Searching for Economic Models that Work
Bill Gross (at Pimco) is having a bad year in bond returns because he bet against the Treasury. When Mr. Gross made public his bet against the Treasury, I thought he was nuts. Perhaps this was because I was only recently (in the last 5 years) trained on the IS-LM economic model that is working to predict bond price movements with higher accuracy than Pimco’s models.
This is yet another example of two sets of (in this case) completely reasonable facts in the market. One cluster of facts, believed by Mr. Gross and others, suggested that medium term Treasury prices would decline. Another fact cluster suggested that medium term Treasury prices would rise.
If you search Google for news articles related to bond pricing, it can’t discriminate between the two different philosophies. In my results set, the top 25 results were from the fact pattern originally followed by Pimco, and, until the last 36 hours, that had not changed.
This is just an example of how Google can define your viewpoint in news. The news reporters didn’t report on the underlying model differences that were contributing to the different world views. And the clustering software had no reliable method to pick out the different world views in play. Instead of producing diverse viewpoints, the Google results produced what almost seemed like a “momentum pick” for the top stories. And, in this case, the momentum pick was the wrong pick for the investor to bet on.
The “momentum pick” has become even more common in Wall Street markets. I’ll examine why this might be happening in my next blog post on High Frequency Trading.
