We are reading Julius Caesar in the interdisciplinary Economics course I teach at Duke. “Shakespeare and the Financial Markets—Why ‘This Time’ is Never Different” is a macro/policy/behavioral economics decision making course wrapped around five great Shakespeare plays. Brutus and the gang provide so many great lessons on poor planning, overconfidence, and confirmation bias (hey Mark Antony, of course you can speak after me at Caesar’s funeral—what could go wrong?). The point is political machinations leading to dysfunction that are here with us today were observed by Shakespeare in 1599 when he wrote Julius Caesar and were at the heart of the conspiracy in 34 BCE that effectively ended four hundred years of governance by Republican ideals.
Today’s capital markets are plagued by a different kind of construct—it’s the irrational market reaction (dating back to the taper tantrum, and reprised this August and September), where investors’ psychology is far worse than the facts on hand. First the facts: low rates for longer; fragmented global growth with pockets of recession and turmoil (Brazil, etc.) but certainly not universal recession; and, maybe most important, a gloom and negative sentiment that has persistently appeared as a narrative since 2009. Investor sentiment is intensely anchored in the memories of the Great Recession and Crash of 2008. Since social media, led by Twitter, has evolved into a primary information outlet, it doesn’t take long for short term panic and “new” narratives rooted in 2008 losses to cause selling “cascades.”
Most psychologists (and behavioral finance practitioners) believe that humans regard bad news or narratives with more credibility than good news. And those pundits and politicians who intone negative messages are often consistently regarded as “wiser” than those who promulgate mostly positive messaging. Some of this is evolutionary—the “worriers” about the barbarians over the hill in our distant past were often survivors when the bad guys did finally show up. But in today’s global inter-connected markets, the constant crying of “Havoc!” by financial gurus and politicians is a huge contributor to uncertainty and the market equivalent, volatility.
Beginning with the US, political, fiscal, and government gridlock (no Federal budget since 2009, no meaningful tax reform since 2006) provides a steady diet of uncertainty to global businesses everywhere. In Europe there are nationalist/separatist movements in the EU. Two thirds of our Tri-Polar world (Americas, Europe & Middle Asia, and Far Asia) is in true political dysfunction.
Pundits who scream “China is crashing” on CNBC and politicians pandering to fear and isolationism, are often very influential voices in the financial and political-oriented media. Their persistent and strident negativity and posturing have driven many Financial Advisors and their investors into a state of permanent risk averse behavior. In the battles after the death of Caesar, Brutus does recover to rally the troops by exhorting, “And we must take the current it serves/or lose our ventures.” The case we make for Tactical Allocation is that while avoiding big losses when risk markets crash is mission critical, it is also about taking advantages of opportunities in all environments.
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