FinancialGuy Writes!

This week provided a stark reminder that “markets” are not as perfect as we might hope.

The double-whammy of the Dutch government falling and Nicolas Sarkozy narrowly losing the first round presidential vote sent markets sharply down. Yet, for those of us that follow politics and policy, weren’t these reasonably predictable events? The polls had certainly been suggesting problems for Sarkozy for weeks. Why the sudden shock in the markets?

I admit that what follows is a broad generalisation and I apologise for that, but to me, I think many people involved in “high finance” aren’t all that politically aware. Now I admit that none of the people I know are at the top of the pyramid making decisions that impact us all, but the people I know further down the pyramid making daily buy and sell decisions or acting as brokers are not followers of politics.

They are relatively normal people that did well in math and economics at university and now focus their attention on making money, their annual bonus, football, drinking and chasing girls. Their above average salaries and IQ makes them confident in their abilities, perhaps over confident. In other words, they are like most other men under the age of 35 or so. I presume that the people one or two rungs above them on the ladder are simply older and more successful versions of them – it is like that in most other industries, so why not finance?

This all becomes problematic when the role of markets is so important, as it is now. Many of the decisions being made by politicians and central bankers are important and they are worried about the impact of their decisions in the market, but often the market is not watching!

A solution to this is not obvious and perhaps not needed, but we must stay alert because some of the people shaping events are asleep at the wheel.

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