The 2008 financial crisis shattered any illusions I had about the rationality of financial markets, which appear to consistently over-react to new information, even if it is trivial compared with the long-run trends that are at play. Hence I am bemused at the behaviour of the Australian sharemarket today, in response to weak retail sales data and ongoing anxiety about the global economy, and the expectation the RBA will cut rates (Shares dive amid global economic jitters). This makes no sense whatsoever.

Treasurer Wayne Swan notes the Australian economy is sound, which is somewhat under-stating the situation. To borrow a phrase from our former Treasurer and PM Paul Keating, the Australian economy is about to “go gangbusters.” This is obvious from the massive amount of resources sector investment that is due over the next few years (see this previous post). Clearly the market has over-reacted.