The Financial crisis in 2019

George Charles Selden believed that market prices were driven by the mental attitudes of investors. So in 1912, he wrote Psychology of the Stock Market based on his “years of study and experience” from watching and writing about the stock market.

Much of Selden wrote over 100 years ago is the same today. Investor behavior and market prices are still intertwined. Recognizing that fact is the first step to keeping an open mind — as Selden suggests we should — in order to limit mistakes and losses.

I pulled out some of the bigger issues investors face, as he described it:

On the market cycle and investor behavior.

As a convenient starting point it may be well to trace briefly the history of the typical speculative cycle, which runs its course over and over, year after year, with infinite slight variations but with substantial similarity, on every stock exchange and in every speculative market of the world—and presumably will continue to do so as long as prices are fixed by the competition of buyers and sellers, and as long as human beings seek a profit and fear a loss.

The fact will at once be recognized that the above description is, in essence, a story of human hopes and fears; of a mental attitude, on the part of those interested, resulting from their own position in the market, rather than from any deliberate judgment of conditions: of an unwarranted projection by the public imagination of a perceived present into an unknown though not wholly unknowable future.

Selden goes on to explain in detail the typical behavior at each stop along the market cycle. That behavior has a lot to do with how an investor’s situation fits or conflicts with the direction of the market. The cycle of behavior is as old as there are markets.

On the dangers of confirmation bias.

Probably no better general rule can be laid down than the brief one, “Stick to common sense.” Maintain a balanced, receptive mind and avoid abstruse deductions. A few further suggestions may, however, be offered:

If you already have a position in the market, do not attempt to bolster up your failing faith by resorting to intellectual subtleties in the interpretation of obvious facts. If you are long or short of the market, you are not an unprejudiced judge, and you will be greatly tempted to put such an interpretation upon current events as will coincide with your preconceived opinion. It is hardly too much to say that this is the greatest obstacle to success. The least you can do is to avoid inverted reasoning in support of your own position.

After a prolonged advance, do not call inverted reasoning to your aid in order to prove that prices are going still higher; likewise after a big break do not let your bearish deductions become too complicated. Be suspicious of bull news at high prices, and of bear news at low prices.

One of the principal difficulties of the expert is in preventing his active imagination from causing him to see what he is looking for just because he is looking for it.

Investors tend to look for information that confirms their theories and ignore information that opposes it. Charlie Munger would suggest investors are better off doing the opposite. Investors should seek out disconfirming information in order to destroy their worst ideas, so only their best theories are followed.

On relying too heavily on math and models.

The effort to reduce the science of speculation and investment to an impossible definiteness or an ideal simplicity is, I believe, responsible for many failures. A. S. Hardy, the diplomat, who was formerly a professor of mathematics and wrote books on quaternions, differential calculus, etc., once remarked that the study of mathematics is very poor mental discipline, because it does not cultivate the judgment. Given fixed and certain premises, your mathematician will follow them out to a correct conclusion; but in practical affairs the whole difficulty lies in selecting your premises.

So the market student of a mathematical turn of mind is always seeking a rule or a set of rules — a “sure thing” as traders put it. He would not seek such rules for succeeding in the grocery business or the lumber business; he would, on the contrary, analyze each situation as it arose and act accordingly. The stock market presents itself to my mind as a purely practical proposition. Scientific methods may be applied to any line of business, from stocks to chickens, but this is a very different thing from trying to reduce the fluctuations of the stock market to a basis of mathematical certainty.

Everyone wants a sure thing; a strategy that always works. Nobody likes uncertainty. But that’s what we got. No model or math formula is guaranteed to work all the time. The best you can hope for is a strategy that gives you the best chance of success.

On the dangers of recency bias

It is a sort of automatic assumption of the human mind that present conditions will continue, and our whole scheme of life is necessarily based to a great degree on this assumption. When the price of wheat is high farmers increase their acreage because wheat-growing pays better; when it is low they plant less. I remember talking with a potato-raiser who claimed that he had made a good deal of money by simply reversing the above custom. When potatoes were low he had planted liberally; when high he had cut down his acreage — because he reasoned that other farmers would do just the opposite.

Investors consistently extrapolate recent events indefinitely into the future. When things are going well, investors assume things will continue to only get better. When things are going poorly, they assume it can only get worse. At the extreme ends of a market cycle, doing the opposite has a higher chance of paying off.

