The sentimental vista

There are any number of ways to define, or interpret, sentiment. As with many definitions and interpretations, this can depend on context. For financial markets, which are multivariate and deep, the context and its drivers, the resulting definitions and interpretations, are like a mosaic — personal, social, geographical, political, historical, economic, industrial, educational, speculative — and it’s all speculative, really. The markets are a network system in which clusters form or dissipate, to varying degrees, to build or shrink the sentiment of an idea in its particular time.

In a narrow finance sense, a definition that may be most closely suited to the subject is the discounting of risk at the risk-free rate. One acts upon a view as though the risk of being wrong can be ignored. This is sentiment.

It isn’t that the risk is left unrecognized, necessarily, or that the belief is necessarily held strongly. Rather, the substance of the view, the risk, the discount rate, are all inconsequential: The sentiment is positive or negative all the same.

Counterintuitively by this definition, sentiment is indiscriminate, and in a sense almost dispassionate. If anything, it may be caught like a contagion and transmitted, muted or destroyed.

The preceding describes sentiment in pure form, and while financial markets are never free of sentiment, they are rarely purely sentimental. Though individual investors may well be.

Still, there are times when sentiment climbs to an escalated level to take a more dominant position in the market’s varied stance. And there are times, like now I think, when sentiment seems like the major driving force. Perhaps because there is so little substance to support the market flows, or, more correctly, because substance is in a state of what appears like never-ending change…

Businesses are changing, industries are changing, economies are changing, society is changing, and now, perhaps, biologies and ecosystems, too. It is quite difficult — no, it’s impossible — to see what happens on the other side of transformations and rebuilding and disruption at such monumental scale.

What follows is a thesis, not advice; the difference cannot be overstated.

  • Many believe that excesses of sentiment were rooted in the individual investor community after the economic collapse of early-2020. This may be true, but it also feels like the contagion spread more broadly to the bigger money, which is likely to continue until the varied levels of uncertainty subside.

But it will… Because every fantasy book needs a map. Sometimes several.

Related reading:

In an economy that can’t be trusted

The third body

The biggest risk

The most basic fundamental

On networks:

Reinterpreting the networks (2020)

If it’s not a bubble (2018)

Interpreting the networks (2017)

Networks, products and their relativity (2017)

Networks 3.0: Defined by digital dimensions (2016)

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