Daily Speculations

The Web Site of Victor Niederhoffer and Laurel Kenner

Dedicated to the scientific method, free markets, ballyhoo deflation, value creation, and laughter. A forum for us to use our meager abilities to make the world of specinvestments a better place

 

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The Chairman
Victor Niederhoffer

4/6/2005
Department of Misconceptions

A reader wrote me today saying that interest rates are artificially low, and that as they adjust, P/E's can only fall.

If I had a buck for every time someone wrote to me that the reason that stocks are too high is that interest rates are about to rise drastically, I'd be a wealthy man. The main problem with this is that it doesn't take into account that long-term rates are an average of expected future rates.

The second major problem with it is that no field in the world has more experts and more arbitrage in it, and the chances that the layman can at the margin have superior insights as to the future direction than the current levels implied in the term structure is like being able to shoot a basket from the opposite foul line.

A related fallacy, one similar to the idea that the dollar is in a swoon, is that interest rates are in the midst of a relentless rise. Indeed, they're near a 20-day low, and long-term rates are comfortably below where they were at the beginning of year. -- Victor Niederhoffer

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