It is not uncommon for humans to tend towards megalomania and self-centeredness. The official philosophy of antiquity and the Middle Ages placed the Earth at the center of the cosmos and man at the center of creation. Even the divine tended to be anthropomorphized. Anyone who thought differently (from Democritus whose books Plato would have gladly burned to Copernicus who arranged to publish his theories posthumously) could only remain alive if he kept his ideas in a restricted circle of scientists and if he did not go out into the field open. Europe, before and after Christopher Columbus, considered itself the center of the world and therefore of the universe. Zhonghua, middle empire, is still today the name of China, which officially defines itself as the People's Republic of the Middle Empire.
So it's no wonder if humans who interact on the financial markets overestimate their intellectual abilities and their centrality. If behavioral finance is excluded, which is humble because it is the only one that starts from the empirical analysis not of what one thinks or what one says, but of what one actually does, the dominant theories at the academic level or in false consciousness of the operators attribute to the market superpowers of Marvel Comics hero.
In the grandest version the markets believe they are equipped with Superman's ultra-vision and to be able to see the future before this happens. Going down one level instead we find the claim that markets can read the present perfectly and act as an omniscient seismograph of all that exists. It is the Aristotelian correspondence of thought and being that spans the centuries and reappears, for example, in a slightly attenuated form, in Engels' theory of mirroring of dialectical materialism (thought mirrors being, but incompletely) and which instead returns to the its full glory in the theory of the efficient market, a perfect discounting machine that reflects the flow of news in real time and immediately adjusts the price of all things, visible and invisible.
It deserves a separate place Soros' theory of reflexivity, according to which markets are influenced by the world but in turn feed back by influencing it. It is a more interesting and sophisticated theory than that of the efficient market (Soros studied philosophy with Popper before turning to finance out of economic necessity) and has the additional merit of taking into full account the more or less unbalanced positioning of the market in explaining its movements. However, despite the financialization of recent decades, the impression remains that the importance attributed to markets in their feedback on the world is in any case exaggerated.
Now that the markets are calm again and in apparent equilibrium it can be clearly seen that the great fear of August and September can be explained at least in part by behavioral finance and the positioning theory that Soros makes his own, as they come apart, again, the rationalizations we heard over the summer based, more or less consciously, on the assumption that the markets did nothing but react to the news that arrived.
As the dust settles we can see Chinese stocks stabilize and up 4 percent year-to-date. We also see that the renminbi has lost just over 2 percent against the dollar. Why, then, did global markets react as they would when faced with a situation that was out of control (and not simply mismanaged) and as if the devaluation had been 20 percent and marked the beginning of a currency war? Why didn't they consider, among other things, that China's current account surplus has been growing for months thanks to the lower cost of imported raw materials?
The answer lies in the positioning of the market, which launched in August as a risk overweight train. And, on the other hand, can we call a market efficient that recorded historic equity highs during a quarter, the first, of near-zero American growth and falling profits compared to the previous year?
After all, the recovery in October was also due not to an improvement in the fundamentals, which are now the same as in August both in China and in the rest of the world, but to the positioning that has become, in the late summer hysteria, deeply unbalanced in the negative sense . On oil, this was particularly evident. The recovery from 42 dollars to 50 on the Wti was exclusively due to financial flows (covering of shorts and incautious opening of bullish positions) while nothing, absolutely nothing, has changed in terms of physical supply and demand (the modest cut in American production was in fact matched by the increase in the rest of the world), to the point that in recent days the price has rapidly returned to its starting point.
In practice we can say that in August and September the markets played and sang it by themselves, first building for themselves a Chinese collapse and a global recession (with an annexed incongruous rise in US rates) which did not take place and then a global re-acceleration ( with equally incongruous indefinite postponement of the US rate hike) of which frankly no trace has been seen. Far from reflecting the mediocre reality, the markets came up with a terrible one in August and then a pink one in October. The same frantic reactions have occurred at the sector level on the European auto industry in the past weeks (Lehman effect, end of the car) and are taking place these days on the American pharmaceutical industry (end of the business model, end of innovation and profitability ).
At this point, after having swerved in one direction and then in the other and after having forced to close first the upward positions and then the downward ones, the market appears clean and fairly balanced. It is also possible that in the coming weeks we will try to climb a little more, also thanks to the renewed expansive momentum of the ECB. It seems to relive, in the communication from Frankfurt, the long months that led to Quantitative Easing. Half-hearted promises, tactical retracements, rhetorical stunts, leaks of news on modest amounts and then, for the grand finale, rich prizes for everyone. This time the reply is in a minor tone, because the markets have fresh memories of the excessive illusions that inflamed the European stock exchanges in the spring and do not want to relive the summer disappointments. The level of our stock exchanges, after the corrections for Greece, China and Volkswagen, is however sufficiently sacrificed (in relative terms compared to America) to leave room for a continuation of the recovery phase.
No one is talking anymore about raising American rates, but in December, if the markets and the economy continue to send signals of strength and stability respectively, someone will wake up and start talking about it again. For the moment, we are still letting the recovery go by, lightening the most exposed positions here and there and without haste, and we remain overweighted in European stock exchanges and dollars, waiting for better levels to which we can seriously lighten.
