Prisoner’s Dilemma Assessment of The Market

photo courtesy of Ms Jeannie Tan, wildlife photographer, SF.


The ordinary person would not be denying that we are living in strange times these days with an apparently random act of terrorism in Nice, a feeble coup erupting in Turkey and where US policemen fear for their lives.

Ironies aplenty as my dear friend recounted that after flying to Sabah last Christmas, not to sight a single of their famed hornbills, that she should encounter one right before her eyes at Tanglin Road, standing smugly on a wall, to her amazement at her stroke of luck. Ironic too that she was also accused of sexism by her son who thinks that she should not stereotype teenage boys to be computer hardware or software whizzes even if they play electronic games all day long.

It is strange that Turks prefer dictatorship over military/martial rule and that Thais prefer the double dose of military dictatorship yet this is the world that we live in where bad news is good news and thus, pile the risk-on as we have come to witness in the past week, after Brexit fears and into record highs for the S&P 500 and the Dow Jones Industrial Index.

Is it strange that “Investors are buying bonds for capital appreciation and stocks for income. The world has turned upside down.”?

If one agrees, then is it not strange at all the emerging markets have now regained favour globally and that Brazil remains the best performer in global currencies, equities and bonds as we pointed out 2 weeks ago that “The volatility of 2016 can only be attributed to an underlying theme of discordance or discord in the marketplace..

It has stuck me that the stakes are rising in the game of the marketplace when game theorists are now favoured as central bankers like the latest hire in Poland, 37 year old Kamil Zubelewicz, a former professor with a passion for game theory (, as Yanis Varoufakis ( continues to maintain rock-star status after his stint as the Greek Minister of Finance.

Game theory, most of us would have been introduced to, whether it is was in Business Decision Making 101 or Management Science 101 or Econometrics and the list goes on, is a topic we can all easily take to for its application in our daily lives and routines, when we use a set information to concoct a strategy that would lead to different outcomes or payoffs which we assign probabilities to.

The trouble with game theory is that it assumes rationality and profit maximization until equilibrium is reached, and until the game ends, players are expected to rationally cooperate for common goals.

How Does The Game Look Right Now ?

  • Since the Global Financial Crisis, nearly all central banks in the world have been dragged into the Fed game to the extent that the world well and truly embraced negative interest rates since last year led by the Swiss National Bank, leading to new record of 12 trillion dollars of negative yielding bonds today.
  • As El-Erian said over 3 years ago, “The investment recommendations made by many financial commentators are now dominated by cross-asset class relative valuation rather than the fundamentals of the investment itself. A typical refrain runs something like this: buy X because it is cheaper than other things out there.” This is mainly driven by the comfort investors have in the relative stability of the central bank’s balance sheet and their promises which means that assets are directly under the influence of central bank purchases will thrive.
  • And true to his prediction, the most crowded trade in history is the rise of the “blind buyers” because “Stagnant policy has minimized investors’ need to make decisions about the path of interest rates.  Nowadays, market participants generally share similar views on the path of policy going into and coming out of each economic release.” Thus making active portfolio management a thing of the past and the same can be said for the bond market.
  • Historic highs for both the US bond and stock market may be flashing red signals for some( but it is only a sign of the growing chasm between the believers and non-believers as some see the new all-time high for stocks as a “mother of all buy signals


The Prisoner’s Dilemma

It would appear that we have come to a prisoner’s dilemma of whether to buy into this Black Swan event as we described last month ?

To continue reading….