There are lies, damn lies and statistics. Substitute statistics for an armchair economist?s take on financial markets and the adage may still ring true. Economists who provide expert views on financial markets are ?after-the-fact-judges? who have a hindsight vision of 20/20, or perhaps better because they can even see things that may not exist. During my trading days, I used to usually smirk when I saw some motor-mouth economist provide a profound and complicated reason for market movement (almost always after the fact) as the drivers were usually never as complicated as they made it out to be. The thought process that I heard from fellow traders or clients who were actually doing the buying or selling were much simpler. I used to, at times, wonder that these economists probably cannot digest their food, unless they can conjure up a long-winded reason, how much ever farther from the truth it might be, for everything that was happening in the markets. Most of these economists have never done a single trade in their life, but work with stylised notions on how markets are supposed to behave. It is like an expert explaining the nuances of swimming without knowing how to swim or a surgeon giving tips on surgery without ever holding a scalpel. And these armchair economists have the supernatural ability to explain anything and everything. Most of the times, they seem to think that human behaviour and responses are always rational and readily predictable. Indeed, if one could decode collective human behaviour and predict it accurately, then consistently making money in the markets will be a piece of cake. But the truth, as they say, is far more elusive.

The problem with most of these economists is that they do after-the-fact justifications for movements in the markets. So, they implicitly assume that markets are right. For instance, if rupee depreciates, they would base their explanations on a few convenient macro-economic indicators and presume that all market participants looked at the same indicators and interpreted information similarly. So, if a currency were to depreciate, as is the case with the rupee, they would retrospectively insist that the economic fundamentals had been weak all along.

It?s an example of a circular argument. There is the basic assumption (more like an article of faith) that the market is an objective and sage evaluator of economic performances, a kind of Supreme Court making the most superior judgments based on the best information with all the time at its discretion. Of course, given this basic assumption of the infallibility of the financial market?s judgment, the rest follows. The problem of this circular argument is that everything depends on the assumption. How untenable this assumption can be is evident if one is willing to concede that the markets can get it wrong.

Nine months ago, the Japanese yen was above 85 and currently it is at 76.71 , a more than 11% appreciation. In the same time, the Japanese economy has suffered the worst-ever natural disaster?the Tohoku earthquake followed by tsunami which lead to severe impairment of nuclear power plants at Fukushima Daiichi, Fukushima Daini, and Onagawa resulting in damage to critical infrastructure. The World Bank has estimated the damage bill to be a massive $235 billion. Last month, Japan?s central bank lowered its assessment of the Japanese economy from ?the economy is taking off? to ?the economic recovery is slowing down? at a board meeting on financial policy. Yet the yen has appreciated significantly in the same period.

Five months ago, on August 1, 2011, the rupee was at 44.01 and the experts were fond of pointing out that our economic fundamentals are robust. The statistics quoted were: capital flows at $61.9 billion; FDI inflows at $35 billion; FII inflows at $14 billion; agriculture grew at 6.6%; industry grew at 7.9%; services grew at 9.4%; investment rate at 36.4%; domestic savings rate as ratio of GDP at 33.8%?all pretty impressive stats. The commentators used similar macro indicators to deduce that economic health of the US ain?t any good, and that the economic health of India is much better. The US has a massive debt overhang of $13.4 trillion, which is obviously not the situation in India. To boot, we have solid foreign exchange reserves in excess

of $300 billion. I did not find a single economist saying that the rupee would depreciate to 53, five months ago or earlier. I am not surprised that the same economists have changed their tune after the fact, and now point out that India?s fundamentals were weak after all, and that?s why the currency depreciation is well justified! That?s the advantage of a circular argument. You need not be wrong, even when actual events contradict your grandiloquent hypothesis.

Market prices are not akin to the Supreme Court of sound economic judgment. Traders can be irrational and needn?t be right always. As John Maynard Keynes said, ?The market can stay irrational longer than you can stay solvent.? But our armchair economists can always rationally explain irrational behaviour, after the fact.

The author, formerly with JP Morgan Chase, is CEO, Quantum Phinance