On loss aversion, fear, and the cause of a market bottom.

It is sometimes assumed that the low prices in a panic are due to a sudden spasm of fear, which comes quickly and passes away quickly. This is not the case. In a way, the operation of the element of fear begins when prices are near the top. Some cautious investors begin to fear that the boom is being overdone and that a disastrous decline must follow the excessive speculation for the rise. They sell under the influence of this feeling.

During the ensuing decline, which may run for years, more and more people begin to feel uneasy over business or financial conditions, and they liquidate their holdings. This caution or fearfulness gradually spreads, increasing and decreasing in waves, but growing a little greater at each successive swell. The panic is not a sudden development, but is the result of causes long accumulated.

The actual bottom prices of the panic are more likely to result from necessity than from fear. Those investors who could be frightened out of their holdings are likely to give up before the bottom is reached. The lowest prices are usually made by sales for those whose immediate resources are exhausted.

The great cause of loss in times of panic is the failure of the investor to keep enough of his capital in liquid form. He becomes “tied up” in various undertakings so that he cannot realize quickly. He may have abundant property, but no ready money. This condition, in turn, results from trying to do too much—greed, haste, excessive ambition, an oversupply of easy confidence as to the future.

It is to a great extent because the last part of the decline in a panic has been caused not by public opinion, or even by public fear, but by necessity, arising from absolute exhaustion of available funds, that the first part of the ensuing recovery takes place without any apparent reason.

The effect of this fear or caution in a panic is not limited to the selling of stocks, but is even more important in preventing purchases. It takes far less uneasiness to cause the intending in vestor to delay purchases than to precipitate actual sales by holders.

The combination of selling out of fear and necessity is only partially to blame for market crashes. Since every share sold needs to be bought, a lack of buyers is also to blame. That fear of buying has the dual effect of causing bigger losses on the way down and missing out on gains after the market turns.

On the money illusion.

A psychological influence of a much wider scope also operates to help a bull market along to unreasonable heights. Such a market is usually accompanied by rising prices in all lines of business and these rising prices always create, in the minds of business men, the impression that their various enterprises are more profitable than is really the case.

The result is that…the high prices for stocks and the feverish activity of general trade are based, to an entirely unsuspected extent, on a sort of pyramid of mistaken impressions, most of which may be traced, directly or indirectly, to the fact that we measure everything in money and always think of this moneymeasure as fixed and unchangeable, while in reality our money fluctuates in value just like iron, potatoes, or “Fruit of the Loom.” We are accustomed to figuring the money-value of wheat, but we get a headache when we try to reckon the wheat-value of money.

Essentially, people recognize that they have more dollars. They feel wealthier because stock and other asset prices have risen. But they fail to realize that those dollars don’t always buy them more stuff. Their dollars don’t go further when inflation drives the cost of goods higher too.

On being aware of other’s biases or second level thinking.

We have seen that many, if not most, of the eccentricities of speculative markets, commonly charged to manipulation, are in fact due to the peculiar psychological conditions which surround such markets. Especially, and more than all else together, these erratic fluctuations are the result of the efforts of traders to operate, not on the basis of facts, nor on their own judgment as to the effect of facts on prices, but on what they believe will be the probable effect of facts or rumors on the minds of other traders. This mental attitude opens up a broad field of conjecture, which is not limited by any definite boundaries of fact or common sense.

Yet it would be foolish to assert that assuming a position in the market based on what others will do is a wrong attitude. It is confusing to the uninitiated, and first efforts to work on such a plan are almost certain to be disastrous; but for the experienced it becomes a successful, though of course never a certain, method. A child’s first efforts to use a sharp tool are likely to result in bloodshed, but the same tool may trace an exquisite carving in the hands of an expert.

This is what Howard Marks calls second level thinking. First level thinkers are drawn to things that seem obvious and simple. If something seems obvious, then there’s a good chance everyone else is thinking the same thing. So if everyone is thinking the obvious thing, then it’s already priced in.

It’s hard to make money when it’s already priced in.

But a second level thinker recognizes this. So rather than following the obvious and simple path, the second level thinker will go deeper. If you can recognize how other investors will react to a big news event or how they view a business, then you have an idea of what’s already priced in to the market, and avoid it.

On being aware of your own biases.

