« CEA rumors | Main | Larry Summers in the White House »
Good news, good news, bad news
The Dow is up 6.5 percent. And Tim Geithner will be Treasury Secretary. That's the two pieces of good news. The bad news is that the market is up because of a political appointment. That's really very bad news, especially since the other logical candidates for the post were extremely competent.
Posted by Tyler Cowen on November 21, 2008 at 05:30 PM in Current Affairs | Permalink
Comments
maybe the market is up on news/noise like this because the uncertainty of the interregnum era is being resolved. this is akin to realizing volatility. (ie maybe at this point we have seriously positive theta.)
Posted by: babar at Nov 21, 2008 5:39:15 PM
The bad news is that the market is up because of a political appointment
Why? Aren't markets supposed to respond to reduced uncertainty?
It would be worse if we found out political insiders were buying just before the
announcement
Posted by: Phil at Nov 21, 2008 5:42:59 PM
My co-worker has a theory: The market is up not because Geither is better than Summers. Either of the two would have been good. Instead, the market is up because the appointment of one of them means that the country has someone who can start making the important decisions in economic matters. Previously, says the co-worker, the market had been spooked because it seemed like there was no one in charge; Paulson couldn't speak for Obama, and Obama didn't seem to be able to make big decisions without his team in place.
Posted by: blabla at Nov 21, 2008 5:43:11 PM
The bad news is only bad news, of course, assuming that the appointment actually was the cause of the late rally. I'm always pretty skeptical that the simple, singular causes that are reported day to day are the reason for any given market movement.
Posted by: Patrick Joyce at Nov 21, 2008 5:45:03 PM
How do we know it's up for this exact reason? It's not like this isn't a very volatile time.
Posted by: jb at Nov 21, 2008 5:45:59 PM
The market rose in late trading in Australia too - well before the announcement. The 'because' in your argument is, at least, suspect.
Posted by: Sinclair Davidson at Nov 21, 2008 5:50:49 PM
a lot of people have been getting into the markets recently given recent reports that the market is "groping for a bottom"
Posted by: babar at Nov 21, 2008 5:52:55 PM
If you believe in EMH (I don't), then it shouldn't make any sense. The whole making decisions thing doesn't make any sense. The market should anticipate that it was always between Summer and Geithner to be Treasury Secretary. One of them would be picked, most likely by Thanksgiving. Finally, whoever is picked would be making the decisions that Paulson hasn't been making and they probably wouldn't make that much different of decisions than the other guy.
The market went up b/c it was looking to rally. Sometimes everyone just goes "BUY."
Posted by: KF at Nov 21, 2008 5:58:37 PM
I am pretty outraged that you would say the political appointment is the reason for the market surge. You really think you know why the market moves? Why did the market fall 500 points at the end of the day yesterday? How about the day before that?
Posted by: Cliff at Nov 21, 2008 6:01:16 PM
Why did the market fall 500 points at the end of the day yesterday?
They didn't know who Obama would pick as Treasury secretary.
How about the day before that?
Uncertainty. About the future.
It's easy!
Posted by: Barbar at Nov 21, 2008 6:37:51 PM
Today was the first time I have bought a stock since Obama was elected. I could care less about Tim Geithner, beyond that Obama might have made a worse pick. Summers was a better candidate but the PC police would never let him serve.
So why did I buy stocks. I saw 4 good companies with stock prices that had dropped so much they looked like a bargain.
Posted by: DanC at Nov 21, 2008 7:07:59 PM
"the market is up because of a political appointment"
I bet the farm that you can't show this to be true. There were plenty of moments of ridiculously large stock rallies in the last period -- without much to go on as far as political or economic significant news.
These are strange, volatile times we live in.
At best you could possibly say that the political news was a trigger for the rally -- but I'm not sure I would bet on that either.
Posted by: Alex at Nov 21, 2008 7:20:25 PM
probably the markets saying bye to paulson
Posted by: babar at Nov 21, 2008 7:35:26 PM
Obama is not going to be the largest problem. The investment and economic geniuses in Congress are going to be the largest problem.
btw - from Calculated Risk:
California unemployment jumps to 8.2%, third-highest in the U.S.
Posted by: at Nov 21, 2008 8:04:11 PM
Correlation is not causation.
