The views expressed in this column are solely those of
the author and do not reflect the views of SVB Financial Group, or Silicon
Valley Bank, or any of its affiliates.
Life in the fast lane
Surely make you lose your
Life in the fast lane
Everything. All the
- The Eagles
As a daily commuter who sometimes travels to two or three
different locations each week, I feel I am fairly well informed about the major
roads in the Bay Area.
For example, just south of the Walnut Creek exit on I-680, I
like to be in the slow lane in preparation for exiting onto Highway 24. However, there is an asphalt patch there that has been eroding over the last four years
which has created a significant divot. I know exactly where, within the lane,
the worst of the divot resides and I instinctually move to the far right-hand
side of the lane to avoid the worst of it.
In addition to knowing where the various bumps and holes are,
it’s easy to recall lane variations, exit-only exits, and even short-term
construction areas where workers may be perilously close to traffic.
Traffic in the Bay Area can be awful at times, but it is also
quite volatile; meaning it doesn’t always depend on the time of day or day of
the week. Sometimes, you have to just go with the flow.
One thing that has always amazed me is that an additional lane
doesn’t always relieve the flow of traffic in the way one might first expect. At
first glance, it seems that if you know an additional lane is coming up on the
left-hand side, the left-most lane should move quicker than the others. As you
get near the new lane, only the cars in the current left-most lane have access
and that additional space should feed back far into the slow traffic causing
this lane to move quicker.
My empirical, but anecdotal, evidence does not confirm this
hypothesis*. Instead, it seems, all lanes move at the same grudgingly slow pace
until the new lane is added when they all seem to feel some relief at the same
Why is this? Well, it’s likely that I am not the only person
who knows the new lane is coming up and so the left-most lane gets overcrowded
as more people “bet” it will move quicker. The added burden of this traffic
causes a slowdown to a point of equilibrium where all lanes move at the same
pace. This is a good illustration of the efficient markets theory.
Last week, we experienced another.
For months now, markets have been made well aware that the Fed
would end QE2 on June 30. During the same period, we’ve heard from all kinds of
pundits that rates will have to rise once such a large buyer of Treasuries is
taken out of the markets. We were told that without the Fed buying Treasuries,
yields would rise considerably — all else being equal.
In the time leading up to the end of QE2, investors have had
plenty of time to change lanes and I’m certain they did. But demand continued
to outweigh supply in the Treasury markets and yields remained depressed.
In fact, during the last month news about Greece dominated the
bond market, first driving yields down in a flight to quality bid and then
releasing them upward (just a bit) after the austerity package was approved.
But overall Treasury rates did not move in conjunction with the
argument that losing the Fed as the largest buyer would leave the market without
customers. The reason for this is simple: the market still believes the U.S.
(and global) economy is sluggish and will take a long time before inflation
becomes an issue, driving action by the Fed. The Fed confirmed as much in last
month’s FOMC statement as well as Chairman Bernanke’s press conference.
As the Fed exited the freeway, markets adjusted — or really,
they adjusted once the Fed moved into the exit only lane — and whatever effect
this had on rates was built into prices long before the end of the quarter.
*- If you’ve seen any academic articles on traffic patterns
that might confirm this theory, please forward them. I’m always looking for an
advantage during the commute!
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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