Irrational Markets

Here is a report on Bloomberg about recent comments by Paul Krugman in Shanghai:

Paul Krugman, Princeton University’s Nobel Prize-winning economist, said global economic prospects don’t justify the two-month rally that has restored $8.9 trillion to stock markets around the world.

Speculation government spending packages and interest-rate cuts worldwide will reinvigorate the global economy has helped the MSCI World Index rally 37 percent since falling to its lowest since 1995 on March 9. The U.S. Standard & Poor’s 500 Index surged 34 percent in that time.

“It looks to me now as if the markets are now pricing in a rapid recovery, that they’re pricing in a V-shaped recession, which I consider extremely unlikely,” Krugman, 56, said at a forum in Shanghai today. “The market seems to be looking as if this is going to be an average recession, but it’s not.”

I think Krugman is a smart guy, but the market has voted 34% the other way. What do I believe? I believe that nobody knows the future. The odds favour Krugman, but unfortunately we step into only one future so even if the odds are 99:1 of down versus up, we might just step into that 1% up future. The only people who "know" the future are the ones in the future who report that they "had it right all along". How is this possible? The other 99 that got it wrong don't crow about getting it right. They got it wrong. But the one guy who got it right bellows "See! I told you all along it was going to be up!" The other 99 who were right in those other 99 futures don't get to boast about their acumen. Life is funny like that.