Economic Theory & Economic Reality
Economics is often called the Dismal Science because in predicting pricing outcomes economists are implicitly also predicting behavior of people wanting something and also of people offering something. Often those predictions can be pretty dismal.
But sometimes the economic theory we economists use can be misapplied and therefore our analyses (predictions) can be wrong.
Over the weekend, two major news events caused me to believe that digital currency prices would be sharply higher on Monday. They were not. Instead, digital currency prices were little changed. The news events I was expecting to matter to the global digital currency markets were: 1) a left-leaning politician won an unexpectedly large portion of the vote in Argentina; given that country’s recent problems with defaults and inflation, I would have thought Latin Americans would have been buying digital currencies, which some see as a relatively safe harbor; and 2) I would have also thought that the pro-democracy protests in Hong Kong would scare people across greater China (mainland China, Taiwan, Macau and Hong Kong) toward currencies not controlled by any government. In other words, I would have thought digital currencies would have been a good destination for such people.
However, the theory seemed NOT match economic reality. Digital currency prices did NOT go appreciably higher on Monday August 12.
Interestingly, though, gold prices DID go up about 1% on Monday — so participants in the gold market may have been seeing these events and seeking the relative safe haven of gold; but, for some reason, digital currency traders & other digital currency market participants did NOT bid up the price of digital currencies on Monday.
What I think I missed was the reality that digital currency market participants were either looking at other factors OR they dismissed the events in Hong Kong and Argentina as too small in terms of their own economic situations to matter to them.
Today, Tuesday August 13, though, the digital currency markets are acting EXACTLY as I would have expected: in US dollar terms, digital currencies are generally trading 2%-4% lower today. That’s because the big news event today regards the world’s two largest economies — mainland China and the US. President Trump today announced he is delaying some tariff actions in the ongoing trade dispute with China. This means that today traders globally can expect higher future corporate profits than they should have expected yesterday, all else equal. So, prices of “safe haven” financial instruments like gold and bonds and digital currencies are generally trading lower today while prices of investments tied to an increasing economy like oil and copper and stocks are generally trading higher today.
When pricing behavior doesn’t seem to follow theory, probably the theory is wrong. Sometimes, traders can make money when they figure out the correct theory before the rest of the market does.
Today, theory and reality match.
For traders and market participants, the best practice is to have a theory as to what is likely to happen going forward and then match our investments to our theory. And when the theory doesn’t work, we had better check our theory to make sure we still think it’s accurate.
Tim Shaler is Chief Economist of iTrust Capital. He is a published Real Estate economist, was a portfolio manager and asset allocation expert at his previous firms and is an adjunct professor at Webster University. His MBA (Finance) and MA in Russian Economic History are both from the University of Chicago.
For all media inquiries, please contact Blake Skadron at firstname.lastname@example.org