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iTrust Daily Insight

Edition 8.15.2019

Market Participants and Market Segmentation

Our update today will be brief and will discuss an important reminder about Market Segmentation.

Sometimes, other market participants do, in fact, wake up to what other market participants had been seeing, because, sometimes, some market participants don’t pay attention to all the information coming at them.
In Fall 2007, for example, the US stock market had remained amazingly resilient despite much of Asia suffering through the Asian Financial Crisis for the previous 15-18 months or so.  Then, when the Taiwan stock market fell 10% one day, US investors paid attention and the US stock market fell as well.

Then, in late 2006, as condo prices in San Diego and Miami were starting to fall, pundits were quick to point out that the overall US property market had never declined in value since the Great Depression of the 1930s.  The US stock market went on to record highs over the next year even as much of the rest of the world was suffering from damage caused by owning instruments tied to US real estate values.  Unemployment got to over 25% in both Spain and Ireland as those countries’ banks deeply curtailed domestic lending.

And, in case you may have thought such phenomena are short-lived or only happen occasionally as in the above examples, please know that life insurance companies globally need to lock in returns for their life insurance policy holders, so they will often buy 30 year bonds from governments even now that such bonds trade at such prices that expected yields are now negative, even after receiving back interest and an assumed 100 cents of principal on those bonds.

This last example is an example of “Market Segmentation”.
Other such example can be two different sets of financial instruments in which each set has a different set of investors both of which believe their investment will “win” — either in the marketplace for more customers or a legal dispute.  Clearly, not both sets of investors can be correct.  

We sometimes see this across different financial markets — gold and bond market investors may be invested in gold and bonds because they are worried about the global economic outlook whereas some equity market investors are particularly bullish and are therefore invested in stocks tied most directly to an increasingly strong economy.

It is likely that some digital currency investors are buying “cryptocurrencies” because they are trying to get money out of a country with capital controls or a failed state.  It is also likely that some investors of digital assets buy them as part of a well diversified portfolio so they increase their purchases as other investment values go up.  And, it is also likely that some digital currency investors buy digital currencies as a hedge against inflation of fiat currencies.

On any given day, all or none of these phenomena may be taking place.
News events will cause each set of investors to move in an out of their digital currency investments.
As the digital currencies mature, such phenomena may become more transparent and obvious.

In the meantime, traders are encouraged to remember such Market Segmentation exists and recognize what may be obvious to them may provide a good trading opportunity — if other market participants are likely eventually to share their view.  Of course, if there is a structural reason why such Market Segmentation exists — like in the life insurance company example above — then traders are encouraged to seek other rationale for their trading positions. 

Tim Shaler is Chief Economist of iTrust Capital.  He is a published Real Estate economist, was a portfolio manager and asset allocation expert at his previous firms and is an adjunct professor at Webster University. His MBA (Finance) and MA in Russian Economic History are both from the University of Chicago.

For all media inquiries, please contact Blake Skadron at b.skadron@itrustcapital.com

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