Daily Archives: April 27, 2015

Keynesian groupthink. Crowds and investors take it all in strides.

Not few smart people from main street are baffled: most investors not only calmly assume negative interest rates for their investments, but also seem to enjoy playing the Central Bank controlled “common knowledge game”. I am frequently asked: why is it that investors, both individuals and institutions, calmly accept NIRP or ZIRP? How come investors seem to be willing to buy either negative yielders, when they play it safe, or equities or high yielders, when they want to go for income? What’s more, they don’t look like being particularly stressed about it. Nobody senses the danger embedded in actual pricing. ¿Does that make sense?

groupthink1It’s a very good question. You know it is, when you understand the extraordinary relevance of the issue, and  you are nevertheless unable to provide a short, sharp reply. In order to find one, it may be time to switch out of economics (it offers no rational answers for this conduct), and take a look instead at both sociology and psychiatry. The observable fact is that rational investors are an endangered species. They seem to share the fate of the black Rhino. ¿Why?

Something is amiss in my long and elaborate reasoning. This crazy monetary and fiscal environment goes on and on with no signs of an end. Worse yet: it has been approved and consented by a majority of the population. And validated by institutional investors. There has to be a deep human reason for the market to blindly follow the  CB leader “du jour”.

victim-of-the-spanish-inquisition-everettMuch like in the Nazi Germany with Hitler, most of the population and investors are not in the Central Bank/keynesian groupthink game. But following the leader is the easiest way out of their personal conundrum. Individual thinkers have a tough time, and the Gestapo might single them out. It’s best to go with the flow.

Nothing new. When the time comes, humanity is seldom brave to stand up against wrongdoing. The Spanish medieval inquisition court is a case in point: people looked the other way. We are still there nowadays. Think of the standard witness behaviour in rape scenes in the NY underground! We have to invest in real education for the population: everywhere!

I was unable to see this. I thought people would not take any more lies at some point. I was wrong. We all get things wrong, Bernanke being the living exception of course, but nonetheless, my ego has to put up with it. Thankfully, when humbled by human behaviour, and conceding error, it does help it to see my shortcoming pale, when put in contrast with Eugene Fama’s EMH (efficient market hypothesis). This quote shows his degree of conviction in his theory:

I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.

I couldn’t disagree more. Markets can only be efficient, and the price generated optimal, when economic actors are buying and selling rationally, in full knowledge and understanding of all the relevant information. This is not realistic. Where’s the rationality to be found in a buyer of French debt at negative yields? He is just following the obvious course, the one that inflicts him less pain in the very short, inmediate term. We all expect too much of rational behaviour, and that doesn’t help our investment performance. We have to allow for ignorance, herding, misunderstanding, and central bank rigging. That makes investing a very difficult science to master. Continue reading