Spinning A Yarn
Aug 10, 2024
We all like stories. They provide some sort of emotion whether it's laughter, sadness, anger etc.
Last week’s post was about the difference in narratives and numbers.
Last Friday and the most recent Monday global markets has an extremely large amount of volatility. US markets went down around 5-6% with Japan, Europe and Australia following suit.
Then we got the reasons why it happened - narratives.
One narrative was the impending recession in the US.
Another narrative surrounded the Japanese Yen and the so-called carry trade. The carry trade has been going for roughly 20 years. Basically, borrow Japanese Yen at zero interest rates, buy US assets, use leverage and hey presto and you generate lots of profit for little cost and very low risk.
Another narrative is about volatility. The Japanese market fell 12% on Monday which is, anyone’s terms scary, especially if you have money there. Tuesday saw it bounce back 11%.
Now, here's how numbers help.
With US GDP at roughly 2.8% large interest payments from high rates of returns on bonds and a large government deficit injecting money into the economy, I strongly doubt a recession is on the horizon. So.........
If the carry trade story is right, we need to consider over the past 20 years the Japanese market has had big down days before, but no one mentioned the carry trade as the reason. So why was it the reason this time but not before? If there is/was a correlation, then the surrounding circumstances shouldn’t matter.
Historical numbers reveal big down days are usually followed closely by big up days and vice versa. So we know volatility clusters and like Monday and Tuesday one day was largely neutralised by the next day. The same thing happened in March 2020. Big down days were followed by big up days.
In Australia, finance folks (one well known tip sheet promoter who has never seen a market he didn’t like) trotted out the usual stuff that large falls on Friday and Monday were “normal” and actually what a great time to buy stocks (since they always go up)! The total fall of roughly 5% took the ASX 200 from 7650 back to January 1's price of around 7590.
So if 7650 is a great time to buy, I can only assume that January's 7590 was also a great time to buy considering the ASX price was roughly the same? But there wasn’t any screaming about cheap stocks in January over and above the usual buy stocks.
Stories are nice and can bring comfort in times of high volatility, but don’t be fooled into believing there is a connection between narratives and understanding what the actual events were.
The reality is no one really knows why the market sold off and then bounced back.
Just look at the numbers.
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