Saturday, November 21, 2009

Cognitive Dissonance

Any of us that have had a psychology class are familiar with cognitive dissonance, though it is unlikely that we think about it in our everyday life. I needed a refresher on this definition, and I give it to you, courtesy of Dictionary.com.

Mental conflict that occurs when beliefs or assumptions are contradicted by new information. The concept was introduced by the psychologist Leon Festinger (1919–89) in the late 1950s. He and later researchers showed that, when confronted with challenging new information, most people seek to preserve their current understanding of the world by rejecting, explaining away, or avoiding the new information or by convincing themselves that no conflict really exists. Cognitive dissonance is nonetheless considered an explanation for attitude change.



I like to pay attention to things that bother me, as my subconscious has a lot on the ball. Readers are familiar with my "What do I have to believe is true?" wonderings out loud when I'm confronted with things that are perplexing to me. My current troubling wonder is the so-called dollar carry trade.

I don't pretend to be knowledgeable about the intricate logistics of carry trades, currency reserves and the like. I know enough to be dangerous....and I know enough to sense danger. I do know this: The USD is still the reserve currency, commodities are still priced in USD, and the boat is listing rather heavily to the side of the boat where the shorts are congregated. And being a contrarian just for the sake of being a contrarian risks one's being label a curmudgeon. Or, perhaps I'm just a coward and unable to take risks commensurate with reward.

But for all of the problems with the US economy and the dollar, we still have a pretty good system. (Or perhaps that is my rationale for dealing with this dissonance!). To me, being short USD (and long commodities) feels like shorting a stock that may have a takeover bid at any moment. Is it the 'smart' or the 'too-good-to-be-true' trade? Father Time always answers that question for us. And perhaps I need to do a little navel gazing to make sure that I'm not the one in the weeds and everyone else on the path to low risk riches.

Position: Long SMN.

3 comments:

GGM said...

I definately struggle in the same way. How does one trade when the primary market direction is bullish yet ones economic view is that our government is only putting lipstick on a pig? I think the answer lies in only trading very short time frames. If I take all my trades for the last two weeks, I find my attempted longer term swing trades lost money, while almost all my short term day trades made money. The net was a small loss over the last two weeks.

For myself I can't reconcile what I read about the destruction of the underlining economy with the stock market going up. The only thing which makes sense is some how some of the QE is leaking into equities. Which I guessing is in response to the Feds purchase of Agency toxic debt, as almost all loans to the banks are sitting on the Feds books.

Let me ask a question, if the Feds want banks to lend, then why do they pay them interest on their deposits with the Fed? Seems doing so encurages banks to sit on cash. Also what kind of world do we live in where the banksters get paid by the Fed to borrow money, or at least it seems that is the case. Why not just pay everyone for taking money ie borrowing from a bank. Seems just as logical.

Leisa♠ said...

They do not want banks to lend, I do not think. Rather, they want banks to heal--so their bread/butter, net interest margin gets helped in a magnificent way with the steep yield curve helps with this.

I still think that the market got ahead of itself. Our job is to protect capital first and watch where money is flowing to earn a return. It is darned hard (I'm not successful at it!) in suspending our biases and holding our noses and jumping into the tank that offends us.

Because we are bothered by it, makes us watchful. And being watchful is better than what many do.

Anonymous said...

Paul Kasriel from Northern Trust has a recent comment (11/16) on the USD carry trade. http://safehaven.com/article-15034.htm
He claims it is "mucha ado about nothing", but I'm not certain. I'm having a 'lil dissonance on it too. Like 2008's "deleveraging",to the degree it is occuring, it's in the category of activity that could potentially overwhelm all other investment themes, fundamentals, technicals etc if / when it reverses.
~Sleepless