Monday, May 25, 2009

Concept VII: Animal Spirits

When Keynes used the term "animal spirits" he was of course referring implicitly to the spirit of bulls and bears.

In the area of investment, he was talking about how when investors feel confident they simply charge forward - like the bulls in the stockmarket; or retreat, like the bears.

Keynes was an ardent stock investor.

What happens in the stock market also happens in the world of real investments.

In an inter-connected world where specialisation has made everybody so interdependent all over the world, that it is insufficient for one component of the supply chain to feel confident.

The whole chain must feel confident. And that can only be done when they all follow each other sheepishly.

For that to happen, they must be foolish enough to listen in someone in authority and tell them a big white lie - that everything is going to be all right - that the worst is going to be over - and things are going to pick up soon.

In the Information Age when the average person is pretty well informed, the credibility of that someone in authority is often tested - and proved to be wanting.

Nobody believes in politicians anymore.

After Greenspan, nobody believes in central bankers anymore.

Investors therefore wait for the other to act - to be the greater fool.

Hence, the tendency nowadays to put the toe in and quickly jumped out.

Investment proposals are designed like daylike robbery - to fool the general public - who is foolish enough to commit his or her credibility so that banks can achieve x% of loan growth so that the bank ceos can get fantastic bonuses.

The stock market is no more a place for creating liquidity for long-term investment - it has become a leper camp where those who enter it become permanently damaged.

Serious research and long-term investment look foolish - not so smart.

Be clever and be a millionaire in no time - by cheating the market - and the general public.

In the process, we all cheat ourselves.

We have become animals without the spirit.


walla said...

(A) Dutton

Keyne's conception of the role of exogenous shifts of moods in stock plays appears to have been preceded by Dutton's The American Omen which quotes:

"Freedom as we know it is a condition of ego. Prosperity is a condition of things. Increase these satisfactions to any degree and there is still that knowledge of incompleteness which torments the spirit. (EP Dutton, 1930)"

Maybe it's that torment that subconsciously makes people punt.

(B) Contra

During those days when the local bourse had one of the fastest growing market caps, fortunes were built on contra which ultimately killed many punters and their brokers when the institutional investors retreated.

Maybe it's because the big players knew the market would be irrational and looking for a signal to buy or sell that they proceeded to define those signals by picking out the closest rational reason they could find in order to create the mood and thus strategically move their portfolios ahead of the market.

(C) Vacuum

Now that central banks, institutional investors and insurance houses, mortgage, hedge and commodity funds, research and rating agencies, as well as private wealth and sovereign funds are all kaput, what animal spirits will be moving next in the big vacuum?

(D) Upheaval

Is something going to happen in the global forex market that will change the primacy of the US dollar as the default currency which in turn will shake the world trading market?

There is a growing concern in some countries which are holding vast amounts of dollar-denominated bonds; they reason that the US government is just printing more and more dollars to flush its own market with cash; the effect is to reduce the convertible value of the dollar when those bonds mature to be called in; in some discernible future, there is going to be a major disruption because the maturity value will be shrinking below what has been paid out to buy those bonds.

(E) Oil

It is hard to find any scenario that has been published which takes a stab at what will happen to the country when we become a net oil importer.

Will the occasional carrot cake cost more than three ringgit, for instance? Will people soon be joking that diesel must have been used to make beer to explain why its price a bottle has gone up?

There seems to be total silence on this matter. Yet the day it will come has already been assayed by none other than Petronas, the national oil authority. Maybe they will continue to shift the goalpost because they have salted away a new find of oil deposits that has not been announced.

But when information is sparse, this is irrational optimism spawned by the root need to avoid further unpleasant feelings. Such as how to continue a yawning national deficit, forty per cent of which is dependent on oil taxes, not to say the effect of that deficit on sovereign rating and the rapid diminution of the eighty billion worth of reserves in a currency that is heading southwards.

(F) Investors

If a free market is only maximally efficient when all players are voluntary and cooperative, then will a free market composed only of investors be acting also as consumers in their vicarious fulfillment of the need to exhaust their investments?


"And what is dependent arising? Conditioned by ignorance there are volitional forces, conditioned by volitional forces there is consciousness, conditioned by consciousness there is mind-and-body, conditioned by mind-and-body there are the six senses, conditioned by the six sense spheres there is stimulation, conditioned by stimulation there is feeling, conditioned by feeling there is craving, conditioned by craving there is attachment, conditioned by attachment there is existence, conditioned by becoming there is birth, conditioned by birth there is old-age and death—grief, lamentation, pain, sorrow, and despair come into being. And so there is the arising of this whole mass of suffering."

etheorist said...



a. I call it The Silent Disquiet aka ignorance. Keynes was the first to put it into a formal economic theory though.

b. Contra is the mismanagement of the financial system by the ignorant, nowadays known as sub-prime.

c. The vacuum will be filled by the men and women with animal spirits to venture into the creation of new things and new ideas - not the miserable punters.

d. The US dollar will be temporarily replaced by metals. RMB will come into being when China is enlightened enough to run persistent trade deficits so that the world wants to be paid in RMB.

e. When we run out of oil, there will be no mega projects hence no corruption and the men will be separated from the boys.

f. Yes, but instead of just consuming their resources, they will be building knowledge and a better way to live.

Epilogue: What is macroeconomics? Conditioned by fear of the unknown future, there is grasping. Conditioned by grasping, there is greed. Conditioned by greed, there is excesses. Conditioned by excesses, there is the deterioration in values. Conditioned by the decline in values, there is stimulation. Conditioned by stimulated, there is overconsumption. Conditioned by overconsumption, there is indebtedness. Conditioned by indebtedness, there is slavery. Conditioned by slavery, there is loss of freedom. Conditioned by loss of freedom, there is dictatorship. Conditioned by dictatorship, there is subervience. Conditioned by subservience, there is fear. Herein lies the samsara of the macroeconomic world that we have created in modern life.