Since 2007, I have offered a year-end perspective on what I see ahead for the markets. Given that every year since has brought with it a further redefinition of the word "unprecedented," I am not sure there is any real value to market prognostications. As we have just witnessed in Japan, given the choice when pressed into action, policymakers will always choose to boost nominal asset prices.
Still, many of the social mood-driven themes which I have written about over the years continue to gain traction (see Years of Magical Thinking: Our World After the Banking Crisis
and 2010: The Robin Hood Economy
Over the past week, for example, zero-sum thinking and the looming battle between “faced” municipal employees and “faceless” bond investors were both topics on the Wall Street Journal
editorial page. So long as social mood remains weak -- despite what nominal market prices suggest -- I expect these themes will continue to influence political, social, and economic outcomes.
As a socionomist, I watch for subtle changes in human behavior. Thanks to pioneering work done by Robert Prechter, I have discovered that what we prefer and the choices we make all tie to changes in social mood. During periods of rising mood, we exhibit a consistent set of behaviors while during periods of falling mood, we do the reverse. When mood is rising, for example, we trust more. When mood is falling, however, we are more suspicious and want greater transparency. What is “don’t ask, don’t tell” at the peak of mood becomes, to borrow from the CEO of Jefferies, "a strip search at gunpoint."
Over the past several years I have quipped, “Never underestimate the inverse correlation of scrutiny and prosperity” in response to various news stories as previously unknown, or at least unreported actions and information have surfaced. Nothing brings out scrutiny like falling mood. It should come as no surprise then that with greater scrutiny -- particularly following a very strong peak in social mood -- comes a long list of scandals. In fact, as this Google Trends chart of the word “scandal” suggests, we really are looking for scandals today, too.
That websites like Zerohedge and financial writers like Matt Taibbi and Michael Lewis have gained traction in our current weak social mood environment is very consistent. While they may not appreciate the term, they are the muckrakers of our generation. And one need only look at history to see how well muckraking ties to the aftermath of peaks in social mood.
As I reflect on this past year, though, I have noticed a subtle shift in the investigative reporting of mainstream media as well. Not only has word choice become more aggressive and negative, but major news organizations appear to be much more eager than they had been to expose the weaknesses of heretofore untouchables. And it is not just folks like Lance Armstrong and David Petraeus under the microscope. Leaders of all kinds are being looked at more closely and the examiners are much tougher. What had been scrutiny now feels more like something I’d call “screw-tiny.” Today mainstream journalists are turning over stones looking for worms and slugs, not buried treasure. What first got my attention to the change in tact was Charles Duhigg’s New York Times
cover story on Apple
(NASDAQ:AAPL) last January in which he openly questioned transnational manufacturing practices. As long-time Minyanville readers know, I had been wondering aloud for some time when weak social mood, with its natural nationalism, would put the business practices of the world’s largest corporations under the microscope (see Pledging Allegiance: Multinationals in an Increasingly Nationalist World
Not surprisingly, since Mr. Duhigg’s first column, we’ve seen companies like Wal-Mart
(NASDAQ:SBUX), Standard Chartered
(PINK:SCBFF) and Commerzbank
(PINK:CRZBY) all fall victim to changing social mood and the need for greater local accountability (see From Socially Aware to Socially Attentive Investing
But as 2013 begins, what have really gained my attention are the recent articles by Jon Hilsenrath of the Wall Street Journal
on the Federal Reserve. On December 12, the day of the Fed’s final meeting for the year, under the headline “Inside the Risky Bets of Central Banks,” Mr. Hilsenrath painted a very different image of central bankers than I had seen from him before. Maybe I am reading too much into his story, but I sensed a significant shift in Mr. Hilsenrath’s unbridled adoration of the Federal Reserve and other global central bank policymakers. Not only did Mr. Hilsenrath paint the group as academics, he added some rather striking adjectives to both the group and its actions. Call me crazy, but central bankers who “dreamed up mathematical models” while at MIT and are “among the most isolated people in government” and are now executing “high-stakes experiments” which, if they fail, could “sow the seeds of another financial crisis” are not what I think of when I think of Mr. Hilsenrath’s coverage of the Fed, nor of Superman -- which is how the Wall Street Journal
portrayed Mr. Bernanke back in 2010.
Earlier this week Mr. Hilsenrath took his critique of policymakers one step further in an article on the forecasting models used by the Federal Reserve. I was particularly struck by his open assertion, “
But here is the problem: The models are deeply flawed. They failed to foresee the financial crisis in 2008 and have tended to overestimate the strength of the economy for several years.”
While admittedly white goes to black through thousands of shades of gray, when you include the Wall Street Journal’s
editorial from this past summer in which they characterized central bankers as "Music Men," I am left with this image swirling in my head:
What is unclear to me today is how additional scrutiny, or more importantly, screw-tiny
will affect the effectiveness of central bank policymakers.
Further I can’t help but wonder whether Mr. Hilsenrath’s focus on Fed policymakers is just the beginning of a long list of investigative articles focused on Washington in general. With banks and corporations already under the microscope, it seems logical to me that media attention would now turn to the public sector.
In 1972, under strikingly similar social mood conditions, two reporters from the Washington Post
gained international attention with their coverage of a break in at the Watergate Hotel. Maybe it's just me, but as I look ahead into 2013, it would not surprise me at all if we see this generation’s Bob Woodward and Carl Berstein come to the fore. The environment for public sector screw-tiny is ripe.
What this all means for investors, particularly in a world unprecedentedly dependent on the acts of global central bankers and policymakers, I don’t pretend to understand. But given what I have read already from Mr. Duhigg and Mr. Hilsenrath, they could easily have been the beginning of a critical trend.
Peter Atwater's groundbreaking book "Moods and Markets" is now available for pre-order on Amazon and Barnes & Noble.
“Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the ‘me, here, and now’ behavioral tendencies of the post-crash world.” —Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation
Position in SH and JPM
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.