Bulls, Bears And Animal Spirits

It’s not technically a bear market.

At the worst levels on Friday, the S&P was nearly 21% below its January 3 record close, but thanks to a late afternoon rebound (surely the result of dip-buyers colliding with OpEx dynamics and terrible liquidity), the pandemic bull dodged death.

There’s probably some truth to the notion that a 20% drawdown has psychological appeal for would-be “bargain” hunters. Some sectors lay in ruins, but I’d reiterate that at the index level, stocks aren’t cheap.

We’ve decided, collectively, on an arbitrary threshold beyond which gains or losses in the value of our claims on corporate profits (real or merely extrapolated) can be described in terms of animals. Bulls and bears. An unconscious reversion to our natural penchant for animism.

The S&P will enter the new week down 18.7% from the highs (figure above).

In an article documenting instances of stocks narrowly escaping 20% drawdowns, Bloomberg’s Vildana Hajric and Lu Wang wrote that quibbling over levels “could be dismissed as trivial except for a nagging fact: History holds an improbably large number of examples of such rebounds lasting.”

That depends on your definition of an “improbably large number.” Just a few paragraphs later, Hajric and Wang warned against “misconstru[ing] the rules of probability.” “The sample in which past reversals took hold is too small — just three,” they added.

The reference was to a trio of historical instances (1998, 2011 and 2018) during which US shares fell to the absolute brink, only to reverse course and stage monumental rallies.

To reiterate: These are wholly imaginary thresholds that we’ve applied to what, at the end of the day, are just certificates of ownership in fictitious entities assembled for the purpose of generating intrinsically worthless fiat scrip. Exactly none of this is real.

Our species organizes around an interconnected system of shared myths which imbue our daily lives with meaning. Hajric and Wang described bull markets’ “near-death experiences” as “weirdly common,” but there’s nothing weird about it, unless you count the inherent weirdness of the myths we share, the peculiarity of which is never apparent until they’re supplanted by a new set of myths. (We chuckle at the ancient Greeks and their Olympian gods, even as we dutifully make our way to church every Sunday to worship a deity who, as it happens, looks exactly like Zeus.)

We made up stocks, made up a threshold beyond which price declines are considered meaningful enough to warrant a special distinction and we organize our thoughts around that threshold. It’s thus no surprise that 20% ends up eliciting excited behavior, which in some cases entails triggering a self-fulfilling prophecy by placing bets on a rebound in prices.

Bloomberg cited Miller Tabak’s Matt Maley, who noted that opportunistic traders often view 20% drawdowns as a green light to reengage. 20% is a bear market, after all, and if that’s not a buying opportunity, then what is? That dip-buying can prevent stocks from actually closing 20% lower which, Maley remarked, is psychologically significant. When long-term investors see that stocks didn’t ultimately succumb, they buy too, and before you know it, a rally is underway.

All of this is manifestly ridiculous, of course. We’re just like our ancestors. We’re conducting our affairs according to a myth. There are animals involved, one of which is benevolent (a bull), one antagonistic (a bear). Amusingly, we cite the concept of “animal spirits” in these discussions. The metaphor is more apt than we typically care to admit.

Hajric and Wang noted that bear markets, myths or not, “possess a weirdly predictive link to the real world.” Looking back nearly a century, bear markets usually presage recessions.

The “link” isn’t actually “weird.” Hajric’s and Wang’s “real world” isn’t any more real than stocks and spirit animals. Stocks, money, markets and the modern economy (i.e., the economy as we think of it today) are all manifestations of the same ordering myth. I’ll recycle a passage that’ll be familiar to many regular readers.

“Economic man” is a relatively new being. In Robert Heilbroner’s classic “The Worldly Philosophers,” he described the emergence of a “pale wraith of a creature who followed his adding-machine brain wherever it led him.” That creature came onto the scene a mere ~300 years ago. Prior to that, the notion that everyday people should seek gain for its own sake was considered blasphemous.

“Markets” as a unifying global concept (as a frame of reference within which to contextualize human activity) and “economics” as a practical branch of philosophical inquiry, are very new ideas.

How long these ordering myths will ultimately last is anyone’s guess. Currently, we’re pretty enthralled. So enthralled, in fact, that we dress up in costumes (we call them “suits,” but what’s a suit other than a very bland costume?), crowd around podiums, cheer, clap, pound tables and ring bells to celebrate the opening and closing of trading every day.

Well, not every day. Only on weekdays. On weekends, the myths that ordered our lives for the preceding 120 hours are put on hold, in part so we can dress up in costumes, crowd into pews, cheer, clap, pound tables and ring bells to celebrate a greater deity than the bulls and bears we worship during the work week.

