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| The new normal |
| Mukul Pal / Oct 07, 2011, 00:41 IST |
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The “new normal” was an innocuous quote by Pimco’s Mohamed El-Erian, suggesting an uncertain future, sluggish growth, international discord, low return on capital, etc. Such is the reach of media that the ‘new normal’ has become a buzz word. It signifies the times we live in. It talks about a new change, new time. But, is the ‘new normal’ old wine in new bottle, addressing “this time it’s different or it’s definitely bad”.
Social networks are the new normal. I juggle between my offline and online networks. We are sharing so much information that we can’t differentiate real information from noise. While it might cause disorientation on one hand, on the other, identifying patterns in presumed random chaos might be the only way out. Is it really that uncertain? Or, do we lack big picture tools?
During a recent trip to a MTA (Market Technicians Association) chapter meeting in Budapest, a colleague mentioned how DAX was hard to trade and behaved like a Struþocãmila, a special Romanian term describing an animal with features of both ostrich and camel. His point was the DAX was a tough animal to trade because sometimes it behaved like an ostrich and sometimes like a camel. Being midway between Asia and North America, an intra-day trader saw the German benchmark correlating first with Asia and later in the day with the US. He said the only way a trader could get out profitably was by understanding this special character of the asset.
Now, one may say this was normal and that friend and assets should always be few. The fewer you have, the better you would know them. The new normal is different. We have a few thousand friends in our network and the way we interact is changing. Success is now defined by the size of your network. Today, we have enough scientific proof to explain that societal behaviour was patterned and ordered because it organised itself as a group rather than as individuals.
According to Philip Ball, author of Critical Mass, “Life confronts us with binary choices. We are, then, like a magnetic atom, wondering which way to point our compass needle. Likewise, we are inclined to be influenced by the choices around us. The result can be a rich and subtle interplay of interactions, leading to outcomes impossible to predict without considering the dynamic of the group as a whole”. Michael Lind, a political scientist, commented: “A friend of mine who raises dogs tells me you cannot understand them unless you have a half-a-dozen or more.”
These ideas fly in the face of the conventionalism which wants us to look at one asset or market at a time. If understanding group behaviour is key, why don’t we have an objective way to look at markets as a composite large group rather than a few assets we love and trade?
The new normal just seems abnormal. Austerity is the new normal because of societal excesses, deleveraging is the new normal because we have overleveraged, being faster than the speed of light neutrino is the new normal because we enshrined Einstein to a god-like status. Whenever we say something is normal, we should bite our tongues. The normal is always waiting for the new. Whether it’s an assumption that salaries in a certain sector can never go down, or a belief that gold uptrend will always be normal, the surprise is round the corner.
The 80-20 cycle simple rule will always work. Today’s worst performers among a group are cyclically going to be tomorrow’s winners and vice versa. Now, show us the new in this normal?
The author is CMT and co-founder, Orpheus CAPITALS, a global alternative research firm
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