The Fickle Nature of Investor Affections and Austrian Reason

Economics Economics Questions
1

What’s been interesting me of late is the notion of Bulls and the Bears. Universally derided by the talking heads of commerce the “Bear” is characterised as the one headed for the door at the first sign of trouble. Indeed this “chicken little” complex is why they say that the Bull takes the stairs.and the Bear goes out the window. Bears are far more like deer in this respect; they spook easily.

Ok enough of the animal metaphors. We often hear of investor sentiment described as irrational when dealing with economic volatility. Money literally sloshes violently back and forth between different sectors of economy, apparently, at the slightest provocation. “Why aren’t you people invested long? GDP is going up! Look! Growth!” Indeed. This behaviour to me just screams rational decision making. The paramount question in Finance is “Where is the Best Yield?” This sentiment arises, I believe, from the simple facts that, a) everyone likes to maximize their satisfaction from a transaction , b) investors are trying to outrun inflation, and c) hedge fund managers get payed according to how much their clients make. The idea is to protect your investment.

I believe that there is some degree of “animal spirits” driving market action. Especially these days. But I think they can be attributed to little more than “headfake” movements in the market where prices dip precipitously but rebound with authority in short order. Even then technical analysts or HFT algos could be chasing momentum. One way or the other we’re still very much animals so I wouldn’t be surprised if we can still be startled. Austrians know why big, decisive moves don’t happen on mere rumours. They know that before the rational investor searching for the biggest yield will sell her position she needs to find the next best thing. The new growth haven. Because with Individual Self-Interest the only thing that matters is purchasing power.

So what do you think? Is my appraisal accurate? Is this even significant? Am I making a mountain out of a molehill? Or have I just smoked too much grass?

2

I’m not sure what you’re asking. I don’t believe “animal spirits” are involved, it’s simply human “greed” and “fear”. Greed = buy high. Fear = sell low. Contrarians take the opposite view and win if their timing is right, but the problem is getting the timing right.

To bring some economic, or Austrian, terms to bear, it seems to me that market volatility is caused by sudden changes in “subjective value scales”. Suddenly, usually after a big move up or down, value scales change. Investors at first value stocks higher on their scale, cash is valued lower. Then it switches, suddenly, cash is valued higher. Now, what causes the sudden change is another matter. But when markets are volatile, something is causing our value scales to change. The Fed is an obvious culprit.

3

Of course the stock market is full of fools who know not what they do. And they can make all kinds of insane things happen. But in the long run the stock that has solid management and correct numbers is the right one.

The real q is how can an outsider know if management is competent and honest? I don’t know the answer.

Peter Schiff introduces two other factors that complicate matters. First, that overseas stocks pay a higher dividend and are cheaper than US stocks. Second, he predicts that the dollar will lose at least half its value in the next few years, so stocks sold in dollars will lose their worth too.

4

" Or have I just smoked too much grass?"

Looks more like you probably have not smoked enough [:)]

regards, onebornfree