Stock markets around the world react to every news report like pigeons in a park. Huddled together in one strutting mass they move slowly around, clockwise, until the smallest cue strikes them. Suddenly, there is a small panic and the flock races counter-clockwise in a feathered flurry. They stop, and then the heads all bob clockwise again for a moment. After a few scratching moments a blind panic sets in and boom! Counter-clockwise with a few desperate flaps of wings.
You may think that pigeons are not rational enough to run a financial system. But if you want to find something in the news to explain the market’s behavior, you might as well consult the mooching birds at the nearest park. Everything that stock markets are reacting to has been in the news for a very long time – they suddenly decided, for their own reasons, to start taking it seriously.
As today starts, the movement is staying very counter-clockwise. The pigeons seem to have a purpose.
August is typically a sleepy month for stocks, but this one has been very different. It is not the news itself that has riled markets, but rather their sudden realization that crises that have been brewing for a long time, such as the European Debt crisis or the US Debt crisis, are very serious. They’ve even taken to watching unemployment initial claims, reacting to a very small downtick in the one somewhat healthy indicator.
What has changed is that traders woke up and realized how much risk they were carrying. It is the psychology that is causing the panic for reasons that will not be obvious. If the pigeon analogy seems a bit harsh, consider this excerpt from J K Galbraith’s work “The Great Crash”, a short book on the 1929 Stock market:
“In the autumn of 1929 the mightiest of Americans were, for a brief time, revealed as human beings. Like most humans, most of the time, they did some very foolish things. On the while, the greater the earlier reputation for omniscience, the more serene the previous idiocy, the greater the foolishness now exposed. Things that in other times were concealed in a heavy facade of dignity now stood exposed, for the panic suddenly, almost obscenely, snatched this facade away.”
The only thing that has changed in the last month of trading is the psychology. And that may be the most important thing of all.
If you want to understand the underlying problems with the Eurozone that seem to have spooked the pigeons particularly badly, I strongly recommend this Spiegel interview with George Soros. This crisis has taken a turn for the worse lately, but what is most important is that it has never been dealt with:
The politicians have not really tried to fix any crisis; they have so far tried only to buy time. But sometimes time actually works against you if you refuse to face the relevant issues and explain to the public what is at stake.
Longtime readers of Barataria will note that this is precisely what I have been writing about as the primary concern since early 2009. The psychology of this moment is merely a reflection of what could have been an appropriate sense of urgency (not panic) when all the elements we have today came together for the first time.
Meanwhile, the park is full of pigeons. It may seem like an utter waste of time to sit on a bench and watch them bob and preen as they move first one way, then the other. But their movements are not all that different from those of humans. The flock has its own personality, something never explained by the attitude of any one bird or anything remotely rational. But it might also be the reflection of something that happened a while ago. You never know with birds.
Why are all the pigeons running counter-clockwise? Because they believe there is safety in a big flock, and today the flock is running that way. If operating about the same as semi-feral birds bothers you it might be best to question not the direction of the flock but whether it is more secure than being alone – or, at least, how a properly managed group of intelligent animals with access to information and communications might behave differently.