Posted by: luispedro at Nov 21, 2008 8:32:35 PM
On one hand, the timing of the announcement and upsurge are just too close in time ... if the upsurge is caused by other factors, its a big coincidence.
On the other hand, this was not some unexpected move. Geithner was trading at 70% at noon (before the market moved at the 3pm announcement). Does elimination of that 30% uncertainty actually revalue all stocks on the exchange up by 6%?
Explaining stock price movements with efficient market hypothesis type arguments appears to be problematic in the current environment. Significant animal spirits appear to be at work.
Posted by: mgunn at Nov 21, 2008 8:32:52 PM
blabla,
Nice point. Additionally, it happens to be someone that will require absolutely zero time to be up to speed on any of the issues, tiny details of the issues, current proposals, past and current plans, the extent and severity of the crisis, abilities and duties of the secretary of the treasury, and most likely knows exactly who is in the most trouble and why there are in that trouble. This knowledge base is irreplaceable at this juncture in history. He is probably working right now.
Note that he can behave as treasury secretary during the time between now and the inauguration. This pick over Larry Summers shows the pragmatism of Obama and is a testament to his competence.
That the market has rallied on the news is good news, not bad. Markets should and do respond to the political environment because they one method of determining valuation. Valuation is and must be influenced by future values, which in part will be determined by the competence and behavior of government officials.
Posted by: mickslam at Nov 21, 2008 8:33:55 PM
I think the market is up because there is some clarity of what Obama's fiscal policy will be. Up until now, many people have been critical of the Pres-Elect for keeping silent on what is arguably the most important cabinet selection he will make, and the sense that no one is in control, considering Paulson has basically thrown in the towel.
Posted by: Patrick at Nov 21, 2008 8:55:51 PM
I would have thought that Tyler would know better than to place great meaning on the day to day movements of the stock market. While I'm not a big believer in EMH, I don't think given the huge swings we have seen day to day that we can say anything about what happens in the next day or why other than the long term trend has been down.
Posted by: Stephen at Nov 21, 2008 9:08:21 PM
The market has been moving a ton at the end of the day recently. Today it went up. Geithner happened to be appointed at the end of the day. I think that's it.
Posted by: Kyle at Nov 21, 2008 9:14:56 PM
The news may have triggered the timing the late day ascent, but it is not the cause of the ascent or it's degree. The market was badly oversold and was due for a rally, and once one gets going on decent volume, shorts begin covering their positions, many of which were closed in the money due to the market's decline over the course of the week.
Posted by: Yancey Ward at Nov 21, 2008 9:16:07 PM
The only way this MR post makes sense is if Tyler is making a joke -- a pun on the double meaning of "bad news."
It is certainly bad news reporting to write such nonsense.
Posted by: Alex at Nov 21, 2008 9:47:31 PM
I can't speak as to whether the appointment had anything to do with the surge in the market; I think in general it's a mistake to even ask, "Why did 'the market' do such-and-such?" It's sort of like saying, "Why did high school students behave like that last Thursday from 1 to 2 pm?"
But supposing the connection is real, I totally agree with Tyler that it's a bad thing if the stock market is whipsawing because of political appointments. His point (I take it) was that we are now in a position where the government is exercising incredible day-to-day influence over the economy, as opposed to providing a general framework.
Of course, this is partly why I opposed the bailout in particular, and just about everything Bernanke and Paulson have done since the crisis began. So I agree with Tyler's observation in today's post, but I wonder why he seems surprised that things have come to this. Of course if the government starts handing out a trillion dollars, people will ignore their customers and look to DC.
Posted by: Bob Murphy at Nov 21, 2008 10:01:30 PM
If Tim Geithner was the reason the market went up and this reflects a reaction to a political appointment, this implies what?
That the markets view the incoming President and a Democratic Congress as very negative for the economy. If the only thing that changed today was a political appointment, then the previous view of the political situation was very negative.
Posted by: DanC at Nov 21, 2008 10:37:03 PM
I'm assuming it would have gone up for any of the logical competent choices. I tentatively rate this 3 good newses.
While I agree with Bob, sometimes it's just fun to speculate about teenage behavior. Maybe it didn't like the idea of Re-Volcker.
Posted by: Andrew at Nov 22, 2008 6:03:06 AM
