Tuesday, August 25, 2015

Market Psychology

The thing that struck me the most about yesterday’s global market selloff, is the sense of déjà vu. The more things change, the more they stay the same:


This is from the cover of the November 1 issue of The Economist magazine – November 1997, that is. At the time, as now, emerging market currencies and capital markets were under enormous pressure. Then, as now, the USD was on a multi-year bull run:


Then, as now, the Fed was right at the start of a tightening cycle (which was short-circuited by the emerging markets crash).

The big difference, at least for us in Malaysia, is that our economic fundamentals now are much stronger. In 1997, the economy was very obviously overheating from a massive credit and real estate bubble – loan growth had exceeded 20% in the two years prior to the AFC. Excess demand was turning up not in inflation, but in asset prices. The current account was in deficit, and international reserves were miniscule. Worst of all, the currency was soft-pegged to the USD and the REER was dragged upwards with the USD’s appreciation. None of these conditions apply in the Malaysian economy circa 2015.

This time around, we’re looking at the consequences of someone else’s sins. Many have been wary of the fallout from China’s post-GFC stimulus, and the Yuan’s devaluation two week’s ago was a signal that all was not well in the Middle Kingdom.

Nevertheless, this is as much about market psychology as it is a fundamental story of a mismatch between prices and underlying supply and demand. You don’t get this kind of panic – and yes, it was a panic (bid-offer spreads on the Ringgit yesterday were ridiculous) – without prices moving well beyond what’s justified.

From my point of view, investors sold because market prices were indicating that others were selling. Some fund managers sold because they were facing redemptions from their investors, while others had holding limits which constrained their holding power, meaning they couldn’t ride out a market downturn. But my thinking is that it’s mostly, I need to sell before the others do.

Nobody wants to be left holding the bag. It’s a case of I know, that you know, that I know, that you know ad nauseam. It’s perfectly rational – and yet totally irrational. It takes a lot of discipline and focus to ignore the noise, ignore the fear and emotions, to go against the crowd.

I’m not sure that even taking the human element out of it would change things much – the same behavioural rules would likely apply to trading algorithms (risk limits, investment horizons etc). If all programs act the same, you’ll still see the same herd-like behaviour in market prices.

The more things change, the more they stay the same.


  1. The herd behaviour is being push forward by financiers, while economist still on their rational model the so call homoeconomicus. I say, the economist will never understand the market and get to nowhere if they keep following the model they on to.

    Following this blog for long time, only now my hand feel itchy to write a comment.

  2. The herd behaviour is being push forward by financiers, while economist still on their rational model the so call homoeconomicus. I say, the economist will never understand the market and get to nowhere if they keep following the model they on to.

    Following this blog for long time, only now my hand feel itchy to write a comment.

  3. "Excess demand was turning up not in inflation, but in asset prices."

    What do you mean sir?

    1. I would interprate it as the following. In the 90's, there was an unprecedented boom in the stock and real estate market because of the opening up of financial accounts and deregulation to counter the economic crisis in the 80's. More and more capital was being diverted to these sectors, culminating in asset prices increase. Capital or excess demand are not being used for investments in the real economy like exports and investment, rather the speculative side of it in forms of stocks and real estate.

    2. I would interprate it as the following. In the 90's, there was an unprecedented boom in the stock and real estate market because of the opening up of financial accounts and deregulation to counter the economic crisis in the 80's. More and more capital was being diverted to these sectors, culminating in asset prices increase. Capital or excess demand are not being used for investments in the real economy like exports and investment, rather the speculative side of it in forms of stocks and real estate.

  4. I just read this:


    Granted that this is nothing like the monetary trilemma, the so-called "Impossible Trinity". I was just wondering whether moving from an export oriented model to a consumption driven one, is a must for all developed/ semi developed economies.

    The ideal would be a balance of the two but is such a balance unattainable or very difficult.

    I know it must be a strain on your time with the storm blowing outside and split second investment decisions to make especially pertaining to buying into a volatile local bourse but care to enlighten me dude, if you don't mind?

    p/s: note that your blog is now swamped with money lenders parading their services...hope I dint bring them in : D

    Warrior 231

    1. @Warrior

      Germany and Korea seem to do ok as export oriented economies, so its not really a hard and fast rule.

