Market's no-taper tantrum reveals its divorce from reality

Fed chairman confounded expectations, which are all that really matter to our financial wizards

PUBLISHED : Wednesday, 25 September, 2013, 12:00am
UPDATED : Wednesday, 25 September, 2013, 4:17am

We have just had a near perfect illustration of the difference between the ways the worlds of business and investment work. It's all the fault of that very, very bad man Ben Bernanke, the chairman of the US Federal Reserve, who had the gall to annoy investment specialists around the world.

They had confidently predicted that the Fed would abandon its policy of quantitative easing and accused Bernanke of misleading them in suggesting that the Fed's bond-buying programme was to be curbed. Well, conditions changed and the Fed stuck to its policy. The investment community threw a collective tantrum and global markets went into frenzy mode.

They were not responding to anything new, but to a confounding of expectations that something new was about to happen. Or to put it another way, they were dismayed and furious to learn that what they had confidently predicted was not going to happen.

Over in the real world of business, boring old reality prevails because although rumour and predictions are jolly exciting, they don't make widgets, or anything else for that matter.

In my little corner of the business world we might anticipate things happening by, for example, buying extra stocks of non-perishable goods before a price rise, but we're not speculating about a pricing adjustment, just acting on certain knowledge.

There is a bit of guesswork in customer demand for products, but it is based on a body of experience about what customers want. Making big gambles on anticipating customer demand is largely left to marketing geniuses.

Financial markets work in precisely the opposite way. Big gambles are embedded in their DNA and the markets move on expectations, not reality. Thus, for example, a company's share price will move more sharply in response to what the market expects its profits or losses to be as opposed to responding to what they actually are. We often see share prices falling if results come in at levels that have been anticipated. Then market commentators say things like "the market was disappointed that Ever Wonderful Construction failed to exceed analysts' expectations". As the old stock market adage has it: buy on rumour, sell on fact.

Meanwhile, over at Ever Wonderful, the good people running the company have managed to produce a perfectly respectable profit and should, if they have any sense, not care a damn if the hallowed market expected them to do even better.

None of this would matter were it not for the extraordinary power of financial markets that either value companies at ridiculously high levels above their earnings, or well below the sum total of their assets. This in turn affects the cost and availability of financing for companies and can damage or inflate their reputation out of all proportion to reality. It can also have an impact on a company's ability to attract key staff, whose attitudes are influenced by market sentiment.

Many people pray at the shrine of stock market guru Warren Buffett but choose to ignore his frequent advice to forget the market noise and focus on real company values.

I have to admit that as a cub markets reporter I was somewhat in awe of the sleek men in investment houses (they were almost all men in those days), who could summon up charts showing more or less anything that was worth knowing in their self-contained universe. These charts illustrated highly confident predictions of where markets were heading and, by the by, why others were getting it wrong.

My grubby notebooks full of this stuff are long gone and I am not likely to go looking for them, because I now realise that these fine chaps may have had a pretty good handle on how markets work but they had only the vaguest idea of the reality behind the businesses underlying those markets. Their reality was the great ticker that moved shares up and down. Even when they made what were quaintly known as company visits, the only information they sought was how this or that would affect the share price, sometimes taking a perspective of as long as a month.

But perhaps the most salient difference between the way real businesses and investment houses work is that entrepreneurs tend to be spending their own money, while the investment chaps are happily throwing around other folks' cash. The discipline of using your own money is mightily powerful.


Stephen Vines runs companies in the food sector and moonlights as a journalist and broadcaster