The Psychology of Financial Markets

The Psychology of Financial Markets

More and more people are catching on to the fact that two sets of rules are currently in place, one for the MEGAwealthy (net worth > $100 m), and one for the rest of us.  Besides the issue of the US government’s debt problems,  and spending more than they earn, there is the problem of the US dollar (world reserve fiat currency) on its deathbed, with a privately -owned central bank (the Federal Reserve) that has proven beyond a shadow of a doubt to have ONLY the interests of its private owners in mind.

Not only were the bailouts in 2008 a mistake, they were the largest theft in the history of mankind!  It was the largest reverse Robin Hood story in history!  The rich stealing from the poor to a degree only imagined (and probably salivated over) by the ‘great’ tyrants of the early 20th century, John D Rockefeller and JP Morgan.  Now in the 21st century we get Henry Paulson, Hank Greenberg, Ben Bernanke, Lloyd Blankfein,  Jamie Dimon, etc.

The question left to ask, then, is why haven’t EVEN MORE people woken up to facts, and the dire situation we find ourselves in?  After a long and careful look at this issue, the answer may be surprising to some.  To discover what impacts the thinking and decision making of the common person the most we have to look to the field of Psychology.  So what could possibly be hampering people’s ability to recognize and address the problems listed above (the existence of a borderline psychopathic, extremely wealthy and powerful criminal class)?  Well, first on the list is ‘Cognitive Dissonance’.

Cognitive Dissonance is what makes you stop reading something, when you disagree with the author, or find the material confusing, painful, or challenging.   Although Wikipedia isn’t always a great source (they seem to have been compromised with regards to financial matters) readers might find this excerpt helpful:

“Smoking is often postulated as an example of cognitive dissonance because it is widely accepted that cigarettes can cause lung cancer, yet virtually everyone wants to live a long and healthy life. In terms of the theory, the desire to live a long life is dissonant with the activity of doing something that will most likely shorten one’s life. The tension produced by these contradictory ideas can be reduced by quitting smoking, denying the evidence of lung cancer, or justifying one’s smoking”

So instead of coming to terms with the issues, and addressing them, as humans we have the ability to cope, by denying there is a problem, or justifying the actions of the criminal elite.   I regularly find myself taking breaks when reading articles that are challenging/controversial.  The key is to actually go back and finish the article, instead of simply running away from the article and forgetting I ever read it!

The other concept out of Psychology that I believe applies to a large percentage of the population is Stockholm Syndrome.  Yes, THAT Stockholm Syndrome!  As many are probably aware, Stockholm Syndrome is the relationship that develops between the victim/hostage and their captor.

Key points:

1) Captives often misinterpret a lack of abuse as kindness

2) [Hostages]… often view the perpetrator as giving life by simply not taking it.

Here in BC there was a good example recently.  BC Ferries stated its desire to hike prices by up to 50%, which was sarcastically greeted with gratitude, because many residents had expected an even larger hike!  People are upset, but because they have been conditioned to expect abuse the ‘better than expected’ price hike is not met with the fury one might expect.

With regard to America, some of the most likely to defend the criminal class, and by extension the US government which they control, are the poorest, who stand to gain the most from  a reformed economic system and a decrease in income disparity (the difference in income between the richest and poorest citizens of a country), but currently benefit from welfare payments, and Food Stamps.  Thus they view the government favorably,  because they aren’t physical abused, and feel that the government could ‘take their life’ by taking away the Food stamps and welfare payments.

At that point, who cares if society boasts two sets of rules, extreme injustice, and a declining standard of living for the vast majority?  It is exceedingly likely that when the dollar collapses those who were previously surviving on government benefits will become violent, but even worse, they are likely to be misguided in their anger by mainstream media outlets.

Now on to the Psychology of the Financial Markets.

There has been a lot of turmoil recently, as can be seen in the DJ chart above.  Back in early March Dow 12,500 looked a certainty, but between conflict in Libya and crises in Japan the market got spooked and hot money looked for the exits.  But another important aspect to keep in mind is that QE2 is coming to an end, and QE3 has not been officially announced yet. The Fed faced extensive criticism with both prior incarnations of Quantitative Easing (AKA money-printing, debt monetization, currency destruction…) and so it is quite likely they will hold off on QE3 just long enough that people will practically be begging for it.   We think the odds are quite high that the Fed will NOT announce QE3 in the next few weeks, and that as a result markets will retrace to levels seen in the last few months.

So, on the one hand, a stock market downturn is likely headed our way, but on the other, much of the recent stock market gains have come as a result of dollar debasement (Quantitative Easing).  It is a confusing situation, because with a downturn looming cash is a natural position to be in, waiting for the right time to buy back in.  But on the other, the dollar can be compared to a train wreck that is in slow motion.  The train has already derailed, but there hasn’t been an impact with the ground yet, so everything still feels normal, as we hurtle through the air…   You do not want to be gambling on when the point of impact will be!  You want to be in cash and on the sidelines briefly, at best.

If we are right then atleast there will be an opportunity to convert some of that cash into precious metals (at slightly better than current prices), and undervalued equities, in the next few weeks.  But the long term picture has not changed, interest rates are going nowhere, and so if you already hold positions in gold miners, Silver Wheaton, as well as physical, it is unlikely to be worth the risk of getting out of the position, and trying to get back in lower.   For the rest of us, though, an opportunity to buy equities and precious metals ‘on sale’ might well be on the horizon!