The most basic fundamental
Financial markets are sentiment markets, even as we feign to strip out the emotion from the buy or sell decision. It is a matter of degree, perhaps, and self-control, to stick with data, the practiced formula and its principles, the so-called fundamentals that are taught. Even in so doing— rigidly, consistently, like a machine — one makes a statement about one’s view, or of a view that one envisions, and by contrast about all the others who may or may not share it. That’s not something lacking in emotion and there’s no escaping sentiment. Even algorithms and black boxes are produced by a creator’s process, which is art much more than science, truth be told. Finance, markets, economics, are that way.
Perhaps there was a time, in fairness, when the established rulebook and its index of set precepts — the multiples and ratios, the discount rates, the cash flow estimates and present values and so on — served as reasonable guideposts, and also as a way to show, if only to oneself, that one held a quantitative grasp on what was happening, that one knew how to carve out noise from signal, scientifically, repeatably, unemotionally, like a pro. Perhaps there was a time when this was even true, before it became purely a guess to say what any business would be like (not how big, or small, but actually what) ten, five, or even two years from the moment.
Perhaps, as well, after the world turned digital and thus an infinite producer of an infinite supply, ubiquity, and unimaginable speed; perhaps, as this began to happen, the known and followed rules turned gradually weak, and weaker as the nature of the fundamentals shattered. There also seems to be consensus among those who know these things, that money flows concurrently have added to the breakage with an infinite supply, ubiquity, and speed all of its own.
It’s tough to say which triggered what, and how these things are or are not connected. That would be an expression of opinion — a sentiment — which brings us back to where this essay started. And here we are: A time of broken models…
… a time when almost all the assets are intangible…
… and the perspectives tend to form unguided, nearly blind…
We’re in a time, I think, when on a minimum-to-maximum continuum, the extent to which pure sentiment drives market moves has shifted far towards the max. In a way, this had begun with Bitcoin and its crypto cousins, trading wholly sentimental as they do, having grown to massive global presence thus. And the phenomenon was further prodded by the loud emergence of the retail day-trade as a market force. Or raw emotion may have always been the driver, and is now only much more noticed through the social outlets, where sentiment is yelled and amplified.
In any case, it seems like sentiment now is the basic and true fundamental, and the analysis — cold, hard, and as much as possible detached (which, as mentioned, is not easy) — might therefore be adjusted to accept the working variables as they seem to have become:
- Prices rise or fall in sentimental clusters that evolve in the financial markets, which are network systems of many clustered links.
- The evaluation now may be as much financial as it is psychological, cultural, and social; that is, the exercise is as much to predict cash flows next quarter, or next year, as it is to predict sentiment during that period.
- Sentiment (i.e., reaction to new information, more than the information itself) leads to where capital quickly follows. The future bank, I think, will be a media conglomerate — in fact, it already is.
- There is entertainment in the investment process, as there is entertainment in consumption, and one may recognize this sentimental factor before the placing of a trade.
- Sentiment can be contagious, and the market is, by definition, right.
And now if this is how we play, it does not have to be a stock that’s traded. It could be anything at all, as long as there is sentiment around it, and enough of that to move the price.
Related reading:
In an economy that can’t be trusted
Markets and the year(s) ahead: Post-stimulus edition
