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http://www.marketanthro po lo gy.co m/2011/06/man-versus-nature.html

Man Versus Nature

I think a great deal about causation. Predominantly because we tend to get it wrong so of ten - yet f ind what we need in what we see. You can do quite well not worrying about causation as a trader and f ocus on what actually is right in f ront of you. Ignorance is bliss, especially if you rely on a system to execute your trades. As a curious participant, I f ind great interest in attempting to understand what likely is much simpler than we typically make it. Or perhaps it's just more of an existential expression of many dif f erent things. It simply is what it is - not what it should be. T he f act that on any given day you will hear with great conviction why the market did what it did f rom perspectives as varied as an old f ashioned candy store is proof to its almost mystical and amorphous composition. Trends continue because of many dif f erent f orces and relationships. Long term trends - trends that have been in place f or decades - can and will continue with even greater uncertainty as to what is actually causing them to continue. T he US government bond market is one of those f orces of nature. Alan Greenspan liked to ref er to it as The Conundrum . Perhaps if he had taken a peak at the historical charts of the US government bond market it would have helped provide greater context and expectations towards the f uture.

It is hard to deny that there is at the very least asymmetry in the above chart with regards to each respective rate cycle (trough to new lows). T he present cycle (approximately 70 years) is actually f ollowing the greatest degree of symmetry - likely because of the historic spike in interest rates in the early 1980's drawing out the trend. In both the previous cycles shown (~ 60 and 55 years, respectively), the f inal leg down is swif t. However, once the previous cycle low was broken, rates tended to base f or an extended period of time. T he chart ref lects why I f ind the comparisons to the 1970's period of stagf lation so misplaced. In the 1970's, inf lation was on an upswing f or over 20 years and on its way towards historic highs. Today we have the opposite dynamic with rates drif ting towards historic lows. T he two rate and inf lation environments couldn't be more diametrically opposed. As a parting thought, the chart and current rate environment also speaks to the f utility of the recent comments and illusions of causation f rom the likes of Bill Gross at Pimco. You could say it's another example of man versus nature. Mr. Gross could very well have had excellent reasoning and rationale as to why he expects yields to rise. However, nature (the market) will always be the great humbler of even the savviest participants; she will walk and romp where she pleases. I'm sure that realization keeps Ben Bernanke up very late at night. More to come in this line of thinking. ___________________________ Disclaimer: T his is not investment advice. Always do your own due diligence. Erik Swarts is not a registered investment advisor. Under no circumstances should any content from this website be used or interpreted as a recommendation for any investment or trading approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor.