The Madness of Crowds

The volatile week for all asset classes that followed the “unexpected” Brexit vote showed the UK FTSE 100 as the star performing stock-index, jumping by 7.2%. At the time I penned a brief comment on this within the “Investment Markets Overview”, emphasising that the return was “in local currency terms,” adding that whilst Investment asset-classes are naturally looked at “collectively” to see if bonds are performing better than say stocks, they also need to be observed “individually and in differing currencies,” as doing so provides a more rounded analysis, as can be demonstrated by the FTSE 100 index:

Currency 5-day week 6-days
£GBP +7.2% +3.8%
$US +3.4% -7%
Japanese ¥ +3.8% -9.8%
+3.7% -5.1%

Whilst the song, “what a difference a day makes,” comes to mind, the serious point is that individual and currency adjusted market analysis is important. In fact, in these days of “competitive devaluations,” orchestrated by the major central banks, it’s imperative. Talking of central banks,’ in reality it’s actually the “perception or illusion” that the central banks have control of the markets, including the direction of interest rates, which has created the largest bubbles in history, particularly within the sovereign bond markets which are also key to the other asset classes.

There is now an extraordinary $12 Trillion of negative-yielding government debt, $1TR of which was added last month alone. “Investors / lenders” now pay for the privilege of loaning governments,’ and mainly bankrupt governments at that, money across the yield curve out to 50-years duration, with the only certainty being that if held to maturity they receive a guaranteed loss. History will surely place this period as an additional chapter within Charles Mackay’s 1841 classic “Extraordinary Popular Delusions and the Madness of Crowds.”

Mackay, a Scottish journalist circa mid-1800s, published the aforementioned in 1841 as a history of man’s best recorded follies, which included economic bubbles such as the 1700s South Sea and Mississippi Company Bubbles, the Dutch Tulip mania of the 1630s and the 1840s railway mania. Latter day writers’ have continued the common theme of Mackay’s observations, that of man’s herding instinct when in comes to financial markets, commenting on the great 1929 bubble and market crash, the commodities bubble of the 1970s and of course the various busts of the past 16-years since the outrageous TMT bubble burst of early 2000.

Of course, just like wars, policy-makers of the day say, “never again, lessons must be learned,” but of course they aren’t, as “it’s different this time!” those most dangerous four words when it comes torationalising financial markets. Another common denominator with every boon and bust is that it needsan element of both “illusion and delusion” so as to mesmerise the crowd, and this time around the main central banks have done a sterling job (no pun intended Mr. Carney.)

 
An August 2013 overview entitled, “The Illusionists,” expanded on this and if you would like a copy of it then just email a request.

 
It’s been a heck of a ride to ever lower interest rates since the 1980 high of 20% for the Federal Reserve Funds Rate shown below, along with the 2-year Treasury bond yield:

21 July 2016

I’ll expand more on the bond bubble next time, leaving you today with a Socionomic observation that Mackay would have liked:

 

Crowds, mad or otherwise, extrapolate the past into the future.”

 

 

 

 

 

 

 

 

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2 responses to this post.

  1. […] This Socionomist and technical analyst observes that based on both charts presented, the divergences are of historic proportion and indeed supports another recent observation in respect of another asset-class, as outlined within, “The Madness of Crowds.” […]

    Reply

  2. […] July’s piece on “The Madness of Crowds,” aside of reminding of financial bubbles of the past 400-years, was timed to warn of what […]

    Reply

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