No Truth in Finance

The other day I was asked by a reporter whether I thought that the dollar was undervalued. I tried to explain that in the markets there is no such thing as under (or over) valued, there is simply price. The current dollar is neither high nor low. It just is. In finance there is no divine, set-in-stone theoretical benchmark from which to judge each specific market level. Undervalued? With respect to what? Is the euro at $1,40 overvalued? What if it reaches $1,60 in a few months? In finance, there is no absolute truth. There is only reality, set-in-practice by the interaction of buyers and sellers, who tend to do whatever pleases them most at any given time.

But if we can´t declare an asset´s current price as high or low, how can we trade? Well, no truth does not equal no expectations. People might, on average, change their minds in the future and drive prices in a different direction. No, not purposely correcting a previously unseemly quote, just acting differently than before, for whatever reason. Not restoring truthness, just consensually quoting a new price.

Why do people like to read so much into a given day´s market price? Undervalued, overvalued, irrational, equilibrium, expected, unexpected, true, false. Why can´t they accept the much simpler, well, truth? Is it the lack of complexity and the depressing simplicity of the supply-demand interaction? Do we yearn for labels-dominated categorization? Would it be the end of financial journalism (at least of the fast-food variety) if the only comment following a move of the Dow from 14,000 to 13,789 were "the Dow went from 14,000 to 13,789 and we don´t know why or what it means"?

Perhaps the beauty of options lies in the fact that they recognize the truth-less character of markets. One can make bets on financial prices without having to make an opinion as to whether an asset is "overpriced" or "underpriced". I don´t know if the price is high or low and I don´t know where the market is heading. I don´t know what people are consensually going to do next or why they consensually did what they did in the recent past. But I can reasonably make the bet that the market will be calm or turbulent. It doesn´t force me to take a directional view in the spot market and thus judge the current level as high or low. It doesn´t force me to confirm or doubt the truthness of today´s price.

ptriana@profesor.ie.edu