For all the progress we’ve made over the millennia, we really haven’t changed all that much.

Speak your mind

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10 thoughts on “Bulls, Bears And Animal Spirits

  1. Sir, you have outdone yourself. The “Worldly Philosophers” was the main text in one of my key Freshman required courses. It was followed up by a deep dive into Max Weber that set the stage for me on my way to becoming an amateur political economist. I suspect the paragraph beginning with: “To Reiterate …” and the wonderful prose that follows will be a bit unsettling to many of your readers. Sadly, too many people who aspire to being a successful “economic individual” have no clue about the actual nature of the arena they have entered. Daily, I see an ad depicting some poor lad touting one of the new non-bank money changers. He avers that he, and his 18k, are only going to deal with companies whose values he supports. What he just doesn’t understand is that his money doesn’t go to any company, only to the pocket of some punter who decided to dump what our young pigeon bought. Somehow, it is starting to feel that finance as practiced at places like Robinhood, Chime, and others of their ilk is somehow a great immoral con game. As customers of those folks wake up after the sting discover how far away from a stable future they are is going to be sad.

  2. “For all the progress we’ve made over the millennia, we really haven’t changed all that much.”
    No we haven’t, …but our planet and ecosystems within have, and unless we figure that out pronto, and rally together on our collective interests…

  3. My background is software development. I delve into databases on a daily basis and I know my way around querying databases. That being said, based upon the statistics of a bear market, I thought it would be interesting to query a database of ‘SPY’ data in order to obtain a number of days, going forward for which the SPY closing price was lower by at least 20% (19%) as compared to the day in question. The query only includes data since 1998-01-02.

    Only 5% of the days from 1998/forward had following days for which the SPY had a total drop of 20% (or greater) from the purchasing day’s close. The same is true for a 19% (or more) drop — on average.

    For instance, if one were to pick 2000-01-03 as the day to buy SPY at close ( a bad choice by the way!), there were 1302 days forward of that date, for which you could have bought the SPY for a discount of AT LEAST 20% from one’s purchase price on 200-01-03. It was until the end of 2011 that you could still purchase SPY at 20% discount or more compared to the price you paid on 2000-01-03.

    Again, though, only 5% of all days ON AVERAGE, will have a 20% or more discount at some point going forward for that day’s SPY closing price.

    What about 19% discount. Should it not be much improved as compared to 20% since 19% does not hit a “bear market” definition and emotions are controlled? It makes no difference:
    Let’s assume that the SP is down 20% from its high on the day of purchase:
    64% of the time, SPY will continue to move to 25% (or more) down going forward.
    40% of the time, SPY will continue to move to 30% (or more) down going forward
    22% of the time, SPY will continue to move to 35% (or more) down going forward.
    9% of the time, SPY will continue to move to 40% (or more) down going forward.

    Let’s assume that the SP is down 19% from its high on the day of purchase:
    64% of the time, SPY will continue to move to 25% (or more) down going forward.
    40% of the time, SPY will continue to move to 30% (or more) down going forward
    22% of the time, SPY will continue to move to 35% (or more) down going forward.
    9% of the time, SPY will continue to move to 40% (or more) down going forward.

    So, it makes no discernable difference whether the market drops close or into a bear market. The potential of additional losses is the same. No matter, if the market drops 19% or 20% from its high, 64% of the time, it gets worse by at least 5% and 40% of the time, it will drop at least another 10%.

    I guess the positive from all this is, you have basically 100% chance the SPY will be higher if you can wait at least 12 or 13 years based on the past 24 years of data.

  4. This is pedantic, but the myth that always intrigues me is the myth of the seven day week. It’s in Genesis, and maybe it’s in other creation myths–I haven’t bothered to check. But we all just accept it–and not just Jews and Christians and Muslims–the whole world does. We will argue and fight about virtually everything, but nobody questions whether May 21, 2022 is a Saturday. It makes no sense to organize your calendar around a prime number, and it doesn’t even work out conveniently as a unit for dividing an earth year. Why does China honor the seven day week? If I had been Mao, I would have instituted my own calendar, free of the influence of western religion.

  5. I have always enjoyed Acts 17 where Paul on Mars Hill pointed out to the Athenian authority that Athenians are ignorant for worshipping at the alter of “The Unknown God”. The early Christians did not wear suits or erect church buildings and believe it or not, Christ was a homely man according to the bible.

  6. I can’t figure out how to paste in a pic here, but this article made me think of a favorite political cartoon. For the correct visual just copy and paste the words into a Google search, or picture a man in a tattered suit, hazy city behind him, around a fire with some children, ostensibly as he explains to them the world they’re inheriting:

    Yes the planet get destroyed. But for a beautiful moment in time we created a lot of value for shareholders.

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