Psychological Investing Moods and Sentiments

Moods are relatively long-lasting emotions. Sentiments are shorter-term.

They both can affect how stock market cycles react and can precipitate booms and busts.

That’s because cycles can easily grow into fully grown varieties. It’s the way minor bear markets start and deeper recessions fester. Given enough impetus and human error, financial meltdowns will eventually occur, as I have outlined in my previous reports.

It’s the reason why astute, wise politicians seeking to prevent a deep recession, never make it a practice to single out industry as scapegoats when they want the economy to recover and produce jobs. (See the Earl J. Weinreb NewsHole® comments.)

Keeping Banks Safer and Mark-to-Market Bookkeeping, Part 2

I mentioned in an earlier blog how bank and investment company net worth figures had been daily devalued to so-called “toxic” levels. Those levels were actually a fiction, brought on by an illiquid market, where true fair value was impossible to determine.

There were defenders on Wall Street for this sham. Some insisted that rules were rules to be defended in emergencies as if they were cast in stone. The rules then became a boon for Wall Street short sellers and the avalanche of constant traders that make up the financial community, folks to which the media give far too much attention.

Ever-lower values were thereby being created for securities with little or no true market with which to establish real market values. And it produced volatility that made for tremendous trading profits among short-term traders who predominate the financial community.(See the Earl J. Weinreb NewsHole® comments.)

Keeping Banks Safe Despite “Mark-to-Market” Bookkeeping

U. S. financial breakdowns usually have to do with governmental “experts” in the past reacting to problems in a panic mode. I’m referring to the Great Depression and our current Great Recession.

The rescuers had come from the financial community, attuned only to the short term, and thus could not see how caution and avoiding panic would overcome problems. Nor did they truly envision the danger of acting in haste.

Example: The value of debt obligations, CDOs. or their derivatives, were “marked-to-market,” under so-called fair value accounting. The latter is part of the Generally Accepted Accounting Principles (GAAP) rule in place since the 1990s.

But that rule could have and should have been suspended for the emergency. CDOs were not some other product that accountants usually measure on balance sheets.

As a result, bank and investment company net worth figures were daily being devalued to so-called “toxic” levels. Those levels were actually a fiction, brought on by an illiquid market, where true fair value was impossible to determine. The rescuers were blinded by their own personal and business backgrounds.

The unintended consequences are slowly but surely unfolding day by day.

(See the Earl J. Weinreb NewsHole® comments.)

Update on Dodd-Frank Problems

You have heard how complicated, arcane deals undermined global finances? Because those “greedy” bankers, intent on “obscene” profit-making schemes used them to the detriment of all.

After lengthy investigations were made, and our politicians in Washington completed their pious speeches, the media contributed their remarks.

And then Congress made its conclusions. Some insights were finally gained on how derivatives really work and their purpose. The upshot of all the nattering? Draconian regulation in the form of the Dodd-Frank Act of 2010.

This piece of legislation is still a work in progress so the unintended consequences are slowly but surely unfolding day by day.

 I comment on them as they periodically occur. (See the Earl J. Weinreb NewsHole® comments.)

Trading ETFs

ETFs are different than mutual funds, in that they are traded on exchanges; they are indexes that are not managed by advisers.

From time to time, their securities may be lent for purposes of short selling, It’s a source of added income. The stock lending profits of such ETF funds can be substantial.

Do earnings go back to shareholders of the ETF, or to its managers?

In some funds, almost all go to the shareholders, while as little as half may be returned to other holders.

You should check your ETF investments, to see how your managers treat these earnings.(See the Earl J. Weinreb NewsHole® comments.)

Federal Reserve Independence is Lost

Central banks were set up for independent banking functions, on the premise it’s best for a country to keep its financial system from political influences.

Politicians have always had a tendency to produce financial and economic pressure to change any banking independence during stressful economic times.

How are major central banks doing with regard to their current national financial crises?

The Bank of England had been relatively independent but rather involved with its government bond market. The Bank of Japan had been somewhat independent since 1998 but it often has been politically directed.

Congress, which always loosely supervised the Fed now wants audits and more disclosure, which would exert pressure.

However, the Dodd-Frank Act now has the Fed go more deeply into the American economy than before, and the present Fed Chairrnan, Ben Bernanke, has had a major tendency to lean to administration policy. (See the Earl J. Weinreb NewsHole® comments.)

Psychological Investing Behavior

Research on human investment behavior indicates how personal psychology has  to do with the way securities markets operate.

I have mentioned in the past my studies and evaluations of over 1,600 investment strategies, and their pros and cons. In addition, I have always said there is no one that I have found to be better than any other. What makes for investment success is strict discipline of strategy use. 

Psychology controls discipline. Furthermore, discipline can be mastered, with proper personalized control over those psychological hazards.

I would suggest investors look at the work done by Kahneman and Tversky on investing behavior. It will provide a glimpse of how investors think, often to their disadvantage. (See the Earl J. Weinreb NewsHole® comments.)