It may surprise a few to learn that the key driver of short term asset allocation is not trade talks, or even interest rates, but in our view, behavioural.

What we have witnessed in Q3 2019 is classic reflexivity in financial markets, particularly sovereign bonds. What is so remarkable about this bout of reflexivity is that all the evidence to connect the group behaviour of investors is hiding in plain sight.

In summary, reflexivity is a self-reinforcing feedback loop between perceptions of economic fundamentals and prices. This self-reinforcing feedback loop causes prices to deviate away from equilibrium, typically overshooting. Perhaps the most famous exponent of reflexivity is George Soros, who has written many books and articles on the subject (for instance, see "The Alchemy of Finance" by George Soros, 1987 ) and maintained its relevance for macro investing in particular.

The particular bout of reflexivity in Q3 relates to sovereign bonds. Many market experts predicting a global recession are frequently looking to the inverted yield curve to increase their probability of a global recession. The unanimous clamour for a global recession then encourage investors to rebalance in favour of long term bonds, which in turn increases the probability of a global recession. And so the feedback loop is established, deteriorating perceptions of economic fundamentals, driving up bond prices, and so forth.

One crude way of quantifying the amount of airtime and the influence of the yield curve on investors is to pull out from Google Trends ( the amount of "News Search" on the term “Yield Curve” Worldwide. (see chart below).

The unprecedented interest in the yield curve is probably best typified by the CNBC headline “How the yield curve predicted every recession for the past 50 years”. (

How do we trade this?

Media’s influence on short term market movements and disequilibrium is increasing not decreasing. Group think is on the rise, as outlets compete for airtime with a broader group of content providers. Under this scenario it is no surprise that headlines are built to attract clicks and maintain relevance.

The outcome of all this is that markets are being driven more and more by common factors and group think as reflexivity of this sort takes hold. This is not necessarily bad news for investors who are able to sort the wheat from the chaff and recognise when the feedback loop takes hold driving prices well away from equilibrium. In this case the opportunity was to recognise that the probability of a global recession as implied by bond markets and commentators was overdone.