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Trading Lessons

Stock Market Investors Conditioned To Catch The Falling Knife

Stock-Markets / Stock Markets 2014 Aug 16, 2014 - 04:03 PM GMT

By: Raul_I_Meijer

Stock-Markets

That’s not a bad metaphor to work with. “Conditioned to catch the falling knife”. The expression comes from the investment world, but it describes a much larger world today pretty accurately.

Investors use it to describe people who see a stock fall, rapidly, from for instance $50 to $20, call the low, and decide it’s a good buy, only to be stuck with huge losses (the knife that cuts their hand) as it goes down all the way to 25 cents.


Tyler Durden quotes Bloomberg’s Richard Breslow as saying this about financial markets:

Conditioned To Catch The Falling Knife

… there is this enormous consensus in all ideas and positions, everyone knows that central banks are there and driving everyone’s positioning“; my friend Bob Savage said yesterday:

“We’ve been trained to catch the falling knife by the central banks, one of those trading strategies that will work until it doesn’t and when the knife slips you will really have a taper tantrum.

It’s becoming harder and harder to look at the news and then guess what markets did in response [..] the expectation tends to be much more logical than the reaction.

If you look at how markets are trading, they move ahead of a central bank meeting, or a strong or weak number, then everyone is caught with the same position and you end up being right but proven wrong.”

Just like most of today’s investors are Pavlovians potty trained by central banks, most people don’t have opinions of their own on most other issues either; some never did, some recently lost them, but all of them are shaped by media and politics, not innate critical thinking.

It may seem that this is something of all times, but there is a difference, since as one’s exposure to media rapidly increases, so does the influence they have, or the way in which they have it.

In earlier days, most people’s opinions were formed by the communities they lived in, the churches they visited, the schools they attended – if any -, albeit admittedly in ways no less nefarious than the present ones.

But in those days far fewer people were even under the impression that they indeed did form their own opinions – who could read and write? – and were capable of critical thinking.

Now, just about everyone does, and that makes for a different view of the world of the individual. And a different approach to manipulation for opinion makers, of both the individual and the masses.

I’ve often talked with friends about how and why 100 years ago people went into World War 1 in Europe’s battlefields from all over the world. How all those Canadian boys got to be killed over in Belgium and France. And how none of us could imagine doing anything like that in this day and age.

But people then did, partly because the risk of dying wasn’t perceived as being as high as it turned out to be, but certainly also because of community pressure, shaped by schools and churches. If all boys in town go, who are you to stay behind?

Things have changed. We are to a much larger extent individuals now. We live in smaller family units, with much more space per capita and therefore much less direct interaction with others.

We also have had a lot more education, and feel that entitles us to pass judgments. We think school has provided us with objective ideas about the world.

But that’s where the pinch is. We are being fed preconceived ideas from day one – though that’s never what they’re called – and few of us can shake them.

To name an example, there are very few people who will tell you a particular TV ad for a detergent makes them buy the product, but that ad wouldn’t be there if it didn’t work, ergo: who buys the stuff? We have Freud and Jung and their findings of the sub- and unconscious to thank for that.

So how does a government today go about justifying going to war? How does it create an “enormous consensus in all ideas and positions”? It’s not that hard, when you think about it.

Political ideas and ideologies, and politicians themselves, can all be sold to the individual, and the masses, the same way detergent is. By appealing to the unconscious. The means through which ideas are transferred may have changed, but the “pillars” they are based on have not. Jung spent a lot of time working on archetypes, and the bogeyman stands out as a prime example of that. If you give the enemy a name and a face, the job’s half done.

Add to that that the enemy and his people do terrible things to babies, eat them, bury them alive, the image has always worked wonders, and still does. Throw in horrid abuse of women and it’s clear sailing. Rinse and repeat. Lots of rapid repetition, something our present media are ideally suited for. Repetition works miracles, in politics as it does in advertizing. It’s not a huge stretch to say that repetition outweighs evidence.

That’s how Saddam Hussein, Gadaffi and Osama Bin Laden, and today Vladimir V. Putin, have become household names in the US and Europe. And everyone recognizes their portraits too. Though Saddam was never proven to have had WMD, there’s no evidence for Bin Laden’s involvement in 9/11, and Putin so far is merely an unsubstantiated evil media figurehead as well.

People at a certain point simply feel sure that they “know”. Because they’ve seen the names and faces so many times a day, confirming their earlier preconceptions. It has precious little to do with critical thinking. It has to do with what everyone around them says.

To get back to the falling knife, investors – potty trained as they are – all think they’re going to come out winners, even though they know they can’t all win, and even though they know all of their friends and competitors think the exact same way they do, and make the same decisions.

That is the herd mentality. Perhaps not an archetype as such, but, if anything, something even older and more deeply engrained in our brains. What Richard Breslow says is that the vast majority of investors will end up catching the knife in their bare hands, and it’s going to hurt something bad. ” … everyone is caught with the same position and you end up being right but proven wrong”

That is, but of course, exactly what will happen to all of us who blindly follow our politicians and their cleverly disguised media messages on our bogeyman enemies and the wars we have to wage against them.

All we want is to be right in the end, that is to say, we want to conform to the meme common to our herd, and whether or not that will prove us wrong is not on our radar.

Still, just as investors will get burned by blindly following every single move and every single word that comes out of the Fed, we will all get burned and cut and hurt by following every word our politicians and media rinse and repeat. We risk doing quasi irreparable damage to our relations with various people in Russia and Iraq and many other places around the world, who don’t want us as their enemies anymore than we want them, just because our “leaders” seek to advance their agenda’s by demonizing these people.

It’s a dangerous sort of deceit, which doesn’t start when war, be it physical or trade or any other kind, is declared, it starts with how and why we elect the people who have the power to declare it in our name.

And then “when the knife slips you will really have a taper tantrum.”, or in other words, when you find out your Pavlovian preconceptions (yes, you!) have been awfully off the mark, you still have to deal with the consequences, and they may hurt. Whether it’s oil that’s no longer delivered, so you’re cold and miserable and stuck where you are and everything runs to a standstill, or it’s someone attacking your communities because the leaders you elected chose to attack theirs halfway around the world, you may find you’re the one who ends up catching that knife.

And then, inevitably, maybe someday you’ll realize that what you’ve caught, and got cut by, and have fallen into, is your own knife. You threw it up into the air. And you were conditioned to catch it.

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2014 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
Raul Ilargi Meijer Archive

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