Tuesday, December 6, 2011
Market looks like it's getting it wrong again on S&P move
So, the market is omniscient? The market never lies? The market is an efficient allocator of capital?
When S&P downgraded the US there was a huge, negative reaction in the market. That was irrational because there is no risk of default for the US, a sovereign currency issuer. If you sold on the US downgrade, you're currently underwater.
Now S&P puts the Eurozone nations on Credit Watch Negative (meaning actual downgrades are likely) and the market rallies?? This time the downgrades actually mean something because none of the Eurozone countries are currency issuers and, therefore, they're all are credit sensitive.
Bottom line: the market is not always omniscient, honest and efficient as the neo-liberal economists would have you believe. It can be affected by bad beliefs just like anything else. (Remember the belief that Quantitative Easing was hyperinflationary?)
Most likely, selling into this optimism will prove to be as correct as buying into last August's pessimism.