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Market Begins To Internalize Reality

Market Begins To Internalize Reality

Summary

  • The financial media is beginning assign blame to the recent stock market weakness to the spike in COVID cases and the potential for a November Democratic sweep of the White House and both chambers of Congress
  • Nothing new to GMM as we have been on this early and stood alone
  • The stock market’s valuation is at a historical extreme
  • The stars are aligned for a nasty and protracted bear market. Timing is anyone’s guess
  • The Fed has created an asset scarcity induced stock market bubble, similar to the Beanie Baby bubble of the late 1990s

In graduate school,  Rudy DornbushJacob Frankel, and Michael Mussa, all giants in the field of macro and international economics,  gave a seminar to our economics department.  I was invited to dinner with them along with the department’s international economics professors.  The one take-away from that dinner was a comment seared into my mind by Jacob Frankel, who went on to become the Governor of the Bank of Israel  and now serves as Chairman of JPMorgan Chase International.

Why Markets Do What They Do

Over dinner, he laughingly mocked the financial media for their propensity to assign specific reasons for why the market did what it did on a daily basis.  He quoted two diametrically opposed and contradictory headlines, one from the NY Times and the other from the LA Times, which explained why the market was down that day.   That comment has stuck with me throughout my career — nobody knows what really causes the stock market to do what it does on a daily basis.  The best, and the safest explanation I have heard on a down day, for example, is  “there were more sellers and buyers,” which doesn’t even suffice.  The comment should be qualified, “there were more sellers than buyers at yesterday’s closing prices.”

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