In this matter of allowing the judgment to be influenced by personal commitments, very little of a constructive or practically helpful nature can be written, except the one word “Don’t.” Yet when the investor or trader has come to realize that he is a prejudiced observer, he has made progress; for this knowledge keeps him from trusting too blindly to something which, at the moment, he calls judgment, but which may turn out to be simply an unusually strong impulse of greed.

It’s not enough to know what drives other peoples to make mistakes. Being an impartial judge of your own investments, requires an honest examination of yourself – your faults and limitations. This is most likely why some of the best investors are quick to admit mistakes and stay humble.

Source:
Psychology of the Stock Market – G.C. Selden

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Thats one long article :slight_smile:

Thank you for taking the time to pull this together and although I didnt understand all of it, i did make sense of some :smiley:

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It is like politics with mathematic and science from a psykolog- everyone want to have the right answer and not have to defend it if they are wrong, so it is always a explanation the expert do not need to be hanged for :slight_smile:

This is a articole for a gold company. I think it got a few good things in it and. It also reflect some of the ideas from Satoshi and can play crypto a favore if the markets starts halting

From Brandon Smith

It is generally well known in economic circles and in the general public that precious metals, including gold, tend to be the go-to investment during times of fiscal uncertainty. There is a good reason for this. Precious metals have foundation qualities that provide trade stability; these include inherent rarity (rather than artificially engineered rarity such as that associated with cryptocurrencies), tangibility (you can hold gold in your hand, and it is relatively difficult to destroy), and precious metals are easy to trade. Unless you are attempting to make transactions overseas, or in denominations of billions of dollars, precious metals are the most versatile, tangible trading platform in existence.

There are some limitations to metals, but the most commonly parroted criticisms of gold are generally incorrect. For example, consider the argument that the limited quantities of gold and silver stifle liquidity and create a trade environment where almost no one has currency to trade because so few people can get their hands on precious metals. This is a naive notion built upon a logical fallacy.

Gold backed paper currencies existed for centuries in tandem with the metals trade. Liquidity was rarely an issue, and when such events did occur, they were short lived. In fact, the last great liquidity crisis occurred in 1914, the same year the Federal Reserve began operations and the same year that WWI started. This crisis was, as always, practically fabricated by central banks around the world. Benjamin Strong, the head of the New York Fed in 1914 and an agent of the JP Morgan syndicate, had interfered with the normal operations of gold flows into the U.S. and thus sabotaged the natural functions of the gold standard.

Central banks in Germany, France and England also applied influence to disrupt currency and gold flows, causing a global panic. This engineered disruption seemed to take place through conscious co-operation between central banks. Does any of this sound familiar?

For those who are interested, the history of the 1914 liquidity crisis is outlined in detail in the book ‘Lords Of Finance: The Bankers Who Broke The World’, by Liaquat Ahamed.

When gold and currency are tied together, gold prices tend to remain rather stable, as they are often set by the national treasury. In 1914, the price of gold was $20 per ounce and had maintained that approximate value for decades. To give some perspective on value, in 1914 the average house cost $3,500, or 175 ounces of gold.

But what happens when gold and national currencies become disjointed from each other? Take a look at the hyperinflationary crisis in Weimar Germany. The price of gold per ounce went from 170 marks to 87 trillion marksonly five year later! Over that same five year period, gold value in Germany had increased at almost TWICE the rate of inflation, indicating that gold not only kept up with the devaluing mark, but made anyone holding gold rather rich in the process.

This is a very important fact. The common argument against gold is that gold is not really a wealth creating investment, but merely protects your buying power. As the Weimar crisis shows, this is not always the case. In some circumstances, often during times of economic disaster, precious metals can in fact generate more wealth than what you put into them.

Then there is the issue of government interference in gold markets and trade during crisis. As the Great Depression in the U.S. began to take hold, investors turned aggressively to gold and silver as a means to offset the crashing values of most other assets. In a highly controversial move in 1933, President Roosevelt outlawed the private ownership of gold bullion and set the price of gold at $35 per ounce.

Keynesian economists like Ben Bernanke often try to assert that the gold standard was the reason why interest rates had to be hiked as the depression was escalating, and that this was the cause of a greater crash. They are only half correct. Increased rates did indeed cause a larger and more prolonged crisis, but this had little to do with the gold standard.

