Inor
07-28-2023, 02:30 PM
Something I have noticed the last 6 or 9 months with the financial markets that was not making much sense to me...
Yesterday the Fed raised interest rates again by 0.25%. Normally, that should have caused the stock markets to go down at least 200-300 points. Also yesterday, another regional bank failed (Pacific West Bank). On top of the rate hike, that should have really clobbered the markets. But it didn't; the markets were mostly flat.
I got thinking about all of the financial chaos the last year or so: None of the fundamental metrics have been particularly strong recently. They have not been horrible, but certainly not good enough to prevent what should be a long, slow decline in the markets. I got to wondering why that is not happening.
The only thing I can think of that has changed recently (within the last couple years) is the release of ChatGPT and OpenAI. About 80-90% of all stock and bond trades are now done by trading algorithms not human analysts. Historically, the algorithms have always been driven by the numbers (10K statements, earnings numbers, Fed numbers, etc.). In other words, they were always driven strictly by results with "sentiment" playing only a minor influencer role.
Since ChatGPT and OpenAI became a mainstream thing about a year ago, I am thinking a lot of the trading algorithms may have been updated to take advantage of the language models provided by OpenAI to be able to parse the actual English statements made by Powell and the other Fed Governors. Powell's statements have always had a "dovish" tone, even when he is raising rates and taking other actions generally considered "hawkish". I am starting to think that may be responsible for the algorithms not reacting the way common sense would dictate they should.
Certainly the algorithms can remain irrational longer than we can remain solvent. But... If we keep a closer eye on the statements made by the Fed and other "big fish" than we normally would, we might be able to judge when results are going to turn back to real fundamentals. When that happens, we should see a very steep decline very quickly and have the possibility to make a lot of money quickly by playing it right.
Thoughts?
Yesterday the Fed raised interest rates again by 0.25%. Normally, that should have caused the stock markets to go down at least 200-300 points. Also yesterday, another regional bank failed (Pacific West Bank). On top of the rate hike, that should have really clobbered the markets. But it didn't; the markets were mostly flat.
I got thinking about all of the financial chaos the last year or so: None of the fundamental metrics have been particularly strong recently. They have not been horrible, but certainly not good enough to prevent what should be a long, slow decline in the markets. I got to wondering why that is not happening.
The only thing I can think of that has changed recently (within the last couple years) is the release of ChatGPT and OpenAI. About 80-90% of all stock and bond trades are now done by trading algorithms not human analysts. Historically, the algorithms have always been driven by the numbers (10K statements, earnings numbers, Fed numbers, etc.). In other words, they were always driven strictly by results with "sentiment" playing only a minor influencer role.
Since ChatGPT and OpenAI became a mainstream thing about a year ago, I am thinking a lot of the trading algorithms may have been updated to take advantage of the language models provided by OpenAI to be able to parse the actual English statements made by Powell and the other Fed Governors. Powell's statements have always had a "dovish" tone, even when he is raising rates and taking other actions generally considered "hawkish". I am starting to think that may be responsible for the algorithms not reacting the way common sense would dictate they should.
Certainly the algorithms can remain irrational longer than we can remain solvent. But... If we keep a closer eye on the statements made by the Fed and other "big fish" than we normally would, we might be able to judge when results are going to turn back to real fundamentals. When that happens, we should see a very steep decline very quickly and have the possibility to make a lot of money quickly by playing it right.
Thoughts?