Market Noise

Grexit, Brexit, Elections, and Noise

Apparently there is a 40% chance that Greece will leave the EU. Or there’s a 25% chance, or an 80% chance. Alan Greenspan says it is just a matter of time. George Soros says it’s 50/50. UK bookmaker William Hill has stopped taking bets.

There are lots of very intelligent people looking at the possibility, and implications, of a Greek exit, and yet all have very different opinions. The recent pick up in volatility in Greek bond prices is in part a reflection of how little consensus there is.

Figure 1: Pricing uncertainty

The fact that there are so many views among the very intelligent raises the first problem with this kind of forecasting: it is very hard. And to be able to find someone (even yourself) that can get these type of call right again and again is impossible. Even if someone has been right in the past, how can you know this will continue? Was it just luck?

But the simple fact that getting the forecast right is hard isn’t the main reason why this type of forecasting is a particularly misguided form of endeavour.

The main reason is that it is even harder to know what markets will do even if you get the forecast right. Because so many other things can happen.

What if I were able to guarantee you that Greece will leave, and even gave you details on how and when it would happen, what would be the best way to make money out of that information?

You might expect volatility to pick up. Banks might be exposed, or they might not. The Euro could fall because of contagion fears or rise because the problem has finally been resolved. But most importantly markets might move on something entirely unrelated.

A common human reaction is to want to de-risk and wait for things to settle down, to become ‘more certain.’ It is now a cliché to say that ‘markets don’t like uncertainty’ but there is a problem with this.

The reality is that the level of uncertainty for something as complex as global financial markets is always the same and always huge. All that changes is how aware we are of that uncertainty; events come out of the blue to remind us and then, because we are human, we forget.

Take the related issue of the UK election. A single discrete outcome like an election is one area where the outcome can be more uncertain. Even Nate Silver says it is tough to call this time round.

And perhaps this election has more important fundamental implications; it could tell us something about whether the UK is more or less likely to leave the EU. So maybe we should sit on the side-lines and wait until the election is over?

But the textbooks on successful long term investment strategies don’t talk about the great money that has been made from systematically worrying about each new risk that might come up and timing when to move to cash.

In the case of past UK elections in particular there is little sign that this is a sensible thing to do, even though there are usually fears about what the election result will mean for markets. Figure 2 shows the price moves of the FTSE 100 in and around the last six General Elections.

Figure 2: Election noise

There might be more information in the above than there is looking at tea leaves but it seems unlikely. However, if you can discern a meaningful pattern, here is where we stand today.

Figure 3: The 2015 election

As investors we will periodically be hit by events. Sometimes there may even have been clues about what was to happen before it actually did. But worrying about each and every potential cause of risk that might arise won’t only make it hard to sleep at night; it will also cost you money. Guaranteed.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.