Don't Let the Bowl Break
A crisis erupts. Stock markets fall. Gold and the dollar rise. By now everyone knows this market reflex by heart. No matter how accustomed we become, a crisis still triggers panic and selling begins. Those holding stocks—especially in risky markets—tend to sell first. As sales accelerate, stock markets in those regions decline.
The second wave follows quickly.
The proceeds from these sales are converted into dollars and transferred out of
the country. As demand for dollars rises, the USD/local currency exchange rate
increases. Even citizens who do not normally invest in the stock market start
converting their savings into dollars or buying gold when they see the dollar
climb. This, in turn, pushes exchange rates and gold prices even higher.
One might assume that if a crisis
originates in the United States—or if the US itself is the source of the
crisis—the dollar would weaken. Yet the opposite often happens. Foreign
investors who hold assets in emerging markets typically convert their funds
into dollars when they withdraw in order to avoid risk. As a result, the dollar
rises rather than falls.
During the recent US–Israel–Iran
war, for example, the Dollar Index (DXY) did not decline; it rose modestly. A
similar pattern appeared in US Treasury yields. By contrast, US stock
markets—led by the Dow Jones Industrial Average—had entered a downward trend.
As of yesterday, however, they too began to recover.
Observing the market’s reaction,
Goldman Sachs CEO David Solomon expressed his surprise:
“I look at the market reaction
and, frankly, I would have expected a sharper reaction to an event of this
magnitude.”
In fact, this surprise points to
something that is not entirely new. Since the early twenty-first century, when
capital movements became fully liberalized, the market’s response to crises has
gradually evolved. Modern financial markets cannot avoid crises, but they have
become increasingly adept at digesting them quickly—and often turning them into
opportunities.
For today’s fund managers, the
US–Israel–Iran war is merely a “change in parameters.” When war risk rises,
algorithms instantly exit aviation stocks and move into defense companies. The
money does not leave the system; it simply changes clothes. This rotation
prevents the overall market index—the water in the bowl—from draining.
Things are very different for
investors in the real economy. A factory, a hotel, or an airline cannot
relocate or transform itself overnight. Consider those invested in tourism or
aviation. If a war lasts longer and becomes more serious, the losses they face
can be long-lasting and costly. Nor is it easy for such investors to abandon
their businesses—especially in an environment where no buyers can be found for
tourism or airline companies.
What I am referring to here are
financial investors: holders of deposits, bonds, stocks, foreign exchange,
gold, and similar assets. Those who fail to make timely decisions about the
form or location of their investments may face serious losses. Investors who
buy at the peak of a rising market, for example, often cannot sell easily
because they encounter losses before they can realize any profit. They wait for
conditions to improve. At first they tolerate the loss, but eventually many are
forced to sell and accept it.
Others delay taking profits because
they believe prices will continue to rise. When prices begin to fall, they end
up selling as they approach a loss. In the end, they lose the profit they might
have secured earlier.
While some investors sell to lock
in gains and others sell to limit losses, another group begins buying,
believing that “the time to buy has come.” These opposing movements often
prevent financial markets from collapsing outright.
In earlier times, when capital
movements were restricted and investors were largely confined to their own
national markets, such rebalancing occurred far less easily. Today, American
money circulates in Europe, European money in the Far East, and Far Eastern
money in Latin America. Thus, when an American investor exits a European bond
market, a Far Eastern investor may step in and buy those same bonds. Even if
bond yields initially fall, they may rise again shortly thereafter.
This market behavior reminded me
of a passage from Kemal Tahir’s novel People of the Enslaved City[i]:
“…I had a friend who was a reserve
officer… I ran into him the other day… I asked whether he would cross over to
Anatolia to join the war of liberation. Without any shame he said no. ‘I won’t
get involved. To be honest, I’ve lost my nerve,’ he said. His mother had
received news of his death several times, because he had stayed among the enemy
for weeks. We all believed he was dead…‘We returned to Istanbul,’ he said. ‘One
evening… I was walking up the slope in our neighborhood at dusk. A woman in a
cloak was walking down. Somehow I recognized my mother. She was going to the
grocer to buy yogurt. I was so overwhelmed that I leaned against the wall and
waited. When she reached me, I said: “Mother.”…Do you know what she did? She
bent down, put the bowl she was carrying on the ground, and hugged me. While we
stood there crying, I swear her mind was still on that bowl she had placed on
the ground. “Oh, let it not break!” I had thrown myself into death perhaps a
hundred times, as if I were less valuable than that bowl… Yet my mother could
not risk breaking a chipped bowl for her son who had returned from the grave. Later
I visited relatives, friends, neighbors. In all of them I saw the same thing:
this inability to throw down the bowl.”
Today the market moves not with
its conscience but with its calculator. People dying and cities being destroyed
are human tragedies. For the market, however, they are merely supply-chain
disruptions.
I once described this phenomenon
with a concept I called “Market Indifference.”[ii]
What we are witnessing today appears to be another example of it.
In financial markets, it seems
that everyone’s mind is on that bowl: Don’t let it break.
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