The most interesting thing we read today goes to Deutsche Bank credit strategist Jim Reid, fresh from a trip in Finland where — as you know — the anti-EU party True Finns came in shockingly strong in the recent election.Reid makes an interesting observation here:
We spent yesterday marketing in Finland which, since the recent success of the euro-sceptic True Finns, has occupied a fascinating position at the heart of European politics. A reminder that they secured 19% in the April general elections, only 1% less than the largest party and up from 4% in the last elections. However of the roughly 70 fund managers/investors/DB staff we met yesterday across one on ones and a group presentation we didn’t find a single person who claimed to vote for them. In fact everyone made it clear that they didn’t.
That stat alone seems implausible, though Reid has an interesting theory why:
Why this is important is that we think that those of us in financial markets are programmed to think of
rational outcomes and the majority of us would be reluctant to vote for a party at the extremes who may potentially throw the financial world into chaos. As such we collectively think it is irrational that other people would vote the same way and economists/strategists generally predict/expect a more rational outcome.
However, the fact that almost 1 in 5 Finns actually voted for them and 0 out of 70 in my straw poll didn’t perhaps shows the potential disconnect between people in the financial community’s expectations and what might be happening across the wider electorate. We can’t help but think that the Euro crisis will continue to encourage these previously marginal political parties and the financial community will under-appreciate the risk due to these rational expectations.
Even if you think Reid is stretching a little bit in this example, you have to think there’s something to it. Investors couldn’t understand how rational bureaucrats would let Lehman go down. And they still can’t imagine how rational EU leaders could let Greece fail, and they certainly all think that ultimately an 11th hour debt ceiling deal will get done, and we’ll avoid collapse in the US. Perhaps investors are just too rational minded for their own good.
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