Investors vs. Policymakers: Who's suffering the most from Confirmation Bias?

There's a term in psychology that refers to a person's mindset when his/her ability to perceive a situation without bias is hindered by the insistence of their beliefs being accurate in every detail to such an extent they jeopardize possessing full clarity by ignoring information that refutes their view and paying attention only to that which supports it.

If you haven't heard of it before, it's called confirmation bias, a well documented human tendency that has significant relevance within financial markets, specifically towards those responsible for taking decisions based on opinions of an investment.

However I'm not here to talk about the decisions made by investors which might be overcome by this bias but rather those in prominent policymaking positions who dictate the direction of an economy as a whole and hold an influential role in deciding what balance works best.

One would think it's safe to assume that these figures have the necessary requirements to equip them with clear thought on growing variance on either side of the economic spectrum and in effect be bring about consistency to the pathway of growth instead of extremity.

BoJ doubles down on easy monetary policy https://t.co/vshzMQnKYs

— Financial Times (@FT) September 21, 2016

But this thought is becoming evermore irrelevant when we come to realise that the power once enjoyed by these economic mechanics are losing their influential grip of reality by overlooking data which suggests their actions do more to distort than anything else but instead choose to merrily continue along a path destined to produce failure.

The Bank of Japan announcement pertaining to the scrapping of monetary base targets and replacing it with "yield curve control" reiterates the point being made that central banks around the globe and more importantly those in the developed world aren't willing to admit defeat in the lack of substance of generating a full economic recovery from the toolbox of available policies.

Merely changing tactic won't change the skepticism being built up around the abilities of these policymakers to effectively take hold of the situation and steer proceedings in the right direction.

How the relationship between Bonds and Gold casts a shadow on world prospects?

Central bankers attempts to smooth over a bumpy economic recovery has taken a new turn following the auction of long term bonds by Portugal, Spain, France and Belgium issuing debt securities with maturities of between 30-50 years in a bid to take advantage of the negative interest rate environment currently being meted out worldwide by many developed world economies.

A staggering $9 Trillion worth of bonds worldwide presently sits at yields below zero, a first for many in the financial industry in an experimental usage of negative interest rates in the hope that it would bring some life back to economies that are suffering from deflation and low economic growth.

Yet experts have warned central bankers that the flaws of implementing such extreme policy could have a dire effect on the outlook of the world economy for decades if the incorrect approach is not taken from government's in restructuring their economies after being afforded ample amount of time to do so, instead choosing to feed the social welfare addiction of its voters to continue flaming their own political greed.

Hindsight would suggest that extending the maturity of long term bonds adds an element of risk when purchasing these bonds which pushes the yield threshold above zero and into positive territory, a once fixed convention that never flirted with any hints of diverging to the pathway we've found ourselves on. The demand for these securities has attracted a substantial amount of attention from analyst who seemingly label this as investors last ditch effort to get their hands on favourably yields.

It's also indicative of the bond markets expectations that central bankers will continue to loosen their grip on monetary policy going forward with no signs of differing views from decision makers. When will the realisation sink in that the fantasy the world has been living in for the past eight years is slowly waking the dreamer by invoking the most terrible of nightmares?  

Investors Fleeing $9 Trillion of Negative Yields Fuel Bond Binge https://t.co/AWsW5OgZzd pic.twitter.com/2RrHsOSsgT

— Quinton Mendes (@CadeTradeR) May 12, 2016

We've heard controversy stir up when protestation was aimed at the ECB for taking the decision to scrap the €500 note, saying it made money laundering easier for criminals. Many haven't bought into this excuse with some saying the central bank wants to eliminate the use of physical cash so it can have greater control over the money flowing in and out of bank accounts, eventually forcing people to allocate their savings into assets or inadvertently spend it.

We also saw the Bank of Japan reporting that the demand for the highest denomination note ¥10 000 has surged by 6.9% year on year after the introductions of negative interest rates.

This points to the Japanese public opting to hold their savings in physical cash rather than be penalised for keeping it in the bank where it should supposedly be earning interest! Besides this fact, it would furnish an opportunity for a far lesser burdensome method of storing wealth to be utilized. That particular method which has stood the test of time is Gold...

A possible reason why we've seen the resurgence in the yellow metal is because investors feel that central bankers, being the last true saviours of the world economy, have depleted their ability to control the outcome and are scraping the bottom of the barrel for bamboozling solutions. As time bides the inevitable, the risks grow larger everyday with each passing day bringing forth new evidence of the extent of the contagion.

