A few days ago, I wrote about how it’s important to take the messy real world into consideration when conducting fundamental analysis of the markets. I’m talking about the world beyond the charts, trend lines, economic statistics, financial news releases and so on. I’m talking about the world where people have bad days, start wars, discover new things about the universe, invent amazing new technologies, and sometimes make decisions based not on facts, but on a shifting set of emotional desires; desires for things like fame, revenge, or a positive legacy.
Earlier tonight I ran across an amazing example of this in a CNBC column by Jeff Cox. The column discusses the developing tension between the Fed and the equity markets as the former pivots to a tighter monetary policy. Why is the Fed doing this at a time when the global economy appears to be weakening, commodity prices are cratering, inflation is nowhere in sight, and the markets are clearly spooked by the moves?
I actually think the Fed’s move makes some sense, as I’ll discuss in a later post. However, the CNBC column raises an interesting possibility as to Janet Yellen’s reasons for the tightening. The piece quotes Nicholas Colas, chief market strategist at Convergex, as saying:
“In retrospect, every Fed chair has their emblematic ‘achievement’: Paul Volcker (tamed inflation), Alan Greenspan (the ’90s expansion), Ben Bernanke (saved the financial system)…For Janet Yellen, her prospective accomplishment must be ‘got things back to normal.’ That means getting interest rates far away from the zero lower bound if at all possible. If for this reason, and no other, the Fed is going to raise rates in 2016 barring a shock to the system.”
So we’re making monetary policy decisions, decisions which affect millions of people in a myriad different ways…in order for the Fed chair to establish her “emblematic achievement” for the history books?
Now to be fair, who knows if this is on Janet Yellen’s mind at all. For all we know, this guy might just be throwing out a hypothesis off the top of his head without any evidence whatsoever.
But the point I wanted to make here is that, whether it’s true in the case of the Fed Chair or not, this sort of thing probably does happen more often than most people would like to think. Our “leaders” make decisions not after a clinical analysis of the cold hard facts, but based on whim or the passions of the moment.
It’s this kind of thing that gives fundamental analysis a bad name. After all, what analyst could attempt to anticipate such behavior, right?
Sure, as I’ve discussed already, the fundamental analyst has to take the messy real world of people into account. But while people may sometimes behave unreasonably, that doesn’t mean we can’t reason about their behavior. People may be emotional, but they’re not totally random.
If we know that some world leader is an impulsive hothead, then we can probably anticipate how they’ll react in a stressful situation. If we know that some public official or business leader is a narcissist, or is a dogmatic true believer in some ideology, then we have a framework by which we can understand what that person might do.
So if you’re a budding fundamental trader, let not your heart be troubled. Yes, the real world of people is complicated and messy. But it can be understood and analyzed. In the next few posts, I’ll be attempting to do just that with respect to several of the issues affecting the markets today. I’ll be looking at the philosophy of China’s leaders, the naivety of the U.S. administration, and the inventive genius of the American people.
So until then…keep pipping up!