Maybe I’ve seen enough ‘headline bingo’ to last a lifetime (prior Geek crises, bank bailouts, US debt ceiling cliffhangers, QE announcements…), but a few things really stand out this time:
- When faced with unpredictable chaos (in the technical sense of both terms), market participants go into analytical overdrive; prognosticating, publishing, tweeting, blogging, holding conference calls, reading and listening to all of the above and then continuously discussing in the most earnest fashion. This is in order to derive an emotional sense of being in control rather than produce any genuine insight. No one, not a single person is capable of simply saying: “This is unpredictable, I’m sitting tight”*. For some this is emotional weakness, for others it is an intellectual failure, for many it is both.
- Faced with a significant period of uncertainty yet no material information, the market will slowly cascade lower as various participants hit stops (hard, mental or otherwise) or realise that if the worst happens, consensus has become so negative that they’ll get fired for being a contrarian.
- Meanwhile, professional opinion formers generate a narrative to fit the negative price action which becomes an even gloomier consensus.
- Finally, and absurdly, when the most logical outcome actually materialises (in this case, a deal**), the market gaps against all those implicated in the above behaviour with a brutality (short squeezes really are brutal) that far outweighs the volatility they sought to protect themselves from in the first place.
I’m sure all of the above is obvious to many, but ‘Greece 2015’ is not quite over yet so perhaps a new kind of ignominy has evolved for market participants to suffer in the mean time. There are hopefully ways of immunising yourself, and I hope that reading every single page of the link below is one of them.
Despite Varoufakis’s very being exhorting us to study ‘Greece 2015’ through the lens of game theory, surprisingly few people have – with the usual outcome.
*see Epsilon Theory
** or the consensus that a deal is effectively done
Aldous Birchall 