The Pendulum in International Affairs

As regular readers of my memos and books know, I’m strongly interested in – you might say obsessed with – the concept of the pendulum. The following is only a partial list of my writings on the subject:

  • My second memo, written in April 1991, was creatively titled First Quarter Performance. It talked about the oscillation in securities markets between euphoria and depression; between celebrating positive developments and obsessing over negatives; and thus between overpriced and underpriced assets.
  • On Regulation, written in March 2011, discussed the outlook for rulemaking stemming from the Global Financial Crisis. I said future developments were likely to be driven by the long-term pendulum-like swing in attitudes on that subject. Over time, those attitudes tend to fluctuate between “the markets best serve the country when they’re unfettered by rules” to “we need the government to protect us from participants’ misbehavior.”
  • In The Role of Confidence, from August 2013, I discussed the way shifts in fundamentals are translated into market volatility by often-excessive swings in investor confidence.
  • And in my 2018 book, Mastering the Market Cycle, I interrupted my discussion of the various cycles – in the economy, corporate profits, credit availability, etc. – to use the metaphor of a pendulum, not a cycle, to describe the swings of investor psychology.

Because psychology swings so often toward one extreme or the other – and spends relatively little time at the “happy medium” – I believe the pendulum is the best metaphor for understanding trends in anything affected by psychology . . . not just investing.

People frequently ask what caused me to start writing memos in 1990. My very first memo, The Route to Performance, resulted from two events I witnessed in short order, the juxtaposition of which led to what I thought was an important observation. Over the years, many memos have been prompted by connections I sensed between ostensibly unconnected events.

At a recent meeting of the Brookfield Asset Management board, a discussion of Ukraine triggered an association with another aspect of international affairs – offshoring – which I first discussed in the memo Economic Reality (May 2016). Thus the inspiration for this memo.