Tick Tock

Pendulum Clock

I’ve had discussions with people on many different topics over time that often end up with me, at some point, making a comment about pendulums. Those things hanging from the beautiful mantle clock, or grandfather clock in the hallway. They seem to explain so much that we live through over time. I mentioned the word briefly in a blog entry almost 2 years ago, and haven’t taken the time to revisit the term, though maybe I should have. Because whether it is in social norms, politics, or where I prefer to focus – the markets – the pendulum effect is in full force.

What is the pendulum effect? I’ll start by saying though I’ve never heard the expression nor the idea as a real ‘theory,’ if it does indeed have validity, then I’m sure it’s been written about before…in actual text  books. To me, the idea of a pendulum effect is that almost everything we live through and have an opinion about, seem to act like pendulums. I think in many ways, in many situations, the ‘true’ majority would really find a center point the place they would like things to eventually settle. I don’t think most people are at the extremes of the loud people. And while it sure sounds as if this is about to get very opinionated in a way that doesn’t serve the purpose behind these blogs, actually it was things like GE and the continued threats and implementation of increased trade duties that drove me to write this.

This all comes back to the idea that in the end, markets are driven by emotions. Emotions turn people into lemmings. It’s why it’s so much easier to buy high and sell low than to do it correctly. Because it isn’t in our nature to be market contrarians. Even many contrarians are only contrarians in speech. When it comes to acting, they still do what everyone else is doing. Why? Because people would rather be part of a large group when they’re wrong. They don’t feel as ‘dumb.’ It’s often truly more important than just being right. Be in the group…

When I was at Bloomberg visiting clients on a regular basis, it amazed me how many institutional traders just wanted a way to be sure to buy or sell no worse than VWAP. VWAP is the Volume Weighted Average Price. This is the average price that, theoretically, most of the trading takes place. And that’s what traders wanted. They wanted to be Average. They strove every day to be Average. Just like general crowd behavior, they were able to explain to their boss that they weren’t any worse than others. This out-weighed the reward of possibly telling their boss they did better than the crowd.

And that’s the pendulum. Average. Where we really strive to be. We don’t like extremes, because the risk is that the extreme is the one on the other side of ours! I’d love for all of the important decisions in the world to go exactly my way, but they won’t. So I’ll accept them not going completely my way as long as I know that they’re not going completely your way either. It’s an equilibrium. An equilibrium we rarely see.

In society we call them liberals and conservatives. And many long for a time when they actually spoke to each other and found a compromise solution. The middle of the pendulum’s arc. I learned early on that a successful negotiation meant everyone was happy, but not too happy. Don’t get those kinds results much anymore. It’s more an imposing of the wills. Corporate management wins or labor wins. We don’t all win (and lose) anymore. And then the losing side gets angry enough about it having happened and they end up finding a way to swing the pendulum too far their own way the next time. “Overextension.” Just another market term.

Brings me back to GE. Being the largest conglomerate in the world was an excellent thing. And now it isn’t. Jeff Immelt was setting an example for others to follow. Until it was deemed a model for others to avoid. So the sale, or even fire sale, of many assets shows a pendulum actively swinging and picking up momentum in the other direction. Bulls and bears. We have big bull moves, we have big bear moves. Occasionally we get sideways equilibrium, the middle of the arc of the pendulum so to speak, but we end up swinging through that point and find ourselves Overbought or Oversold, again.

The thing that I try and do is to be conscious of this as much as possible. Does it make me happier when things go the opposite way? No, but it gives me perspective. The perspective that in due time I’ll see the pendulum at the apex where I’d like it to stop, and then it won’t. It will end up all the way on my side of that swing. And if I keep my perspective, I’ll realize that this state will only hold up for a brief period. And then it will swing the other way.

Democrats grab a majority, Republicans revolt and the majority becomes theirs. Then the Democrats revolt and the cycle repeats. Just replace Democrats and Republicans with Bulls and Bears. It’s a natural pendulum at work. It’s what keeps the markets in balance over the long term. As many times as the word cycle is used in analysis of securities and markets, we really should be looking at those market moves as a microcosm of the cycles we choose to live every day. It’s the discipline of making sure you keep the overall perspective that “This too shall pass” (and maybe even preparing for that inevitability) before you follow too many lemmings off that bull or bear cliff.