RateWatch #365 – Perception vs Reality
July 20, 2003 by Dick Lepre
I guess that we had been talking too much about the Fed intervening because Greenspan dropped the hammer on the concept in Tuesday's testimony. He said (seemingly) that rates decreases by the FOMC would be all that is needed and that intervention (aggressive buying of the 10-year and 30-year) was off the table. This may or may not be the true. If Greenspan had it in mind that the Fed would have to intervene he still would have said the same thing because it would
have made no sense for the Fed to tip its hand.
Markets are made - in large part - on perception. The perception is that we are on the path to economic recovery and intervention will not be necessary. It remains to be seen what actually happens. Tuesday was catastrophic for Treasuries and mortgage rates because perception of the Fed's intentions changed.
Last week's call that a bear market was starting turned out to be timely.
So, where the heck are we and where are we going? In the short-run (the next 3 months) we are stuck with rates near or higher than where we are now. If the economic recovery that has been the basis for the Treasury sell-off and the equity rally does not occur then "all bets are off" and a
new perception will be formed.
When it comes to markets, perception is reality. Or, if it is not, it is a lot more important than
In non-economic areas this is true. People are judged, to a significant extent, by their appearance.
Clothes, plastic surgery, make-up, high-heel shoes, hair-dos, fancy cars are all about perception.
The "perception is reality" thing may be more true in business and investing than in other areas of
society. The entire Internet stock bubble was based on perception not reality. This was not a couple of grifters ripping off some little old lady's life savings; this was a relatively small number
of people fooling the majority of the investment community. People make investment decisions
based on flimsy information. In addition there is a herding mentality. If enough people thought
that Red Hat was worth more than $100/share then, for a brief time, it was. Perception made that market. In the longer run, reality has a way of catching up.
The issue with equities is that many folks in the market do not do enough research because they are not really interested in the stock as a long-term investment opportunity but are only interested in it as a speculative medium.
This past week's Treasury movements resulting from Greenspan's comments provide an excellent example of perception.
On Tuesday, Greenspan testified before Congress and seemed to indicate that rate cuts alone and not intervention would be all that the economy needed from the Fed. Treasury markets - which were volatile due to the technical change from bullish to bearish - reacted violently.
Then on Wednesday Greenspan seemed to take some line back in saying that there was "a general judgment that in a sense we took off the table ... the notion that we might use so-called nontraditional means. I wasn't aware I took anything off the table at any time." ("Nontraditional means" is the same as intervention - aggressive buying of 30-year and 10-year Treasuries.)
Greenspan was rectifying perception.
Markets - both equities and Treasuries - are made on the margins. They consist of a core group of investors who are in for the long haul and marginal participants who are in short-term. It is the behavior of the marginal participants that moves markets on a day-to-day basis. Their behavior is more readily subject to changes in perception.
So what changed this week? Perception changed.
The key to understanding why a market such as the treasury market behaves in the way that it does is to recognize that perception is more important than reality.
I am not implying that the bear market is bogus. It may indeed be justified by economic recovery but, for now, all that is available is perception.
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