Friday, March 5, 2021

Financial Market Disconnected with economic reality

Lately, articles about the discounting of financial markets from economic reality have begun to be frequented. From economists to left-wing politicians, he warned how markets today are getting more and more away from the real economy they are supposed to represent and reflect.

Covid-19 spreading around the world makes experts increasingly convinced that financial markets have completely moved away from the real economy. The movement of indices in the world is divergent from the movement of economic indicators. As the world confirmed the recession, indexes such as the Dow and Nasdaq set a fantastic record for gains.

K-shaped recovery

Many experts are beginning to worry about the occurrence of K-shaped recovery, where the post-depressive economic recovery will run ambivalently: wall streets rise, while main street declines, forming two branches like the letter K.

As we understand from the Efficient Market Hypothesis, information, sooner or later will be translated into the price, the sooner the information is translated into the price, the more efficient a market.

The main source of information is the performance of the company itself. Whatever rumors, news, policies, and suggestions, as long as it does not directly affect the company's performance is irrelevant information and should be ignored by the market.

When non-relevant information is used as the main benchmark in the translation of the price and value of an issuer, then definitively the issuer has been divorced from the root of its business performance and the value / price is no longer a reflection of the business it runs.

If this happens massively, then the market itself has undergone a dissection of the economic reality it is supposed to represent.

Is this dangerous? Not always, as long as all who "play" realize that the exchange has changed face, from a "means of investment, while occasionally speculating", to "Alternative to World Series of Poker" aka "gambling house".

Which is dangerous when many people are still unaware of this reality and discounts, so still naively assume the exchange (or issuers at stake) still reflects the real economic conditions.

Gamble with probability

Our rush to place bets, until the bidding pot on the table is so large (and the stock price becomes so high!), indicates that we no longer care about business performance, no longer care about the quality of hand cards in hand. All we do is a naked bet, bluff each other, and bet-raising each other, if necessary until all in, while hoping kartu2 flop, river, and turn side to our advantage.

Again, it doesn't matter if we who bet realize that we are indeed betting, are playing poker, are gambling with probability.

Again, the problem is when some of us play on the table but forget to realize that they are playing poker, not saving stocks, or investing.

Because if we err to realize it, then let me quote a well-known adagio in the casino business:

"House always wins"

Even professional gamblers are unable to fight "the owner of a gambling house", let alone the naïve who do not even realize that they are entering the slaughterhouse, under various guises.

Profit or loss, please let's all remain cautious.


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