Tuesday, 20 January 2009

Ignoring the stockmarket

There's an interesting throwaway line in Andrew Hill's Lombard column today:
The government must also learn to ignore the whining of the stock market. RBS's slide yesterday reflects the one consistent message from public interventions since the credit crunch began: that shareholders tend to lose out. They could lose out again. But equity market volatility is not a sure-fire sign of whether yesterday's plan (let alone the banks themselves) will succeed or fail. That must be measured in other ways.

I'm not saying anything new here, but it is interesting how quickly we (with the aid of the financial press) grasp market movements that are flickers on the screen in the long run as evidence of... err... anything we choose. Much as I believe that you can infer very little of genuine value from short-term equity market moves, I still find myself looking at them, and sometimes subconsciously feel they validate a particular opinion or other of mine. That little bit of data helps flesh out the narrative we have about a company, trend or issue.

But actually, as Mr Hill suggests, often the best strategy is to shut it out. There's apparently evidence that people who check their portfolios a lot are unhappier, and make worse trading decisions - though they no doubt feel that they are 'managing' the problem. At the corporate level, I suspect many people would these days argue that fixing the chief exec's attention on the share price is actually a dumb idea. Broadening this point out a bit I wonder whether agency theory has a lot to answer for - it may have led us to 'fix' the principal-agent problem in a way that has made things worse.

And finally, is there any way we can counter the idea that the stockmarket is a barometer for economic performance more generally? All we are actually looking at is the consensus of views of those who hold shares of the value of companies that issue shares. There's a lot more to what happens in society than that. (Nice quote from Robert Shiller on this here).

PS. On an unrelated point, is it simply a massive coincidence that the banks' shares have gone all roller-coaster on us so soon after the FSA's shorting ban ended?


Charlie Marks said...

The government won't be able to ignore the deterioration of sterling...

The FT's gone a bit mad of late. Only the other day there was an article entitled "Shoot the bankers, nationalise the banks" - which makes me wonder whether there a Trotskyist group practicing entryism(!)

Tom P said...

yeah I saw that piece!

Steven_L said...

Could you argue it is a coincidence they timed the short-selling ban to end slap bang on bank reporting season?


As for the decline in sterling, if RBS has assets weighted towards foreign currencies (mortgage securities, corporate paper etc) and liabilities weighted towards sterling (your savings account, borrowings from the B of E etc) then a devaluation will deleverage the balance sheet.

Devaulation will also help our trade deficit, spark inflation (especially if deleverageing/quantitive easing/gvt control of the banks get lending going again) reducing consumer debt in real terms and encourgaing consumer spending.

This is my latest theory, although I'm worried I might be going mad for thinking anyone actually knows what they are doing here.

Then there's the 'Iraq' theory - that the gvt are just doing what the yanks tell them to - part of the deal for them to bail out AIG?

I am turning into a conspiracy nut I think, so much for quitting smoking I'm off to the garage for some fags.