Strategist says markets have nothing to do with fundamentals anymore

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Fundamentals are a proxy for determining the intrinsic value of an asset. Financial markets depend on offer and demand, market mechanisms such as bidding and the availability of short-selling and derivatives, regulations, transaction costs, information transparency and quality as well as how risk is transfered between buyers and sellers, notwithstanding anomalies such as momentum. In a low rate environment, it becomes increasingly difficult to hedge inflation with risk-free products, therefore there is a change not in the fundamentals of the assets themselves in terms of their cash flow streams, but in the fundamentals of the market. If an asset class ceases to hedge a risk it was assumed to be able to hedge, it loses a lot of relative value and therefore other classes gain value. This is one of the desired effects of an accomodative monetary stance, to force investors out of risk-free assets. Many models are outdated in these market environments. It’s not necessarily because the market is out of touch with reality (though it can be), but because the models don’t take into account all the considerations that come into pricing assets.


I will preface this by writing I did not listen to the pundit. This is based on the title. I think that the fixed income markets are decoupled from fundamentals-certainly in the “higher credit quality” buckets. When sovereigns like Italy are yielding in line with same tenured treasuries, the “risk free rate proxy”, markets are not functioning properly. The coordinated central bank interventions have artificially forced rates to zero or subzero. This has forced investors from pension funds to asset managers to search for yield, to manage duration gaps in their portfolios, in areas they may not have otherwise. Also, portfolios are being reallocated with a greater portion to equities, which I would argue are not as effective at asset liability synchronizing. This search for yield has driven rates down and distorted the markets ability to accurately capture the riskiness of assets via yields.


I like the part where he said anymore


I wish my name were TooGood. People’d say, “What, you think you’re too good for us?” Yah. I am.


Taco =/= Burrito