Archive for February, 2010

The Market’s Recent Volatility According to Keynes

Keynes’ General Theory of Employment, Interest and Money remains a timeless classic from which all investors can learn much. For the reader who is in a hurry, skip forward to Chapter 12, “The State of Long-Term Expectation” — it’s a solid standalone read. Keynes explains much of what an investor needs to know regarding how markets work, especially whether or not those with the greatest influence on prices are concerned with short-term speculation or long-term intrinsic value. (Take a wild guess on what he concludes.)

Given the market’s up-and-down 1-2% per day behavior for almost the past trading month, I thought readers might enjoy the following classic snippet of wisdom from Chapter 12:

In abnormal times in particular, when the hypothesis of an indefinite continuance of the existing state of affairs is less plausible than usual even though there are no express grounds to anticipate a definite change, the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid basis exists for a reasonable calculation.

Which means, in short, that the market’s ridiculous volatility is a sure sign that there’s not a single swinging talking head out there that knows what 2010 will bring — but this doesn’t stop them from queuing up for their 5 minute blabfest on CNBC so that each “expert” can, in succession, contradict the opinion of the one who spoke before.

Special Bonus: For those of you whose minds roil with virulence at the very mention of Keynes’ name, here’s another quote to help you better understand your agitation, courtesy of Jonathan Swift:

When a true genius appears in the world, you may know him by this sign, that the dunces are all in confederacy against him.

If you’re motivated to learn more about Keynes’ contribution to economics, I recommend Bob McTeer’s excellent article from December 2009 “Why Fear Keynes?” Among his many career accomplishments, McTeer spent 14 years as the President of the Dallas Fed and was a member of the Fed’s Open Market Committee. He knows his stuff, and his blog articles are excellent.

Categories: Market Commentary