May 15, 2008

Market participants are bombarded with a never-ending flow of information, much of which can not only be useless but downright harmful to the search for understanding the future. Looking back, one tends to see more misinformation than information.

Misinformation comes in many varieties. The information may be incomplete or subject to meaningful revision. Data may involve inaccurate measurement or be reported incorrectly. Data may deviate sharply from expectations, sending a strong bearish or bullish signal that never materializes in the marketplace because different factors are governing price action. Some data changes that at first glance appear significant are really unremarkable because they stem from seasonal or one-time distortions. Likewise, data may accurately reflect what an economy had been doing, but conditions have changed by the time they get reported. Data that are generally assessed in year-over-year comparisons will change sharply if either something big just happened or if a meaningful movement occurred a year earlier. One needs to distinguish between the two to divide useful data information from misinformation.

A whole different category of information involves things one hears. Policymakers say a lot of stuff, much of which is spin, implying something with no intention to deliver. Some official remarks reflect personal views that may not represent majority positions on the committees to which the speaker belongs. A frustrated committee disident may merely be posturing for the public. Even when the content said by different committee members sends a uniform message, the comments may be intended to keep speculators honest, creating a hint of planned policy action that never really materializes.

Markets are full of false rumors. Many are intentionally planted to evoke a market response. Some become false after mutating over the course of being retold often. The common thread of all market misinformation is the layer of uncertainty. Economists like to divide information into facts and opinions. But few facts are 100% verifiable, and opinions are subject to change as the stream of what is considered fact itself evolves. Yes, we live in an information age, but we also live in an age of misinformation. Knowing how to separate one from the other is the residue of experience.


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