      But I think Mr Wang is conflating two separate development issues here. The "high growth fantasy" he refers to can be simply put down to growth accounting. If you look at the three components of growth - labour, investment, and productivity - there will be limits to all three.

      Investment growth is subject to diminishing returns, labour supply growth is subject to demographics, and you can boost productivity growth only so much by shifting workers from low-productivity to high productivity sectors.

      The end game for all economies (including ours) will eventually be the 2%-3% growth coming from productivity improvements - if we're lucky.

  5. Ah, a R R fan!

    The other central bank chiefs in the region aren't doing that a bad job themselves - like those heading up the HKMA, Bank of Thailand, Bank Indonesia, MAS and Bangkok Central ng Pilipinas.

    They have managed their currency gyrations against the USD pretty well.

    As for Krugman, he is a fan of "deficit spending". Definitely not a fiscal conservative in the Merkel mode!

  6. Oops....that should be Bangko Central ng Pilipinas!

  7. @anon 1.02

    MAS uses the exchange rate as its monetary policy tool, while Hong Kong uses a currency board system. You would expect to see exchange rate stability in those cases. In fact it would be downright disastrous for it to be otherwise. Given exchange rate stability, the consequences naturally turn up in other places. Both HK and SG are fighting deflationary pressures. So far HK is holding up (barely), but SG is flirting with recession.

    BI, BOT and BSP have explicit inflation targeting mandates. Any exchange rate stability in that regime is by sheer accident. In fact, going through the individual country situations, the Rupiah is doing no better than the Ringgit, so I'm not sure why you're saying BI is doing better - if you look at a time scale longer than a year, the Ringgit has appreciated against the Rupiah. BOT monetary policy has been a disaster since last year - they're now trying desperately to talk down the Baht. So is BSP, though the Philippines is (un)lucky in being the only decent growth story in ASEAN.

  8. Afternoon all, trust all is well to you all,

    Sorry to read about our friend from Singapore is facing the big C. Hope your operation is a success.

    Just read TS Zeti speech http://www.thesundaily.my/news/1541466

    TS Zeti indeed is on the spot.

    I am of the opinion that there is now a big disconnect between the real value of ringgit vs usd, sgd aud etc.

    Zuo De

  9. Part 2

    And @Zuo De, (you beat me to it, man) that is what Dr Zeti was saying- the disconnect between finance and the real economy:


    Shuffling financial instruments, assets, speculation etc can only get you so far especially with plenty of QE money sloshing around....but eventually, the whole scheme will run out of delusions and when Mr Reckoning steps in, the Grim Reaper normally follows in his wake. We are now at that stage of the global economy...and the winter is only starting as only a global war and total collapse of the current framework will put that right...but that's History's way of Natural Selection at work...culling and shearing off absurdities so that realities can sprout, grow and thrive in their place.

    Warrior 231

  10. Hi

    Wonder what happened to part 1?

    warrior 231

  11. Part 2

    And look at Yank wage growth as well, here:


    so they are next in line to get into their Japan lost decades as the Euro have just done….hahaha:


    So you see, when wage growth inflation dies, there are very few means left to switch inflation on unless you pass the pie around to restart it…except maybe a global war..perhaps…you know creative destructive destruction to reset the switch and start afresh hahahaha…which is what will be on the cards next.

    Now another tidbit, about QE whatever version….it has enriched the rich further by moving capital in their direction by default, skewed inequality numbers and created a class of financial leeches who have binged on all that QE blood through a variety of absurd financial instrument-like suckers till they are bloated.

    The masses are now to be left holdling the can courtesy of Central bankers thinking with their butt brains rather than their real brains.

    I remember writing about this last year when I talked about the Fed blowing its balance sheets after WW1 and how it enriched the elite but I dint have much data to support the contention, then (actually there is, but man, I was too lazy to look).

