| Up and Down War News |
31 March 2003
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Why War Makes Markets Jumpy
It may be a matter of the painfully obvious, but precisely why war makes markets jumpy is a perfect illustration of what it is markets do. They transmit information about buyers' and sellers' perceptions of value. Whether one deals in oil, or cars, or zero-coupon notes, the market is a mass of information that synthesizes everything everyone believes into a single number, the price.
That being the case, war creates volatility in markets because it is changing perceptions and creating new information. Perfect markets require four conditions to be perfect -- perfect information (that is, all participants must know the same things as the same time), a homogeneous product (something advertisers try to destroy), entry into and exit from the market must be cheap or free, and there must be many buyers and sellers (lest monopoly/monopsony arise). Of these, war drives the information function.
When President Bush launched his attack on Iraq, stock markets rallied because the perceptions was that the violence had at last begun, and it would end quickly. Then, Sunday of last week, coalition forces ran into Iraqis who shot back at them. Perceptions changed to accommodate a longer war, and stock prices dropped. With each new fact(oid) the media send, perceptions of market participants will change, and prices will follow.
What one ought to remember, though, is that volatility is how profits are made. If there were no price changes, there could be no buying low and selling high. A great deal of money will be made very quickly because of this war, and a great deal of money will be lost just as quickly. It will be a kind of jungle Marxism as to who the winners and losers will be, "From each according to his greed and to each according to his agility."