Herd Mentality

But here is a giant freebie for all those stupid, clueless oil executives out there in North America.

I bet OPEC never factored into their analysis the lifting of the US Oil Exporting Ban in 2015 after being a non-starter for so many decades.

"Don't run with sharp objects" ... "If everyone jumped off the cliff - Would you do it too?" ...and "Don't talk to strangers!"

They aren`t about to stand for a strong dollar in a world where it is a competitive advantage to devalue currencies from a multinational profits, tourism and global trading perspective.

This past week has seen a continuation of market volatility unlike anything witnessed over the last several years. Of course, this volatility all coincides at a time where market participants are struggling with a global economic slowdown, pressures from China, collapsing oil prices, a lack of liquidity from the Federal Reserve and the threat of rising interest rates.  It is a brew of ingredients that would have already likely toppled previous bull markets, and it is only by a hairsbreadth the current one continues to breathe.

For students of history, the China stock market crash looks eerily familiar. It’s playing out much like the Wall Street stock market crash of 1929. One of the factors fueling the soaring stock market of the 1920s was an influx of new, financially unsophisticated investors who saw the rising numbers and saw an opportunity for quick and easy profits. And that’s exactly what’s happened in China over the past year or so.

"It's starting to get ugly..."

Because the only thing more exciting than betting on the continuation of a margin-fueled, self-feeding domestic mania is betting on the exchange where the maniacs are trading...

Huxley’s words describe a psychological condition termed cognitive dissonance. According to the American Psychological Association, cognitive dissonance is induced when a person holds two contradictory beliefs, or when a belief is incongruent with an action that the person has chosen freely to perform. Cognitive dissonance is on full display today in the financial markets. The U.S. economy has been supported for seven years by a zero interest rate policy, record fiscal deficits and unprecedented surges in the money supply. Despite all of the stimuli, the economy is slogging along well below trend. The actions taken by the Federal Reserve, federal government and governments around the world are unprecedented. In a normally functioning economy such actions would generate massive growth and inflation. Since growth has been tepid and inflation benign, there is obviously something amiss.

"Ladies and gentlemen. A few weeks ago, in Riyadh, I was at a small, private function along with the British central bank governor, Mark Carney. Mr Carney asked me two questions. First, why did the oil price drop? And the second, where is the price heading? I will tell you today what I said to him then."

- Ibrahim Al-Muhanna, Advisor to the Minister of Petroleum and Mineral Resources for Saudi Arabia

I would say Apple is the most dangerous holding on the street right now for portfolio managers.

During the last several years of uber-accommodation by the Fed, both stock and bond prices rose. It would not be surprising if both fell in price as the Fed proceeds with a June “lift-off”.   However, stocks might be the worse of the two performers. In a sense, markets are now beyond the control of the Fed.  They were able to change investor behavior for a few years, but the herd mentality is now becoming dislodged: “lift-off” could possibly cause a steep reversal. We expect SPX to dip below 2000 by the time of the March 18th Fed Meeting.

Going into 2015 the economic outlook held by the U.S. investment establishment could not have been much more positive, and more unified. Pundits saw all the variables aligning to create the best of all investment worlds, a virtual "no-brainer" of optimism. High degrees of certainty can be dangerous. Herd mentality can cause investors to chase returns en masse and pile into positions that may already be overvalued. But herds can be spooked, most often by unexpected developments which can catch the herd wrong-footed and spark major movements when the masses scatter at the same time. When that occurs, those who resisted the herd may find themselves rewarded. We believe that we are approaching such a point.

The market is a giant living organism of human behavior and trying to predict what the market will do in two weeks, much less twelve months from now, is pure folly. However, by looking at the price trends, and using some statistical analysis, we can garner a view of the direction that the “herd” is most likely heading. There is a fascinating analogy in nature, called murmuration, that very much resembles the “herd mentality” in the markets.

The American miracle idea of energy independence is fully reliant on a shale patch that went over $100 billion deeper into debt every year for years running just to produce that not-so-miracle. Take away 40%+ of what revenue it did take in, and there is no independence left. All that’s left is fracking fluids in your drinking water, and a few trillion in debt that the Big Kahuna lenders will seek to unload upon the real economy.