Clearly, in 2008 the U.S. and most of the world was NOT on a gold standard, yet we suffered a very similar collapse in credit and equities as happened in the Great Depression. Also, there is no gold standard forcing the Federal Reserve to raise interest rates today, yet they are doing so. Whether or not this will cause an even more violent economic catastrophe remains to be seen, but Jerome Powell, the new Fed Chairman himself, warned in 2012 that this is exactly what could happen. Jerome Powell has stated in no uncertain terms that rate hikes will continue under his watch in 2018.

Central banks were the core institutions to blame for the Great Depression, not the gold standard, considering the fact that central banks did NOT follow a true classical gold standard exchange internationally, and instead tried to establish a global basket exchange system of multiple currencies and gold in what they called the “gold exchange standard”.

Add to this the unnecessary interest rate hikes as deflation was pummeling assets, and you have a perfect recipe for calamity. Even Ben Bernanke, in a 2002 speech to honor Milton Friedman, openly admitted that the Fed was the root cause of the prolonged economic carnage during the Great Depression:

“In short, according to Friedman and Schwartz, because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn.

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

The use of gold prohibition had mixed results. Obviously, it did not stop the freight train of the Great Depression. In fact it probably exacerbated difficulties in trade and savings. Black markets took over and precious metals were still highly sought after.

As far as the crash of 2008 is concerned (a crash which is still ongoing today), we all know what happened with gold markets. In the lead up to the crash, from 2004 to 2008, gold doubled in value. Then, after the initial crash from 2008 to 2012, it doubled again.

Despite predictions by mainstream economic naysayers, gold has not collapsed back down to pre-crash levels. In fact, gold has remained one of the most effective investment performers for years.

The question is, what happens next? Setting aside gold confiscation as a factor (a factor which I believe would be impossible to enforce in today’s markets), we can see that massive fiat stimulus as a means to artificially support a deflationary fiscal system, as well as central bank intervention in general, leads to collapse and a flight to hard assets like gold. Even with rising interest rates and the potential for a spike in the dollar index, if the rest of the economy is in steep decline, investors and others will still turn towards precious metals.

As I have mentioned in previous articles, the initial reaction of gold prices to faster interest rate hikes may be negative. That said, I do not believe gold will drop as dramatically as mainstream economists expect. Once higher interest rates kill the stock market bubble as well as the renewed housing and credit bubble, gold will skyrocket as one of the only asset classes with tangible real world value.

Brandon Smith has been an alternative economic and geopolitical analyst since 2006 and is the founder of Alt-Market.com.

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Birch Gold Group.

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An Introduction to Credit Markets

Capital markets can generally be divided into two components; the equity market and the credit market. And soon we will get the crypto market, that will be divided in to where one also is for credits, because credits will be a future part of crypto, and that is the way finance is working.

There are two types of categories: equity market and the credit market. The former provides the mechanism by which investors can trade a share of ownership in publicly traded companies, and thus exchange a legal claim in their future profitability, while the latter is a platform in which participants can issue new debt or trade existing debt instruments.

Although stocks and shares typically dominate the news and most retail investors’ focus, it is in fact the credit market where most of the action in capital markets takes place in.

Types of markets and participants

Although the bond and the credit market are terms often used interchangeably, the former is actually only a segment of the latter, which consists of any instrument used for an entity’s financing needs, including direct loans provided by a bank.

However, as bank loans don’t constitute securities and are therefore not regulated by the Securities and Exchanges Commission, the broader term has effectively come to refer to all issuance of debt in the capital markets

The bond market itself can be further classified into several sub-categories, depending on the nature of the issuer of debt. The most prominent participants, on the issuing side, are arguably governmental agencies, public companies and municipalities, thus giving rise to the government, corporate and municipal bond markets, respectively. Naturally, participants in the bond markets also include the buyers and sellers of the debt securities issued. These include large investment banks, hedge funds, institutional investors, as well as retail traders

How does the Credit Market works ?

Simply put, the scope of the credit market is to provide the issuers of debt securities with funds to finance their future expenditures or to balance their current needs. A government, for instance, can issue a bond when it’s having difficulty to meet its current obligations due to a revenue shortfall, or in order to finance new public works.

Similarly, a company looking for a cheap way to raise money for its future expansion or acquisition plans, and wants at the same time to retain its present control of ownership, will choose the corporate bond market for the financing it requires.

