Skip to main content


Showing posts from August, 2011

Crisis and asset price behaviour

The previous post was squeezed in-between trades (to have a standing record of my thoughts-in-motion). I spared myself a rather longish exposition on history and behaviour. Now that the gyrations have played out (somewhat; and I have unwound my panic trades), I have time for a breather.
The US debt downgrade was greeted with knee-jerk reactions followed by various voices crying hoarse, expressing solidarity in Uncle Sam’s debt. The Risk switch snapped from ‘On’ to ‘Off’ and capital duly forsake equities, fleeing into US Treasuries, Gold and CHF (Swiss Franc). The flight into Gold was understandable, given its current-flavour-of-the-season status as a safe-haven. The CHF and US Treasuries' behaviour were queer, to say the least. 
Crisis moments in history always provide good food for the curious brain.

1987 stock market crash The 1987 stock market crash triggered a bout of risk-aversion. Panicking investors pulled out of equities to seek refuge in Treasury bonds. Gold was sold. The…


So S&P downgraded the US one notch to AA+ with a ‘negative’ outlook. Given the downgrade, escalation in the debt limit and promised spending cuts spread over the next decade; one would be forgiven for thinking Treasuries would have sold off with money flowing into safe-haven favourites (CHF, JPY, Gold..). Treasuries rallied reacting to this news, showing that in times of duress, psychology trumps everything else as investors pile into an asset class for its perceived safety value. Never mind if the expected return is not commensurate with the risk assumed. Actually, few think in terms of 'return' when it is apocalypse time. Treasury rally in the face of a downgrade also indicates that few probably believe in the rating agencies' opinions. With the Swiss bank slashing rates to curb the CHF's rise and the BoJ intervening to prevent a rise in the JPY, the world resembles the stage in the 1930s when everyone scampered to be the first to hit the currency bottom in a bid…