Haphazard Linkages

In what should evolve into a multi-part series, Mind of the Market will endeavour to peer under the hood of the largest laboratory of human psychology in the world; the financial markets. Where frigid numbers and emotive participants spar enthusiastically in an elaborate and often bewildering drama-in-motion. Where apparitions and reality merge so finely as to be mostly indistinguishable. Where paradoxes and circular relationships reign supreme, frequently, and fervently, questioning the very essence of rationality and cause-and-effect. Part I addresses the dynamics of Pavlovian Conditioning and market participant response to stimuli in investment decision-making. Intriguing paradoxes and the behaviour of asset prices - a cause (and consequence) of market participant response - is considered concomitantly. Finally, the psychology of herding closes Part I. Pavlovian Conditioning and Asset Price Behaviour When Ivan Pavlov discovered his lasting contribution to humanity - Class...

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 s...

Quick rallies make me a little more skeptical than usual. The bond markets seem to tickle the skeptic in me. In times of doubt, I turn to history for a new perspective through which to view the present moment. As I browsed through the past, I chanced upon this article on the Great Bond Massacre of 1994 . As with almost all instances, the 1994 bond market episode is instructive as much for the parallels with the present moment as for the uniqueness. Back then, as today, bond yields were at historic lows and inflation was muted. Wages were subdued and companies were struggling to raise prices. At the same time, idiosyncrasies exist, making the comparison an interesting and instructive exercise. In 1994, euphoria ran high and the big spread between short and long rates saw speculators loading in on the carry trade (borrow short, invest long). The Fed kept rates low as the Clint on administration contemplated ways of slashing the deficit and Mr. Greenspan worried about inflation. Then...