M1 Market regimes

Topic

Ownership and investment undergo various market regimes during normal operations—none of which constitutes an anomaly in itself—such as bull or bear markets, periods of high or low volatility and liquidity, and states where ownership is either concentrated among market agents or widely dispersed. The variables triggering transitions between these regimes are the relationship between market price and fundamentals—the same metric tracked by the relevant stock index—and the rate of ownership turnover (or circulation), which describes the speed at which control over assets changes hands.

These regimes constitute the environment in which the very indicators that define the three "lane anomalies" operate without crossing extreme thresholds: the price-to-fundamentals ratio can swing between bull and bear markets without constituting a bubble-and-crash scenario; volatility and liquidity can fluctuate within normal ranges without crossing the fragility threshold that triggers systemic illiquidity; and ownership can become moderately concentrated or dispersed without that concentration closing the system off to other participants—as happens in cases of corporate capture or an oligarchy of owners.

What distinguishes a market regime from an anomaly, then, is not the direction of movement but its magnitude relative to those established thresholds: a bull market with a steadily rising price-to-fundamentals ratio is precisely the regime in which that ratio might eventually cross the extreme threshold defining a bubble and crash; similarly, a steadily slowing rate of ownership turnover is the regime in which concentration might eventually cross the threshold leading to system closure. Market regimes are thus the starting point from which the three lane anomalies emerge, rather than a category separate from them.

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