Even if you knew the cards…

Mohamed El-Erian on the US dollar not behaving as it should have been expected to:

When measured by the DXY index, the dollar’s value against other currencies dropped 10 percent in 2017, with another 1.5 percent decline so far this year. These moves have confounded many analysts, especially those who focus primarily on U.S. economic and policy developments. After all, the Federal Reserve has ended up hiking rates more than the markets predicted a year ago, and the economy has grown faster than most anticipated — outcomes that would normally lead to an appreciation of the currency.

One of the (many) reasons I stopped heeding the macro forecasts of others and quit trying to come up with my own is that even if you knew what the future data would be, you’d still not be able to predict how people would react to it. You could certainly try, but markets are set up to confound us, not confirm our hypotheses.

Imagine a card game where somehow you were able to know what cards your fellow players were going to receive – you’d probably be able to make some good guesses as to how those players would play their hands, but could you be sure? People behave in erratic ways all the time, and respond to circumstances in a variety of ways that simply cannot be accurately foretold. And the more variables there are, the harder it is to bet on which stimuli or cues they’re going to respond to.

Markets are people. The future actions of people cannot be determined in advance with anything even approaching precision.

The good news is, being able to do this is not necessary.

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