Bearish Convergence

Thanks to the commenter who left this link: When Does the Story Break?. This led back to another good and relevant article, Adaptive Investing: What's Your Market DNA?
Aren’t there really dozens of distinct market languages out there? Absolutely, but I’d characterize them as genetic offshoots of the proto-languages, as the reflection of the adaptive radiation that has occurred as these ancestral investor “species” moved into new “habitats” and took on behavioral adaptations that made them more suitable for that environment. A value-oriented stock-picker today speaks an almost entirely different investment language than a value-oriented macro investor, and if you looked at them from a distance you might be fooled by the morphology, by the equivalent physical distinction between a big black ground finch and a tiny gray warbler finch. But if you pay attention to the grammar of their language, you’d see that they both interpret the world through a reversion-to-the-mean prism. This is their ancestral genetic code, and I believe that there are useful and practical applications that stem from making this connection, by observing that the population of value-oriented macro investors has more in common (from this perspective) with a population of stock-pickers than with growth-oriented macro investors.
In practice:
For example, let’s say that you shorted Twitter right after the IPO because you’re a value investor and you believe that the stock is just crazily priced on a value basis. The stock has gone against you significantly in recent weeks, but over the past few days it’s declined about 15%. Okay … what now? Do you press the short because you think maybe the story is broken, or do you thank your lucky stars for the brief reprieve in the onslaught and cover? You have no insight on this whatsoever because the bull story on Twitter has nothing to do with value and the recent price decline has nothing to do with value. Everything about the stock is being spoken with the grammar of extrapolation, which you don’t understand, and the dominant population around the stock is not your tribe. I know what I’d do with the position if I were you, but then I wouldn’t have put it on in the first place.
Going along with the theory, I believe the tribes win when there is convergence between them in a bullish or bearish direction. The swing tribe is the traders who I'd argue are among the foremost experts in human psychology. They have turned bearish for technical reasons, topping patterns, etc.

As for the fundamentals:
Economist: Why negative interest rates have arrived—and why they won’t save the global economy
ECONOMISTS said it could not (or at least should not) happen. Yet rich-world central banks are starting to impose negative interest rates. In June 2014 the European Central Bank (ECB) began paying -0.1% on deposits held in its vault, before lowering the rate to -0.2% in September. Denmark and Switzerland have negative rates, as well. And on February 12th the Swedes joined the party: the Riksbank cut its benchmark interest rate to -0.1%. Central bankers hope that moving into negative territory will boost their economies in a number of ways. Will it?
The ECB went negative in June 2014. The U.S. Dollar Index began its rally the next month.
Jose Canseco is a former professional baseball player best known for hitting homeruns, using steroids and occasional mishaps such as shooting himself in the hand.
If Canseco doesn't buy the central banks' bullshit, no one will.
From When Does the Story Break?
On the Island of the Green-Eyed Tribe, blue eyes are taboo. If you have blue eyes you must get in your canoe and leave the island the next morning. But there are no mirrors or reflective surfaces on the island, so you don't know the color of your own eyes. It is also taboo to talk or otherwise communicate with each other about blue eyes, so when you see a fellow tribesman with blue eyes, you say nothing. As a result, even though everyone knows there are blue-eyed tribesmen, no one has ever left the island for this taboo. A Missionary comes to the island and announces to everyone, "At least one of you has blue eyes." What happens?
Jose Canseco is the missionary to the people with a message: central banks are clueless. Wait, is my central bank clueless? Do other people know this?

1 comment:

  1. While Jose Canseco is amusing, I think he is too small of a fry to be a missionary. My understanding is that the missionary needs to be trustworthy, reputable and widely followed. Of our modern times the person that seems to well fit that role is Trump - he came out a year ago and told the world that America stinks and is in the dumps. Sure Austrians like Peter Schiff have been saying that for decades, but his following is too small to make him an effective missionary. When Trump came out and publicly said that the economy stinks he was fulfilling the role of the missionary as now everyone knew that everyone else knew that the economy was indeed lousy.

    In reality the situation is far too complex to analogize it to just the green eye blue eye game, but there is definitely something to it and I believe Trump has played a part. As I said in the last post and I know you agree, the fundamentals have been awful for a decade now, but it wasn't until recently that market sentiment has changed.

    - Luke