Making things easier and safer for investors to buy gold than was the case only a few years ago is the creation of exchange traded funds which actively buys and sells gold, storing it in vaults for safekeeping which represented most of the weight in demand. Delving further into the matter, one wouldn't be naive to miss the fact that demand from India and China, the largest consumers of Gold in the world, has shrunken due to a strike by jewelers in the former nation and a slowdown in the economy with the latter.

Yet the demand for Gold has still increased with the price registering a gain of 16% this quarter, the second highest on record since 2000. Moves on a scale like this don't blow into the market by chance, they form when there's a sentiment change which is exactly what's happening right now. The tornado may be blowing in but the storm chasers aren't riding until they can get close enough, a thought to ponder over when you consider how close we really are to the edge.

Gold demand surged to the second-highest ever in Q1: World Gold Council https://t.co/ozGCem0eTH pic.twitter.com/tqdonxjx87 MT @EdVanDerWalt

— BN Commodities (@BNCommodities) May 12, 2016

Focus turns to central bankers to qualm uncertainty

Markets have been edgy this week with much of the movement stemming from currency pairs as developed world's central banks and economies took centre stage as risk begins to build up. Most notably was the Japanese Yen's remarkable appreciation against all of its major peers with the government attempting qualm bullish optimism by saying it was ready to intervene in the market at any given time.

The abrupt appreciation of the Yen flies in the face of policymakers at the Bank of Japan who have tried but failed in their attempts to depreciate the currency with extremist monetary policy that's seemingly had an inverse impact.

We also saw shakiness in the Euro as a number of issues take strain on the economic bloc. The ECB came out reassuring the market of it's willingness to up its ante if the stimulus measure currently in place failed to produce the desired outcome market participants had been expecting.

Apart from the monetary woes weighing heavily on the Eurozone, political scandals are not afar with leaked transcripts of conversation between IMF officials providing impetus to believe that negotiations surrounding a renewed bail out deal with Greece and the Troika is set to display the same indecisiveness produced at the beginning of last year.

Notwithstanding this, the worry that the Brexit referendum vote will need more convincing than once thought adding further complexity to matter within the region with the date of both aforementioned issues falling within a tight schedule that wouldn't allow policymakers to give enough attention to each.

It was the turn of Fed Chair Janet Yellen to face the scrutiny of the market's nervousness after she sat on a panel with former Federal Reserve Chairman Paul Volcker, Alan Greenspan and Ben Bernanke discussing the state of the US economy as well as the direction of monetary policy around the globe. Yellen said she did not believe that the US economy had formed a bubble and there were no risks of a burst either. This after presidential candidate Donald Trump made remarks that the US economy could be on the brink of implosion at anytime.

Evidence is pointing to the market becoming unsettled and the lack of response to central bankers dovish tones  is spelling danger for the weeks that lie ahead. The focal point around major central bankers of the world happens as the backdrop of political uncertainty takes hold of fears however this time the once turned to financial superheroes of yesteryear are tripping up over their own powers to save the world economy from it's inevitable fate.

It's been a rocky week for the $5.3 trillion-a-day forex market https://t.co/Uz3hFWDqG4 pic.twitter.com/N23tksqJ3I

— Bloomberg (@business) April 8, 2016

Discussing it earlier this week in Travelling Technicals I had said that the New Zealand NZX 50 Index looked to be the best looking technical chart I've done analysis on so far this year and it proved the best performing index this year amongst its developed market peers.

The reasoning could lie in the fact that New Zealand's economy operates with a wide exposure to agricultural production which probably gives a clue to the performance. In the article below its said that the lack of foreign investment and defensive stock all played its part in helping lift the index. If this were the case it could possibly be one of the first indications that investors are starting to channel their capital towards defensive plays as they expecting a world recession.

New Zealand is a rare case of a developed market that's posting gains this year https://t.co/JDp7BT4ixs pic.twitter.com/Gv1Jm42Xwh

— Bloomberg (@business) April 8, 2016

Travelling Technicals with Global Indices: Nikkei 225

Among the world's top stock markets as measured by market capitalisation is the Tokyo Stock Exchange with 2292 listings, it certainly lives up to its hierarchical standing with plentiful multinational corporations having all started in Japan and expanded outwards, conquering new business landscapes and winning over global consumers with products that has seen them become some of the most trusted, reliable and technological brands of our time.

