FROM STOCKHOLM TO HELSINKI SYNDROME – A REVISIT


In the Q1 2021 edition of The Ghost In The Machine, I wrote about how markets appeared to be shifting away from ‘Stockholm Syndrome’ - a psychological response wherein a captive begins to identify closely with his or her captors, as well as with their agenda and demands - in this case the central bank’s pledges on low rates for a protracted period.


The pendulum had moved to ‘Helsinki Syndrome’ - questioning that pledge, along with the aura of omniscience and omnipotence that markets had bestowed upon central banks since the GFC, and the ‘transitory inflation’ narrative, above all as the year progressed. Revisiting this analogy seems apposite now, given that markets’ reaction function, and the signals that emanate therefrom look to be very confused, if not contradictory and paradoxical. As but one example, while 2023 kicked off with a strong consensus anticipating recession in developed market economies, it also saw a sharp drop in the AAII Investor Bear Sentiment, and a relatively sharp rise in AAII Bull Sentiment, accompanied by a jump in equity indices, credit spreads tightening to levels not seen since March 2022 then the Fed started tightening, i.e. ostensibly strong appetite for risk assets, which has a strong whiff of QE and zero rates era FOMO (‘fear of missing out’) about it. For any contrarian investors, this cacophony of market signals is probably an invitation to remain on the sidelines. (As editor of The Ghost In The Machine, I would add that both Stockholm or Helsinki syndrome no longer hold as a political reality in light of Russia’s invasion of Ukraine, but are valid, and are deployed here as conceptual analogies).


So, what is to be made of all these conflicting signals, and is there perhaps method or logic to them? As is well established, markets are primarily driven by psychology (some might call this confidence, as in ‘exuberance’ or ‘despair’) and the resulting level of leverage and capital flows, and while economics does play a role, it is very often more about perceptions and expectations, than actual economic outcomes. The latter are all frequently retro-fitted or extrapolated in a highly selective way to create a supposedly historical rationale for price action, all too often because ‘more buyers than sellers’ or vice versa is simply not acceptable, above all for media reports. From a psychology perspective it is important to bear in mind that our individual perspective, or the lens through which


we view and react to the world around us, is the sum of our cumulative experience, per se constantly evolving, but as importantly operating both at a conscious and subconscious level, the latter being important in terms of our ‘conditioned’ reaction function.


Now consider how deeply ingrained both TINA (There Is No Alternative) and FOMO (Fear of Missing Out) became in the post GFC / pre-Pandemic era had become, and how it was amplified by the deluge of central bank QE during the height of the pandemic. While last year’s sell off in debt and equity markets was brutal, along with the volatility across all financial sectors, but most notably energy commodities, thanks to the Russian invasion of Ukraine and the fastest pace of developed world central bank rate increases in 30 years, remarkably few financial trading entities failed outright, despite some heavy losses being inflicted, and the de facto end of TINA. While TINA have been put to bed for the time being, FOMO certainly has not, given that it is in practice the very essence of financial markets ‘animal spirits’, and it requires a shock on the scale of the GFC or COVID to genuinely extinguish it for a more protracted period.


It is worth recalling that while policy rates have risen sharply in the US, Europe, UK, Canada, Australia, and some parts of Asia, they remain unchanged in Japan and fractionally lower in China. This is very much tangential to the fact that while Fed and BoE balance sheet reduction is well underway, and the TLTRO restructuring has seen a relatively sharp reduction in


21 | ADMISI - The Ghost In The Machine | Q1 Edition 2023


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