    Now, thanks to el digitalo internetto, you can take your pick, folks from too many mea culpas (here are two sample tidbits) :



    and here is how you common folk is screwed by QEs or by any "debt steroids" for that matter. Take Japan for instance:

    “Nor has Abe been able to persuade corporations like Sony (NYSE:SNE) or Toyota (NYSE:TM) to raise wages to increase consumer spending, though they're flush with record profits thanks to massive monetary stimulus.”


    See, honest hardworking folks are losers in the eyes of financial fat cats and political big wigs...that's why power counts...as cash aka money is .....hahahaha

    Warrior 231

  12. @Warrior

    I seem to recall a certain someone claiming that QE always results in hyperinflation. Wasn't you was it? :)

    In any case, I think saying QE causes low wage growth is a long stretch.

  13. All things being equal, that is what excessive easing should do in the long run, as what happened previously in japan and the weimar germany in those prewar days.

    But then again, those were in the pre bretton woods gold standard era, you might say and today's scenario is unique. But I will respond in due course, rest assured.

    2. LOL........long stretch....sez who, dude? Sez the guy who insists that oil is the trigger when all the world knows Malaysia is a a net oil importer and a gas exporter including Malaysian themselves. The oil bunkum has worn thin....threadbare almost ......no investing head honcho worth his salt buys into that anymore despite the wire agencies screaming themselves hoarse. A hint of whats cooking was revealed by MIDF themselves as of August:

    "MIDF said "the significant depreciation of ringgit was due to the selling of MGS (Malaysian Government Securities). Data from central bank showed that foreign holdings of MGS were reduced by RM8.0 billion in August, the highest in 25 months. On the other hand, total foreign bond and sukuk holdings were down by RM8.9 billion, highest value year-to-date."


    I bet they (MIDF) are crazy conspirators too, gone amuck that is..........hahahahahahaha. Remember someone sarcastically querying whether I just discovered Credit Default Swaps (CDS) some time back. Well, here is a bit of sunshine to brighten up yer daylight:


    Forgive me if I am being condescending, you are still a good dude by a long shot. Just watch what you are smokin' mate for it sure smells hokey.......hahahaha.

    Have the data to write a longer one about QE and wages but time constraints keeps me leashed real tight....for now... ;D

    Warrior 231

    1. @Warrior

      1. As I recall, in Weimar Germany inflation began accelerating almost immediately, as it did in post WWII Japan (and post WWII Germany for that matter). Since you seem to think QE and money printing are the same thing, you have a bit of a methodological paradox here boyo.

      2. Ironically, I was with MIDF on Monday. You might want to refer to my Notes on Oil, especially the comments on LNG.

      The reason why we're all still talking about oil is because of the structure of the LNG market. There's no accepted benchmark price in Asia (unlike in the US), and the market is largely OTC with contract prices mostly pegged to JCC with a lag. Malaysian LNG contract prices basically collapsed in May, nearly to the same degree as oil has - the S-curve price range was much wider than I expected. Contract prices now are about US$8 per mmbtu, compared to US$17 a year ago, and down from a peak of US$21 in early 2014. So, like it or not, global oil prices are still relevant.

      More importantly, the prevailing narrative is that Malaysia is a net energy exporter, and investors are treating us as such. Whether that's crude oil or LNG, or refined fuels, hardly matters at this point. Our overall exposure is slightly larger than Australia and Canada, and slightly less than Mexico's. No surprise then that these four currencies tend to move as a bloc.

      3. On CDS, I'm starting to think CDS pricing (and implied default probabilities) has more to do with market supply and demand for CDS, than with market views on credit.

    2. Erm....getting cocky eh kiddo?. Well I almost dint want to link anything from that rag (wink wink), dude but on second thoughts reflections and repentance are better voiced via the horse's mouth:


      the whole mea culpa is bleeding with choice sirloin cuts and it was difficult to pick a winner, but I loved this cos it said everything thats to be said ....oh sooo sweetly:

      "Even by the Fed's sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn't really working."

      and just for the road, here is another link to those sensitive to anything Wall Street:


      But economists with shaded blinkers dont give a damn wont they, especially when they are being ridden roughshod by their financier jockeys to the swill trough.......hahahahahahaha.

