubts about this point, and have explained my skepticism in this space before.
I think, as well, there is another dynamic at play, and the idea came to me as I stumbled upon this blurb (The Curse of Perpetual Nowness) by technology investor and blogger, Om Malik: “… in our constant quest for the hottest, newest, trendiest, sexiest, we suffer from a collective cultural amnesia about what happened five minutes ago.” The statement is self-contained and requires no further elaboration, but I believe it to be reinforced – or, rather, augmented – by a recent article (Giving Every Person A Voice) on Fred Wilson’s A VC blog. In it, the case is argued that one of the Internet’s greatest contributions to society has been its creation – through public broadcast platforms such as for blogging and micro-messaging – of a podium from which all have the ability to hold forth. (Exemplified by my own blogging podium, this is true.)
Here, we should draw an analogy: On one hand, the flow of real and unreal information, valid and invalid ideas, in short, the great noise that has become the Internet; and on the other hand, market liquidity that is forever pumped. Maybe there is in information also a degree of efficiency that is subtracted from the waters, as it were, by too much flow. And if we were to draw another analogy, along similar lines, between high frequency trading and high frequency communication (e.g. Twitter), then perhaps here again the high frequency of missives has a distorting impact. In other words, it is possible that excessive volume and a frenzied pace, rather than adding to the collective’s access to information in fact has the opposite effect. I think this may be what Om Malik was suggesting with The Curse of Perpetual Nowness.And just as a “perpetual nowness” betrays limited attention and fragmented thinking in our every-day activities, perhaps the same is true of the markets and their limited continuity, their fractured causality and follow-through, that seem increasingly to prevail. Maybe the markets, on certain days – more often, it would seem, than otherwise – are living strictly in the moment.
Disclosure: No positions.