Bullishmood,operationtwistandurgetosimplify

The equity markets around the world are on a hope run. Japan’s Nikkei is trading around its 3 decades peak. Dow jones is also trading around its all-time highs. US Yields are up, gold and bitcoins are also up. The US 10-year yield is trading close to 1.08 now. If we try to tie all these market factors together, we can form a plausible narrative which can explain the current movements. Readers should be aware that a move in the reverse direction also can be defined by an equally compelling narrative. Just two days back when the stock markets had a slight correction it was tied to democrat control of senate, not surprisingly the rise is getting attributed to the same event. This phenomenon is called the narrative fallacy which we discuss in a bit of detail today.

In the 2007 book The Black Swan, trader philosopher Nassem Taleb writes about narrative fallacy with gusto. He writes about the reason that why we humans like to narrate (tell stories) and are likely to fall prey to a well-built narrative. He opines that apart from psychological evolutionary reasons it has something to do with the way information is stored and retrieved from our brains. As per Taleb, any information coming in and out of our brain has three cost implications i.e. it is costly to obtain, it is costly to store and finally it is costly to manipulate and retrieve the information.

Taleb writes that hence we humans seek patterns (narrative constructs) in information to store them more efficiently. The simpler the pattern, easier it is to store and later retrieve. Any random high dimension abstract pattern hence needs to be reduced to simpler one-dimensional story. Stock markets going up, Democrat win. Gold up, more stimulus. Clear, simple and precise. You have reduced the degree of randomness. Finally, he writes that the fault is not that if we try to simplify but the problem is that if we also start believing that the world is uni-dimensional and non-random.

We will have the NFP data coming out today. The initial jobless claims for the past week showed a surprise dip in the data released yesterday. The transfer of power in the US was approved by the US congress amid chaotic scenes of unruly mobs in Washington. There has been a renewed call of impeaching the outgoing president by the Democrats. The news however has no special market implication.

In India govt released the advance estimates of GDP for FY 20-21 yesterday where it showed a close to 7.7% contraction on YOY basis. Government estimates that in the next financial year the economy is expected to grow by 9.5% YOY.  On the bond side, RBI made announcement of conducting another OT (simultaneous buy and sell of securities with different maturities) for INR 10k Crore on 14^th January.  The 10-year benchmark bond is trading at 5.89 currently.