Two big moves in the market in the past couple of days have offered delightful examples of the role of stupidity, ignorance and humanity in the markets.
One deals with wheat, the other with European equity markets.
They’re both perfect examples of why the rational markets hypothesis doesn’t work in practice, since it doesn’t include the fact that about 70 percent of market participants are clued-out or in denial most of the time. It’s why we often get big market moves.
THE WHEAT EXAMPLE
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Look at what’s happened to wheat prices in the past couple of days. Big boot downwards. Why? Because Russia has announced that it will be allowing exports of grain again, something it banned last year when drought and wildfires dried and burned up much of the crop, which is usually a major export source. Â As of July 1, Russian wheat will be back on the market.
I saw stuff about this all weekend on Bloomberg TV. And nobody seemed shocked. Because everyone knew this was coming. So that reality should have already been factored into the market.
Except that everyone didn’t know, because lots and lots of people just don’t pay attention, then panic when they hear something like this. Who the heck that trades wheat futures didn’t know that Russia was extremely likely to start exporting grain again, now that a decent crop is in the field and there’s enough supply for hungry Ivans? Apparently quite a few people.
So when the markets opened in Europe Monday morning, wheat prices tanked because of this surprisingly shocking development, and canola got sucked down in the downdraft. U.S. markets were closed, but today wheat took the same southward path.
It’s typical of the way markets react to news that gets to the top of the news pile, even if informed people knew all about this quite a while ago. And look at the rest of the grain market news today. Here are some headlines from the daily CME Group report: “French Wheat Harvest Will Suffer From Drought;” “Rabobank: China 2011 Corn Imports To At Least Double.” Not very bearish, is it? But the Russia story grabbed everyone’s attention, and the ignorance of so many made it the big crop markets story of Monday.
THE GREECE EXAMPLE
A great breath of relief broke out across Europe and spread across much of the world Monday, when it appeared the Europeans had once more kicked the Greece can a few more feet down the road. Markets rose strongly with joy and hope. Greece, as you should know, is slipping into bankruptcy and depression and has no chance of repaying the money it owes to European banks, governments and financial authorities. Obviously – at least to economists who have looked at the numbers, which are available to all – Greece needs to default on its debt obligations. Perhaps also leave the Euro zone. It can default either peacefully – by “restructuring” its debt obligations. (That means the lenders accept an interest rate reduction, or a longer term for repayment, or probably both.) Or Greece can just simply run out of money, which would cause a panic.
But that’s not what European governments and  financial authorities want to hear. It is verboten to suggest Greece needs to reduce its debt payments to lenders, even though there’s no way it will be able to come up with the money, so the Greek government never says it out loud and other national leaders pretend that it is not an inevitable result of the country’s unpayable debt obligations. So they hold summits every couple of weeks and find a clever way to stave off a default for a few weeks. They kick the can down the road, then when they’re about to trip over it they hold another hasty confab.
So they kicked the can again Monday, and the markets rejoiced! Odd, really, when you consider the fact that what they really did was once again proved they can’t face up to a problem that’s getting bigger every day, but that’s the markets: filled with humanity, with its mix of informed, wise, stupid and ignorant members, all mixed up together like the folks down at The Forks here in Winnipeg today, celebrating the return of the NHL. Don’t go looking for any rationality there.
