Wednesday, October 29, 2008

Stocks higher, no wait...

(Warning, Taleb-like rant ahead).
Newspapers are ridiculously dumb with their headlines. Last night the headlines read:
"Dow up 900 points on news of expected Fed rate cut."
This morning they read:
"Stocks open lower ahead of Fed rate decision."

So, which is it? Neither! Correlation does not equal causality! It's about as dumb as when they say "Dow up 2 points on news of XYZ company merger." The market does what it does, there are a lot of reasons for its volatility, pinning one reason to a headline is bad journalism.

The Fed just lowered their target for the Federal Funds Rate last week to 1.5%. There was no huge market surge then.

And, in fact, the Fed has ALREADY lowered the Fed Funds Rate to 1% (HT: Carpe Diem). They never really kept it at 1.5%, looks like they ordered their traders to go ahead and make it 1% unannounced last week.

The market has already taken this information into account. So, the volatility in the market doesn't depend on the Fed's announcement later today.

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