Man Versus Nature

By: Erik Swarts | Wed, Jun 1, 2011
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I think a great deal about causation. Predominantly because we tend to get it wrong so often - yet find what we need in what we see. You can do quite well not worrying about causation as a trader and focus on what actually isright in front of you. Ignorance is bliss, especially if you rely on a system to execute your trades.

As a curious participant, I find 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 different things.

It simply is what it is - not what it should be.

The fact that on any given day you will hear with great conviction why the market did what it did from perspectives as varied as an old fashioned candy store, is proof to its almost mystical and amorphous composition.

Trends continue because of many different forces and relationships. Long term trends - trends that have been in place for decades - can and will continue with even greater uncertainty as to what is actually causing them to continue.

The US government bond market is one of those forces of nature. Alan Greenspan liked to refer 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 future.

200 Years - Gov't Bond Yields
Larger Image

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). The present cycle (approximately 70 years) is actually following 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 final leg down is swift. However, once the previous cycle low was broken, rates tended to base for an extended period of time.

The chart reflects why I find the comparisons to the 1970's period of stagflation so misplaced. In the 1970's, inflation was on an upswing for over 20 years and on its way towards historic highs. Today we have the opposite dynamic with rates drifting towards historic lows. The two rate and inflation environments couldn't be more diametrically opposed.

As a parting thought, the chart and current rate environment also speaks to the futility of the recent comments and illusions of causation from 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.


I just joined Twitter. All my trades and occasional market musings are disclosed in real-time here.



Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or 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. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

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