Market Anthropology: Man Versus Nature

Wednesday, June 1, 2011

Man Versus Nature

I think a great deal about causation. Predominantly because we tend to get it wrong so often – yet find what we need in what we see. You can do quite well not worrying about causation as a trader and focus on what actually is right in front of you. Ignorance is bliss, especially if you rely on a system to execute your trades. 

As a curious participant, I find great interest in attempting to understand what likely is much simpler than we typically make it. Or perhaps it’s just more of an existential expression of many different things. 

It simply is what it is – not what it should be. 

The fact that on any given day you will hear with great conviction why the market did what it did from perspectives as varied as an old fashioned candy store is proof to its almost mystical and amorphous composition. 

Trends continue because of many different forces and relationships. Long term trends – trends that have been in place for decades – can and will continue with even greater uncertainty as to what is actually causing them to continue. 

The US government bond market is one of those forces of nature. Alan Greenspan liked to refer to it as The Conundrum.  

Perhaps if he had taken a peak at the historical charts of the US government bond market it would have helped provide greater context and expectations towards the future.

It is hard to deny that there is at the very least asymmetry in the above chart with regards to each respective rate cycle (trough to new lows). The present cycle (approximately 70 years) is actually following the greatest degree of symmetry – likely because of the historic spike in interest rates in the early 1980’s drawing out the trend. In both the previous cycles shown (~ 60 and 55 years, respectively), the final leg down is swift. However, once the previous cycle low was broken, rates tended to base for an extended period of time.  

The chart reflects why I find the comparisons to the 1970’s period of stagflation so misplaced. In the 1970’s, inflation was on an upswing for over 20 years and on its way towards historic highs. Today we have the opposite dynamic with rates drifting towards historic lows. The two rate and inflation environments couldn’t be more diametrically opposed. 

As a parting thought, the chart and current rate environment also speaks to the futility of the recent comments and illusions of causation from the likes of Bill Gross at Pimco. You could say it’s another example of man versus nature. Mr. Gross could very well have had excellent reasoning and rationale as to why he expects yields to rise. However, nature (the market) will always be the great humbler of even the savviest participants; she will walk and romp where she pleases.

I’m sure that realization keeps Ben Bernanke up very late at night. 

More to come in this line of thinking. 


Disclaimer: This is not investment advice. Always do your own due diligence. Erik Swarts is not a registered investment advisor. Under no circumstances should any content from this website be used or interpreted as a recommendation for any investment or trading approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor.