An Unsettling Market Backdrop Leaves Certainty in Crisis

Investors are in a severe state of ambiguity and doubt thanks to a sudden mixture of sluggish global growth, broadly lower commodity prices, stress in China, and the stalling of U.S. earnings growth.  Add to that the rapidly deteriorating balance of payments situation in emerging markets, and those factors have painted an upsetting backdrop.

From aluminum to zinc and everything in-between it is abundantly certain that we are in a chronically overstocked commodities market.  Global manufacturing is anemic; cost curves have ground themselves down to the bargain basement, and cheap money allows industry to keep production lines going.

These are not just episodically bad prices mind you; these are prices more like those you’d associate with an economic disaster – especially if you factor in the effect of global inflation.  And, what’s unique is the decline has been noteworthy for its breadth: Prices have fallen in all major currencies and all major commodity groups.  What is not certain is why?

Doubtful Dogma

As people and investors, we crave certainty.  And secretly wedged within that longing dwells a set of conventional beliefs that nobody questions, and if something is proposed that seems to contradict this, it is doubted. We crave affirmation of what we believe to be true about the markets and thus what is true for everyone.

The most recent meeting of point-and-click investing with the digital age has generated a cottage industry of self- applauded authorities trying to retrofit an explanation for why things are the way they are. We tend to accept what everybody else believes and anything that is different, we doubt.

Even in this outrageous era of central-bank intercession, I don’t think markets always trail to a single-factor model based on government wishes, domino effect, or what happened last time.  Of course they have and can, but comparatively, according to the Borel-Canteilli probability theorem, find enough chimpanzees to clap away on an old Royal Mercury typewriter and one of them is bound to write the complete works of Shakespeare!

In other words, perhaps markets are meant to be understood as the product of an endless series of random events and that chance and causality are the sufficient explanation of all that is and all that happens.

We crave certainty for similar reasons to pedaling and falling off your first two-wheeled bicycle as we long to have that confidence to ride the bike as millions of others, to decipher the chance workings of the free market, to have that ability to see through walls whereas if China’s equity market continues to fall, OPEC continues to produce, US GDP hovers below escape velocity than of course the result will be this that and the other.

A good, healthy market mentality can be learned, yet it flies in the face of conventional wisdom and how our minds sift through traditional knowing and believing.  It is an evolutionary process that requires an ultimate submission to the delicate balance of dogma and doubt.  A seasoned investor understands that knowing things as they are is not something that happens automatically nor is it pleasurable or guaranteed to work.