      2. Oops....kiddo..them slips are showing....wonder who is wrestling with paradoxes actually....emmm...let me see MIDF...hahahaha

      You see yesterday they spouted this:

      “As long as foreign investors are not done with their asset selling, it would be difficult for the ringgit to recover to its previous level,” MIDF Research said yesterday.

      and here:


      But barely 1 hours or so later they do a three sixty pirouette:


      Phew...in all my 50 years(yep.... I have hit a half century) on planet Earth, I have not seen such a serious case of schizophrenia...but wait......more will be in the pipeline soon and more ballerinas will cringe in embarrassment....hahahaha.

      CDS? mmmm....now its supply and demand...maybe we will get back to somewhere saner when things calm down, wont we, mate? U know like how Moody's,Fitch and SP are now smelling roses after being near pariahs half a sun back......hahahaha.....

      3. Gas?oil? ...ah now you are getting somewhere..actually, Bloomberg provides a snapshot of gas, so that should be elementary,isnt it:


      Thing is its has been oil, oil, oil and more oil everywhere and not a ringgit to spare..when actually:


      Wonder if you missed out on the term "factored in", a common term in investment honchos vocabulary.......thats why people like Nazir says MYR is way above its FV of 3.70 to 3.80....

      Now let me see whats twitching inside my knee cap.....hahahahaha

      Warrior 231

    3. @Warrior

      1. Still waiting patiently for your evidence that QE causes low wage growth. Just sat through a presentation yesterday on US prospects - much of the current poor wage growth is actually due to demographic changes (much as in Japan in the 1990s).

      2. Not really a contradiction - most analysts are expecting short term weakness before a recovery in the exchange rate at the end of the year. Also, their chief economist just resigned last month, so you might be seeing reports from two different people.

      3. That Bloomberg quote is for US Henry Hub prices (that's the US benchmark). Unlike oil, the global LNG market is really weird, with very large price discrepancies between regions, due to the large capex required for LNG transportation. Transporting US LNG to Asia is barely profitable, so arbitrage opportunities are limited. Having said that, people are trying e.g. Petronas 2012 acquisition of Canada's Progress Energy and is currently building an LNG export facility in British Columbia.

      Generally speaking, US prices have been the cheapest, as the acceleration of NG production from shale oil fields and an almost complete lack of export facilities means the US market is flooded with gas. Gas on the European market is much more expensive, and the Asian market is an order of magnitude more expensive still. You'll note also that my blog post on oil (and gas) predates Irwan's statement by a couple of months.

      As for fundamental value - as I said before, deviations from FV are the norm, not the exception. As long as the Ringgit is not out of line with the other commodity currencies (and we're not), I don't see why people are making such a fuss.

      Lastly, despite the truth, I'm STILL hearing analysts and market participants (especially but not solely foreigners) refer to Malaysia as a net oil producer. Maybe these guys don't read The Star.

  14. Oh yeah....I just read this. Hope you like it especially the last paragraph:


    Warrior 231

    1. @Warrior

      Read it. Not exactly surprised. Actually, most central bankers know already, for example this series from the Atlanta Fed:




      The only people who really pay attention to central bank communications are in the financial markets, because they have money on the line.

  15. 1. CBs: Thanks for the article dude. Shows how detached CBs can be from the mainstream.

    2. QE- wages : err...ummm.......QE ...wages.....gulp....chomped off more than I can chew? Nah...just be patient,it will be up....

    3. MIDF, CRAs and Brazil: In the meantime I was struck by how fickle minded financial analysts,economists can be:

    "Could the worst be over for Brazil?" Brown Brothers Harriman emerging markets strategist Ilan Solot wrote in a research note. "Only time will tell. But the idea that we are approaching an inflection point is not as far-fetched as it was just a month ago."A more stable currency comes at a crucial moment since it would help the central bank rein in inflation without a need for further rate hikes. It could also reassure Brazilian consumers, whose confidence has sunk to record lows.

