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Markets vs the zeitgeist

  • Markets
  • Econ
  • Philosophy

Does art imitate life? or is it he other way around?

The latest Bloomberg Odd Lots podcast looks at pop music as a barometer for market sentiment.

At the heart of this episode of the podacast lies the question whether market sentiment - as guaged by an analysis of the pop culture of the time - could be an accurate, or even a rough indicator of market movement.

The theory of investor attention is clear about one thing: whether sentiment is analysed using pop culture, indexes, trading volumes, or some big-data algorithm, one can’t ever be sure that a particular market-based indicator was driven due to investor attention.

All this reminds me of the following dilbert cartoon:

dilbert random

Still, investor attention and pop culture’s influence on investor’s attention remains a perennially discussed and infinitely fascinating topic if only because of the ponderable, catch-22 type of situation it presents.

Leaving aside the ‘post-hoc-ergo-propter-hoc’ types of accusations that get levelled against any theory of investor attention, the problem bears an interesting analogy with the philosophical theory of mind-body duality. Simply stated, if culture and economy/markets are the two halves of the social whole, does one follow the other? and if yes, then can tracking one half predict which way the other half will move?

Regardless of whether you choose to see mind as a metaphor for the markets or culture, you can replicate the conundrum at a philosophical level. This in turn allows for some cross-disciplinary answers to the question.

Philosophers have found three ways out to explain the dualism, and in each case, we can look at the way economy/markets deal with the apparent duality.

1. Spinoza’s Parallelism

Following his Pantheism to its logical conclusion, Baruch Spinoza declared that thought (mind) and extension (body) are totally independent of each other with no causal interaction between them, yet they run parallel to each other and mirror each other’s activity. Much like two tracks of a railway line.

Applied to the markets, parallelism could explain phenomenon like indexing, volume analysis, and even phrases like “the trend is your friend” and “all boats sink or float with the tide”. Pop culture and market sentiment would play no role in your investment strategy if you believe them to be independent of the economy. Market sentiment would become synonymous with market trend.

Unless of course, you are, in Joe Wisenthal’s words, a “mindless contrarian” and pop culture (however you measure it) is the only indicator you use to justify market trends. Interestingly enough, a few Indian traders I’ve known follow this logic, except they substitute pop culture with astrology and discount any fundamental or technical analysis in the face of a good celestial omen.

Parallelism, for the most part, choses to rationalise mood as a reflection of market action rather than use it as a predictor. Makes sense. If the two are truly independendent, why bother with the other?

2. Descartes’ Occasionalism

René Descartes himself believed that God, through some kind of a dial-up connection to the human pineal gland (according the frenchman the seat of the human soul and the point of convergence of mind and body), fixes the causation of things.

I don’t claim to understand this position fully, but it seems to me rather similar to how some stock occassionally forms a “bullish harami” or a “hanging man” pattern. Stocks herein act as if occasionally steered into their specific formations by a hand that is even more invisible than usual.

A majority of positions taken from a technical analysis standpoint can be said to be occasionalist. Once again, there is no real correaltion between cultural and market sentiment but occasionally, abstractions in the zeitgeist’s subconscious drive candlesticks into equally abstract symmetries.

Perhaps the eliott wave theory is the ultimate culmination of this line of reasoning. I can’t be too sure.

3. Leibniz’s Pre-established harmony

Then there is my favorite philosopher Gottfried Leibniz, who explained cause and effect with the metaphor of two clocks that are always in sync (not necessarily showing the same time, but always the same time difference) because some genius watchmaker (aka God) has made the duration of their units-of-measure to be exactly the same. The correlation between sentiment and action here is always a fixed constant known only to God.

Using this idea, you can time the market to perfection provided you are able to quantify the harmony in useful terms. Renowned technical analyst Tom DeMark evolved a system around this type of thinking wherein the “harmony” was defined as “a series of 9 consecutive bars that close higher or lower than the close 4 bars earlier”.

Pontificating about scientifically unfalsifiable hypotheses is always fun, but not always necessarily productive. Still, I have to take issue with Joe and Tracy for focussing excessively on The Beatles as a bellwether of pop culture. I love the beatles as much as the next guy, but I couldn’t help thinking what the episode could have been like if they had chosen, say, Metallica, Jim Morrison or even Micheal Jackson to illustrate their point.