It's not easy training children to say "please" and "thank you" when appropriate (I must have reminded mine 10,000 times), and one unexpected benefit of the coronavirus pandemic is that my children now have a healthy hand-washing habit. Nothing focuses the mind like contagious disease.
Today's newsletter focuses on information contagion - how information infects markets, provokes denial and fear, and creates investable patterns during negative events like disease outbreaks. A PDF presentation with graphics and more information underlying the newsletter is available here.
For excellent alternative perspectives, see This New York times review projecting the disease burden of the pandemic. This James Mackintosh article in the Wall Street Journal discusses financial markets scenarios (e.g., L-U-or V-shaped bottom).
No one can deny the epidemic anymore - it's time to wash our hands and dig in.
UNDERREACTION (a.k.a. DENIAL)
I've given webinars and conference presentations on coronavirus over the past month (here's one), and I've been surprised by the wide range of attitudes towards the pandemic in different countries. As recently as last Friday I was on full flights in Scandinavia and occasionally shaking hands during meetings (and then nervously stuffing my hand in my pockets so I wouldn't touch my face).
However, at some banks in Stockholm meetings were canceled to prevent outsiders from bringing the virus into the firms. In other firms, in order to keep trading operations normal through the pandemic, employees were sorted into Team A and Team B alternating weekly home/work shifts. The general consensus in my meetings was that EU and US governments weren't taking the epidemic seriously enough. They were in DENIAL. As they say...
“Denial ain’t just a river in Egypt.”
~ Provenance unclear, but formalized by self-help guru Stuart Smalley (played by Al Franken), 1991.
Eleven years ago we were trading through the Swine Flu epidemic. At the time, while I was trading our hedge fund (MarketPsy Long-Short Fund LP), my colleague Frank Murtha penned this humorous advice to relax about the outbreak (perhaps directed at me!)
Our fund's strategy took advantage of fear-driven dislocations, and we created the below image of an actual trade for our investors to understand how the fund timed investor overreaction. (In 2009 trading on social media was seen as seriously goofy, to put it politely, and we needed clear explanations of how our quant systems identified good trades).
“All the incentives point to continuing this sort of self-extraction….Why would we stop scooping the attention out of ourselves, destroying democracy, and debasing our mental health when that’s the thing that makes the most money and Wall Street’s not going to stop funding it?”
Tristan Harris. Sep 19, 2019. “Fighting Skynet and Firewalling Attention.” Tim Ferris podcast, Minute 1:11.
"... I see people I have known my whole life slip away from me on social media, reposting conspiracies from sources I have never heard of, some sort of internet undercurrent pulling whole families apart, as if we never really knew each other, as if the algorithms know more about us than we do, as if we are becoming subsets of our own data, which is rearranging our relations and identities with its own logic, or in the cause of someone else's interests we can't even see ..."
Peter Pomerantsev. (2019). "This is Not Propaganda: Adventures in the War Against Reality."
“In the Banda Islands, ten pounds of nutmeg cost less than one English penny. In London, that same spice sold for more than £2.10s. – a mark-up of a staggering 60,000 per cent. A small sackful was enough to set a man up for life, buying him a gabled dwelling in Holborn and a servant to attend to his needs”
― Giles Milton, Nathaniel's Nutmeg: How One Man's Courage Changed the Course of History
"You need to build a fairytale that will be common to all of them.... The disparate groups needed to be unified around a central emotion, a feeling powerful enough to unite them yet vague enough mean anything to anyone."
Peter Pomerantsev. (2019). "This is Not Propaganda: Adventures in the War Against Reality"
“Facebook has learned how to manipulate empathy and attachment in order to increase engagement and make billions.”
~ Jennifer Szalai. Jan. 16, 2019. New York Times. "O.K., Google: How Much Money Have I Made for You Today?"
“Instead of mining the natural landscape, surveillance capitalists extract their raw material from human experience.”
~ Jennifer Szalai. Jan. 16, 2019. New York Times. "O.K., Google: How Much Money Have I Made for You Today?"
“You’re not technically the product, she explains over the course of several hundred tense pages, because you’re something even more degrading: an input for the real product, predictions about your future sold to the highest bidder so that this future can be altered.”
~ Sam Biddle. Feb 2, 2019. “A Fundamentally Illegitimate Choice”: Shoshana Zuboff On The Age Of Surveillance Capitalism." The Intercept.
True story: In the first few days of October 2018 my friend Nate asked me over coffee, “Do you think we’re at the top of the market?” Over the course of an hour Nate and I went through the market prognosis in detail. Interest rates were up, housing prices falling, increasing economic uncertainty, and our sentiment indicators were all negative. We both agreed it was the top. We closed our conversation with a mutual reminder - “Time to sell everything.” A few days later the S&P 500 dropped more than 3%, beginning the rout that continues through this week.
But to be clear - I'm no hero. I didn't sell anything.
And I’m not alone in my inertia. Despite what we KNOW to be true intellectually, taking action based on that knowledge is a different beast.
Today’s newsletter examines why it’s difficult for many people to sell at tops and why - based on longer term patterns - the selling may not be over.
IT'S NOT AN INTELLECTUAL GAME
I have various excuses for my inaction in early October - I’m not a market timer, I'm not currently managing money for others, it's not worth my time and attention, etc... All seemed true at the time, yet all these excuses are intellectualizations. I could have saved a pretty paper penny getting out back then. The leap from armchair investor to professional crosses that motivational chasm.
A few months ago my wife and I moved our kids from California to Bali, Indonesia for the year. We've been surprised by the strength and frequency of the recent earthquakes. During one earthquake I watched waves of water slosh out of our pool. During another I paused a business call as my roof groaned and light fixtures jangled. During a few late night earthquakes I’ve been shaken awake in a daze wondering, “Why is my wife jumping on the bed so hard?” Is she doing jumping jacks?!" (She had similarly foggy and illogical thoughts about me).
We have chosen to live in the “Ring of Fire” where earthquakes and volcanic activity are a fact of life – part of what makes the landscape beautiful, lush, and dramatic. And despite the instability here, we feel very lucky – residents of the Indonesian islands Lombok and Sulawesi have lost much more than pool water.
Financial markets have their own quakes and tremors, including one this week. Intellectually, we know such events will happen. But after each many people wonder “Could this be the Big One?” As a seismologist of the human psyche, in today's newsletter I feel some responsibility to explain what we know about predicting market downturns. Today’s newsletter explores market quakes: their psychological predictors, the potential this week's tremor was a precursor to the “Big One”, and a Balinese understanding of duality.
Sentiment Momentum