A contrarian reminder

J.P. Morgan provides this week's contrarian reminder.  Just because variables in the investing world have been correlated in the past does not mean they will be correlated in the future.  The field of economics involves people - and the study of people is not the study of the physical world where constants can be known (like the effect of gravity, the course and speed of the earth in orbit around the sun, etc.).  People are inherently ever changing and will not always respond as expected.

J.P. Morgan reported this week a $2 billion paper loss (paper only the loss could go away or even be profitable for the company).  According to the company this loss stemmed from an attempt to hedge bets made by the company.  The Wall Street Journal states:

"Behind the losses: unusual movements in the relationships between various derivative indexes focused on investment-grade and junk-bond corporate debt, both in the U.S. and Europe"

As Robert Wenzel speculated on Friday at Economic Policy Journal, before the WSJ article, was published, indeed J.P. Morgan assumed correlation and when that correlation began to break down the losses developed.

Of course it is good to remember that there were people on the opposite side of the bet as J.P. Morgan, apparently a few hedge funds. As of right now these firms are sitting on profit.

So I look to take a valuable reminder away from J.P. Morgan's (ongoing) mess.  Markets are made up of people and not constants seen in the physical world.  While variables may seem or even be correlated for a long period of time that does not mean that is will remain so indefinitely.  Investing as if there are constants will eventually lead to losses.