On mkt turmoil: Pearls from FT’s Lex and others

In Financial competency on 20/01/2016 at 5:52 am

From FT’s latest Letter from Lex

On the list of books that everyone in finance should read, Benoit Mandelbrot’s The (Mis) Behaviour of Markets sits near the very top. For those who have made the questionable decision to earn an MBA or a CFA (your correspondent is guilty on the second count) it is an essential curative to the large quantities of pernicious nonsense consumed thereby. Against the classical finance theory, Mandelbrot points out that price changes (unlike coin flips) have “memory”: prior changes have effects on future ones. Stocks demonstrate momentum – until they don’t. The basic pattern of all markets (seen at any scale, from the intraday to the multiyear) is periods of identifiable trend, broken up by sharp periods of volatility, after which a new trend takes hold. Once this fractal picture of market dynamics takes hold, one sees it everywhere.

We have undoubtedly entered one of these liminal periods of volatility that separate longstanding trends. The long bull market is over. That does not mean, however, that it will not be followed by yet another bull market. Lex has no idea how one would know what the next trend will be, except to say that current high valuations of stocks and bonds make high future returns a bit less likely. There is, however, widespread belief that the next trend will be down. We hear talk of deflation, overcapacity, slowing trade and industrial activity, higher interest rates, emerging market debt crises, and various other flavours of economic distress.
In retrospect, it is clear that Lex made its own contributions to the atmosphere of gloom this week.


This is all pretty dour, and we may all need to take a step back. Because bearishness is en vogue, and everyone (Lex included) seems to be particularly aware that bearish data do not mean that the next market is especially likely to be a bear. On the contrary, in fact. Groundless optimism, rather than paranoid pessimism, is the most fertile ground for a bitter harvest. And the week ended with some reassuringly calm words from Jamie Dimon on JPMorgan’s earnings call. As far as he can see, the economy is holding up. Cheap oil prices are not the end of the world. The market’s mood is not a reliable indicator.


“You have a big change in the world out there – people are getting adjusted to China slowing down.”
Jamie Dimon, chief executive of JPMorgan Chase, on the bakn’s fourth-quarter earnings.

“Technically we are in a bear market. … There is just a broad reassessment of risk right now.”
Laurence D. Fink, the chief executive of BlackRock, the world’s largest money management company.

(NYT Dealbook)

My favourites

As a colleague pointed out, it is tempting to believe the markets only when they are sending a message that coincides with your pre-existing views.


Given that the Fed took the first step in withdrawing the stimulus last month, are market movements an indicator of economic activity or a sign that investors are worried that Daddy is about to cut off their allowance?

(Economist’s Buttonwood)

  1. Luv that Buttonwood comment.

  2. No worries man. From international macro perspective, would be a flat to slightly down year, not yet for major crash and prolonged secular bear. Although individual countries may drop -30% or -50%.

    There will still be an overall irrational exuberance meltup before the next big plunge. Golden times still ahead.

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