Corporates predominantly use the process of underwriting when issuing bonds, which involves one or a syndicate of large investment banks buying the entire issue of bonds and then re-selling them to investors. Governments, on the other hand, tend to issue bonds through an auction process, in which a number of institutions bid for the bonds on offer, and thus determine their issuing price and corresponding interest rate.

The debt instruments are essentially a form of loan or IOU. The issuing entity receives funds from the investors for a fixed term and is under the obligation to pay a pre-agreed fixed or variable interest rate at set time intervals, as well as to repay the amount borrowed at a pre-determined date in the future, known as the bond maturity. Once the bonds are issued, a process which is often referred to as the primary market, their prices will fluctuate depending on the prevailing market conditions, thus making further trading on them possible in what’s known as the secondary market.

What is Credit Market size and importance ?

The size of the global bond market is currently estimated to be close to $100 trillion, a figure which is more than twice that of the global equity market, as all types of issuers have rushed to take advantage of the prolonged environment of ultra-low interest rates globally.

Savvy investors thus keep a close eye on it, and often assign more weight on its moves than those in the equity markets; the first signs of investing trouble ahead will usually show up here.

The credit market’s size isn’t the only reason investors watch it closely, however. As it effectively determines the costs of borrowing, it serves as perhaps the best indication of business and economic conditions in the future.

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https://finance.yahoo.com/m/e5dc0839-e93d-3bf7-8f4f-609a172ff4fd/stocks-close-mostly-higher-on.html?.tsrc=rss

The text i marked is one important point and might have many explanations, but it is not the point. My point is this is a typical sign that smart money are leaving exposed space before a crisis and goes to safe places. So this is interesting reading looking for clues of what is going on.

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This is like trying to define areas and where danger can occur. This is the Dow index. I would not set spesefic number of when thing happens due to interpretation and timing.

This is a industry index and how it reacted in the different in IT and credit bobble

This is S&P500 and it is more tech so in 2001 it reacted a bit different. My point is to illustrate to different scenario on to different indexes, but where on is specific IT and only hit ard on one type of markets, but where credits hits hard everywhere.

So a financiele crisis can be hard also for the crypto market because money is lost and risiko investment is a no go for institutions. I am only pointing out that this is a possible scenario.

This is some media fear masseur guidance if i could cal it that!

The VIX S&P500 is to day at 16.5 and i will class it as low. in 2009 it was 90. I think it is a small riske in stocks as long as it is below 30, and dangour around 40. So we are not in a fear sone in volatility. So the market is not full of fear at the moment. So December was a fake out or a taste.

LCDX is a “credit” index or derivatives and are often season wawes. So the drop in Q1 is “normal” but it indicates the price to pay for debt. The lower the price thee higher the demand or harder it is to get credit.
The big problem is if it show no sign of recover when it is expected adjusted for natural swing like expected good results from the stock market (earnings) in Aug-Sept if it still drops, we can then see the VIX rise. It is not on the week but they have a tendency to have some correlation.

So we can see the rise of VIX followed by a dump in S&P500.

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WHAT IS A CREDIT INDEX

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Great analysis and very informative @B.F.A thank you for sharing :nerd_face:

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Everything in Finance got a name. The big engine today is US and it looks positive short term for now, but there might be a bum or Trump in the road or a Brexit that can cause mayhem in global scale. And it got a name :slight_smile: Black swan event… But the big question that i have been asking myself lately is … Can Crypto be such event?

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I found this great explanation on intrinsic values.

This is a great tool for price evaluation

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S&P 500 index SPX might have pulled of a bad sign…

The transport from DJT are slowing down compare to the last 2 years

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https://www.armstrongeconomics.com/how-did-the-us-markets-respond-during-watergate/

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Wow, it’s really terrifying isn’t it @B.F.A :pensive:

This song is much like our hodl memes-

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just a short up date and i still cant say if we are heading in to financiele dark times or if we just correct.

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There are really smart people that us a lot of money on this topic, and i am a simple keyboard warrior… but can this to formations have a correlation that shows the high market are coiled up fore a crash? or is this what the market needs to get back up on track again?

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How he did he’s macro Picture…

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I have some thoughts about how ETN will act in a recession in the global stock market…
when uncertainty and fear comes to the stock market money tends to go in to safe places like commodities and that can be cell phone operators MWO. BTC was invented after last crisis because of the nature of fiat printing banks…So ETN as a crypto fore the mobile market can make a home run based of assumptions like that…any thoughts about it?

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