As expectations went in a tailspin over January and February, better-than-expected economic growth became increasingly probable. The string of positive surprises which naturally ensued has led to a regain in risk appetite with positive implications for the equities and debt capital markets (especially in the leveraged finance markets).
There are indeed tentative signs of a pick-up in China, with significantly lower capital outflows, improved lending conditions, rising property starts and a stabilizing yuan. The improvement may be artificial since driven by fiscal and monetary policies, but at least they appear to be effective. The US economy seems to be re-accelerating when considering last Friday’s payroll data and a strong rise in the March PMIs/ISM indices.5,6 Europe is resilient, driven by its consumers.7 The oil prices are still whimsical but those predicting a crash to $20/barrel with dire implications for the credit markets and the world economy have lost supporters.
Whilst it cannot be suggested that all is well, the macro-economic outlook has improved, and at a minimum the timing of end of the world has been pushed back.
Curiously, the anatomy of the first quarter’s market cycle, from panic to relief and recovery, eerily mirrors the one which took place during the three months spanning August-October last year as evidenced by the attached slide – check it out. An interpretation of the market’s repeated rollercoasters can be found in a quote from Al Pacino playing an inveterate gambler in “Two for the money”(2005):
“[We, gamblers,] when we go to gamble, we go to lose. Subconsciously. Me, I never feel better than when they’re raking the chips away; not bringing them in. […] Hell, even when we win, it is just a matter of time before we give it all back. But when we lose, that’s another story. When we lose, and I am talking about the kind of loss that makes your [beep] pucker to the size of a decimal point, […] you’ve just recreated the worst possible nightmare this side of malignant cancer, for the twentieth [beep] time; And you are standing there and you suddenly realize, Hey, I’m still… here. I am still breathing. I am still alive. Because we constantly need to remind ourselves that we are alive. Gambling’s not our problem. It’s this [beep] need to feel something. To convince yourself you exist.”
This does find its roots in philosophy. Almost two centuries ago and in a different style, Soren Kierkegaard argued in “The Concept of Anxiety” (1844) that “angst is the dizziness of freedom”. He illustrates his point as follows: When a man stands filled with anxiety right above an abyss, like Al Pacino’ character as his last casino chips get taken away, the sheer possibly that he can choose to jump makes him feel immensely free as he realizes that his possibilities are endless. He can do what he wants, including jumping off the cliff. It is that extreme sense of freedom which makes him feel dizzy.
It seems like financial market participants keep driving themselves near the abyss. They contribute to and experience the panic of potentially losing it all. The anxiety which results from this possibility makes them feel dizzy. Free. Alive. Until they recover, ready for another plunge, counting on the world to give them plenty of excuses to relive this exhilarating up-and-down process (next, speculation about a potential EU implosion?).
The sensation is addictive, which makes human beings enamored with cycles. It should be no surprise that the most successful stories follow the cycle of the Hero’s Journey (1949) which is illustrated below (remember “The Matrix” in “Choosing the Red Pill”, January 2016). Coincidentally (or not), the story cycle explicitly refers to the hero facing an abyss at its nadir.
By engineering cycles, human beings not only get a taste of their freedom, but also shape their individual stories. An explanation for market gyrations may thus be related to the expression of a collective desire to deal with existential questions.
Whatever the interpretation of these recurring market cycles is, there is obvious value in seeking to see through them. If the current cycle continues to follow the H2 2015 patterns, the market may suffer a setback in the coming weeks as per our chart. But it will recover again. Hasn’t it always?