Newadministrationandefficacyofhistoricalprobability

The world of markets as like the world of sports is full of surprise events. Events whose historical probability is very low but somehow post facto we are able to concoct a narrative even to explain the unexplainable. In sports the oft repeated reasoning is the grit, determination or sometimes the chutzpah shown by the young, in markets it is often an unknown risk manifesting in a previously unknown fashion like the sudden run on currency (taper tantrum), contagion risk (East Asian crisis), collapse of a major player (LTCM) or something more recent like an outbreak of a virus.

But the philosophical question to answer here would be that should the occurrence of an improbable event change the way we compute the historical probability attached to it. For context, a team batting fourth in a test match has scored more than 320 runs for winning only 40 times out of 2400 international tests played so far. Hence a statistician would compute the historical probability of such an event happening at close to 1.5%. Now should that change materially once that event has happened. In behavioural finance this is termed as recency bias. The insurance premiums for the air travels go up after a crash has happened. Market players can obviously benefit from such behavioural biases by setting up their bets accordingly. But one thing which they need to answer is that whether some structural change has happened i.e. are the modern aircraft engines actually becoming more vulnerable (for some reason) and the new creed of players becoming more confident (courtesy T20). Unless such structural changes are in play there is no reason to discard historical probability as useless.

Coming back to the market roundup, in her testimony the incoming US Treasury Secretary Janet Yellen emphasized the need to “defeat the pandemic” before tackling the deficit. She confirmed that there are no tax hikes are on the table, but she lobbed one surprise by saying that the details of tax changes might be there in the infrastructure bill later this year. She also said though the amount of debt relative to the economy has gone up, but the interest burden hasn’t. Dow Jones closed in green post the testimony. The US treasury yields were down slightly as 10 year traded at 1.09%. Dollar Index also retreated a bit to trade at 90.40. Today also is the day of the presidential oath taking ceremony.

Domestically the bonds recouped some of the losses yesterday as some value buying was seen. The 10-year benchmark bond is trading at 5.93 currently against 5.98 seen last week. The Rupee has appreciated against the Dollar from yesterday. The FPI flows into the Indian assets remain net positive as close to 13k Crore INR has been brought in so far in this month.