It's not difficult to understand why the Nikkei 225 has formed part of a common index following throughout the world. If one thinks of just a select few companies that can be found in their day to day lives that reside in the index you sense that they are the appropriate gauge for world economic outlook;

• Toyota
• Nissan
• Sony 
• Fujitsu
• Panasonic 
• Komatsu 
• Yamaha 

It's evident to see how Japanese products have influenced the way the global consumer utilises their purchases and in saying that has set the benchmark in terms of standard of quality that should be expected.

But as much as the Japanese businesses have successfully captured profits from their export endeavours, the pathway with which the Japanese economy is along has been troubled for the past two decades with a risk of continuing to deteriorate if long term solutions aren't found to pressing issues. One particular dilemma facing the Japanese is a crisis of having a shrinking population or put more plainly a situation where there are more old people than young people.

As a result the Japanese government is finding it extremely hard to tap into revenue sources that would produce sufficient taxation to fund an increasingly demanding fiscal budget that requires more priority on the health of the elderly and as such needs to tackle restructuring their economic activity that would be prosperous over the long term. Thus far that goal looks too distant for many to begin being hopeful of the future yet with every passing year the need to deliver is growing ever constant.

This is just one of the many problems facing the Asian nation but makes a worthy case study for other developed economies to pay attention too. We've seen parallel policy implementation when it comes to a monetary easing between the Bank of Japan and the European Central Bank which is seemingly causing the world to ponder what trajectory both these nations are on.

However because the generous helping of monetary easing has made the need to find suitable returns ever greater the Nikkei 225 index has seen a dollop of resilience coming through that's assisted the index to challenge long term resistance with potential to go higher.

Let's get down to the charts:

Quarterly

The chart we looking at has a considerable length of time spanning as far back as 1987 which would date the preceding rally before the asset price burst that has held financial markets back in Japan for over two decades. The highs made during the late 80's early 90s have never been registered again since the huge declines that sent it into a secular downtrend. 

That downtrend was completed in 2005 with an initial break out producing a good rally but falling short of the resistance level needed to see a resurgence of buyers joining the trend upwards. It seems as if the trouble started around the same time as the Financial Crisis and sent prices back down to the lows of 2003/04. But surprisingly prices were able to hold support steady without plunging further which would have reaffirmed the continuation of the downtrend. 

Prices remained subdued after the shock of the Financial Crisis which is something I found unfamiliar compared to other major indices that registered fresh lows then made a courageous effort to reach for the highs last seen at the peak. In this case there seemed to lack directional movement which would suggest a disconnect between this index and other major indices. 

In came Abenomics together with the BOJ on a crusade to rid Japan of the evils of deflation by putting together a string of stimulus measures that helped get the index moving once more in sight of the overhead resistance that had yet to be broken. 

However it must be mentioned again that another disconnect became known and that happened between the Japanese GDP growth rate and the Nikkei 225. Where the GDP growth delivered far below par performance, the Nikkei continued its flight to the top which begs the question, who's buying into the Japanese recovery story? 

It turns out that the amount of bonds available for the BOJ to buy isn't sufficient enough so Governor Haruhiko Kuroda found it necessary to buy Japanese equity ETFs that has caused the BOJ to own roughly 50% of all equity ETFs listed on Japan's stock market. 

Back to the aspects of the chart and we see that the resistance around 18 000 has been broken but subsequently fallen back below that level which shifts the risk into the hands of the buyers. If we assess the overall price action that has taken shape over the last 15 years it resembles that of a double bottom formation suggesting that we could've found a solid bottom. With the price having broken upwards activating this pattern with big potential. 

But with the price hovering below 18 000 it does leave traders a little skittish over the prospects of going higher. A general rule of thumb would be to say if the price were to close below 14 000 (roughly half the measured move) it would nullify the pattern. We saw a dramatic drop in the first quarter of this year but a strong bounce shows that buyers have strong interest at those levels.     

Weekly

The uptrend we spoke about earlier on is seen clearly on the weekly chart with a distinct topping pattern having formed, the Cup and Handle with a break to the downside. The progress of the move indicates that we've reached a level that hasn't satisfied the full target of the move which means there could be further downside before we see any resolve of the price.

Two scenarios could enact themselves in reaching the final target price that lies just below 14 000, a level we established to be critical in previous paragraphs. Either the price falls to reach the target and bounces strongly back to shield it from anymore technical damage or the price falls below 14 000 and becomes stuck underneath nullifying the quarterly Double Bottom pattern which would be a real nuisance had you been following it for the past 15 years!!!

Current market conditions don't bode well for a bullish case in this situation so it should be accepted that the bias lies to the downside however if the BOJ were to up its stimulus measure we could see a strong rally pursue but this is becoming unlikely with the markets sentiment around the use of such measures being frowned upon.