Traders spent Wednesday morning moving a number from 30% to 70%. Took them three hours. The number represents the chance the Fed raises rates next week. Which means traders assigned a precise probability to a binary event controlled by twelve people in a room who haven't decided yet.
Imagine walking up to a roulette wheel that hasn't been spun. The ball isn't even on the table. The croupier is in the bathroom. You announce the odds are exactly 70%. Someone asks how you calculated that. You explain you watched the croupier eat a sandwich earlier and he seemed tense.
That's what happened here.
The Fed meets next week. They'll either hike or they won't. Traders looked at some data—doesn't matter what data, could've been CPI, could've been a pigeon landing on Jerome Powell's car—and decided the odds moved forty percentage points in one morning. Not 39%. Not 41%. Exactly 40%. Because precision implies expertise and expertise implies you're not just guessing in an expensive suit.
Retail traders saw the headline and panic-sold their index funds. Again. They've now panic-sold the same shares nine times this year. Each time they buy back higher. It's like watching someone repeatedly slam their hand in a car door while taking notes on optimal door-slamming technique.
The Fed will hike or hold. If they hike, traders will say they called it at 70%. If they hold, traders will say nothing because nobody remembers probabilities assigned to events that didn't happen. It's the perfect grift. You can be wrong 30% of the time and still claim victory.
Next week the number will move again. Maybe to 85%. Maybe back to 50%. Traders will move it based on Powell's tie color or the spacing between words in the FOMC statement. They'll call it analysis. It's astrology with Bloomberg terminals.
Photo by Markus Spiske on Unsplash
Leave a Comment