In every crisis there is an opportunity and your ability to make money depends on your perception.
It was barely a week before the Mumbai terror attacks that I was having meetings in south Mumbai, the area under siege. After staying two years at the YMCA Colaba, having weekly trips to Leopold and working at the Bombay Stock Exchange, I still consider myself lucky to have escaped two blasts in the region. I can't imagine what my friends sitting there in adjacent buildings must be feeling.
“Sad state of the world” as a colleague put it summarises the social behaviour extreme we are witnessing. But, even though sad and painful, there are economic linkages to what happened. Some subjects are better left untouched, but maybe there is no better time to discuss this aspect of history, markets and terror. Moreover, now that psychology has started getting accepted as a valuable aspect in market forecasting, we as a society are not far away from revisiting history that has long been lost and would be ridiculed as a market forecasting tool.
Conventionalism would interpret news of Mumbai terror as not good for incredible India, business climate and cricket. A few boat men caused the exchange to shut down and brought a city on its knees. One can project what an escalation of conflict can do to markets and economic sentiment. Reality is different. Historically, social unrest is a sign of bottoming economic activity (larger or smaller degree) and potential positivity rather than peaking or sustained slowdown. Why so? Because, we as a society do not fight when things are good and prosperity is more, we fight, when we are upset and there is a sense of loss and anger. Terrorists are part of the same society that we live in.
Terror and war are only different in scale. Their aim and effect are broadly similar and the sentiments they evoke are also the same. The Kargil war lasted a few months and saw the markets gapping up from May 1999 till February 2002, 50 per cent higher. Economic recessions become news after more than a year of collapse (like now). And, economic depressions are followed by wars not vice versa. This was the case of US Civil War of 1857, which was preceded by a depression. The 1932 depression was also followed by World War II. The World War I also came after a recession, not before it. The 1942-66 Dow bull market started from the base of WW II. We could extend this argument to terror attacks also, and it is not a coincidence that Mumbai terror attacks did not come at a market top in January 2008, but after markets collapsed 60 per cent and fell for more than a year.
This is why trading conventionally on war or riot news is statistically a poor strategy. The terror news connections with markets are poor and statistically insignificant. Markets move in a preordained path. The Sensex closed positive the next day it opened after the attacks. Conventional thinking would call it market resilience, but this is a feel good factor, easy to talk on market shows, easy to write and hard to prove. Market fractals are indifferent to external events across time frames, multi year or multi minutes. It is a truth we may find it hard to accept, but a time series composed of one minute bars has predictive value with or without a war. Prices have no emotions. People have emotions, all the time and mostly the wrong emotion at the wrong time. Being a speculator, guru or commentator debating whether market should be kept open or close while the ‘The Taj’ guts in fire and shooting happens a few yards away from the Fort (South Mumbai) area is easy, but understanding what history and psychology means for market is tough.
In a paper written on the Physical factor of the historical process, A L Tchijevsky talks about human history and how it has been found that even the most prominent intellects have been powerless to foretell the future of their own nations or countries or the outcome of wars and revolutions. Humanity has never formulated any law which would govern any particular historical facts or sequence. This was despite the gradual and progressive development of a precise science. The basis for the destinies of history seems chaotic and the allotment of events in space and time (short periods of history or whole epochs of hundreds of years) unruled by any law. This is despite the fact that history has been proved to repeat itself, making it possible to model. Further study done by K Lamprecht, O Spengler, J de Condorcet (1793-94) suggests inefficiency in finding out the laws of history. People assume the hand of providence guiding the destinies of men; others like Taleb would call history random and a man speaking of the ‘practical purposes of history’ would be called irrational. History is wrongly believed to present knowledge of material already dead and useless for the progressive life. English historian, H T Buckle (1821-1862) shows that the principals and methods of natural sciences must be applied to history in his book “History of civilisation in England”. A similar argument was made by J M Draper (1811-1882) in his work “History of the intellectual development of Europe” 1856.
The science of history is cyclical and proved to be connected with nature. It took more than 200 years for Fractal geometry to challenge Euclidean geometry. We humans are resistance to change. This is why field theory works. Conventional research is nothing short of herding, if we are closed to the other ideas. Human excitability like everything is cyclical and predictable. It is not that brilliant ideas like new TV channels, 20 over cricket or Chandrayan that changed the industry, it was that the masses moved into a new realm of excitability that took us to a new cycle high. It is this excitement that also drives the economic consumption. Professor A L Tchijevsky also wrote about this excitability index.
It needs more than an open mind, to understand the linkage between markets, history and psychology. My father, an architect, understands fractals and the mathematical symmetry of markets and how they work in isolation unaware of news. But, the subject of World War III cyclicality in 2024-2030 disturbed him. But then there is no order without chaos, there is no balance without imbalance, there is no growth without decay, there is no psychology without wide swings and extremes, there is no peace without terror and there is no economic cycle without a war. Every generation has its war. We will have our share of terror and war too, the only challenge we will have then is to see it as a lifetime wealth opportunity or a crisis that we fail to accept.
The author is CEO, Or-phe-us Capital, a global alternative research firm