    Also shoring up the real is the central bank's decision to step up intervention in the foreign exchange market, as well as Moody's Investors Service's recent declaration that the country's investment-grade rating was safe for the next couple of years."

    for after you read the whole stuff and digest it especially the one about Moody's, wham...this one comes into the pix (folks...this is a must read):


    There are echoes of some vaguely familiar country (wink wink) in the link above, can't put my finger where but even more hilarious was the fact that Moody's prognostics was dismissively upended by S & P.

    See things can change in 21 days or even less but CRAs have never been accurate much less consistent, anyway.

    So I guess I have to make myself understand MIDF's bizarre turn perfectly well....for ...by gosh....they turn colour faster than even a chameleon can ever dream of.....hahahahaha....yep faster than CRAs even...hahahaha

    Warrior 231

  16. This should be Part 1 (as usual went missing)

    Part 1

    The crux of my contention that QE induces wage growth stagnation rests on the following theoretical model as espoused by Palley. The key points being the following:

    1. “On the demand side the model is expanded to include the effect of real wages and income shares as follows:

    y = D(y, w/p, sw, sp, sc, …)
    Dw/p > 0, DsW > 0, DsW > DsP > DsC < 0

    The economy is assumed to be wage-led so that an increase in the real wage and wage share both increase demand. An increase in the commodity share decreases demand. An increase in the profit share can increase demand if it comes at the expense of commodities, but it reduces demand if it comes at the expense of wages. Commodity producers can be identified with OPEC. An increase in commodity prices is equivalent to a tax on wages and a redistribution of domestic income that lowers aggregate demand.”

    2. In sum, a simple Keynesian styled ISQQ model shows at the theoretical level that there are several channels whereby QE can have negative aggregate demand effects. These include ……….. higher commodity prices that lower real wages and adversely impact income distribution;………..….”

    Having established the potential channels through which QE can wrought a negative aggregate demand (in 2 above), Palley postulates that to be exactly the case in his concluding remarks here:

    “Moreover, commodity prices and interest rates have actually responded to the Federal Reserve’s second round of QE in a manner consistent with these negative theoretical effects.”

    Source: http://revistas.unam.mx/index.php/rie/article/viewFile/37317/33907

    While he does not have solid data in there, Palley’s contentions are validated by data from elsewhere…

    Warrior 231

  17. @Warrior

    Very interesting. Probably very wrong, but interesting nonetheless.

    But I'll look at it later, as there are more important things at hand.

    On this blessed day, I greet you brother from Mina, and ask forgiveness for all my wrongs and sins against you, whether in seriousness or in jest. May Allah swt show us His infinite mercy.

  18. I don't think I ever mentioned QE and hyperinflation in the same breathe, dude? Been downing too many Don Perignons lately, man.....hahaha

    Be that (QE and hyperinflation) as it maybe, I have a theory as to why inflation didn't take off despite tightening labour markets.Perversely, dirty ol' QE has a role to play and much of what I am about to say is related to Part 1, Part 1b and 3.38am above (to give them their proper sequence!).

    By the way, you really need to fix yah comments section, mate, instead of smoking or chomping on them signature bourgeois Havana cigars like a true blue capitalist would hahaha. It is teeming with ah longs and weird verification Qs and pix ....... hahahahaha.

    But what I am about to rant will remain on the back burner awhile for I have to hop on me bike, and ride through the countryside to me farm yonder in them boondocks to a waiting heifer in a paddock for Faith calls and Sacrifice beckons......

    So once I have sharpened them tools, wielded them to good effect, be done with the cow, plus enjoy the moon's final lovemaking session with Earthon the 28th as part of its tetrad quartet....I will be back.

    In the meantime, hasta la vista dude and ..... Salam Aidil Adha to HishamH and family. May Allah Blest you and yours and keep all safe always, insyaAllah

    Warrior 231

  19. Great to know that you are the epicenter of this holy day.

    Take care dude, and yes seek your forgiveness too for my faults whether in seriousness or in jest.And yes on my part, everything is sincerely forgiven and forgotten if any. May Allah blest you and yours with a mabrur Haj, inshaAllah and shower His infinite Mercy on us all.

    Keep safe and take care mate.

    Warrior 231