What Are the World's Headline Writers Inadvertently Telling Us About This Market?

By Peter Atwater  JAN 08, 2013 1:43 PM

A real-time assessment of social mood -- and what it means for the markets -- based on the last three days of news reports.


As a socionomist, I spend a lot of time looking at news reports. What happens in the world around us and what specific stories the media chooses to focus on says a lot about our current level of social mood. As I discuss in my book Moods and Markets, changes in mood drive changes in our underlying level of confidence and, in turn, what we prefer and our choices and actions. What few investors appreciate, though, is how transcendent changes in social mood really are. What influences our decisions to buy and sell stocks are the same factors that influence what we say on Twitter, the headlines we read in newspapers, and the actions around us in business, politics, and even culture.

Using news reports from the past seventy-two hours, I thought I would offer a real-time assessment of where I think current social mood is and then offer what I think it means for the markets.

Yesterday, Bank of America (NYSE:BAC) reached an $11.6 billion settlement with Fannie Mae (OTC:FNMA), ten US banks reached an $8.5 billion agreement with bank regulators to settle charges of foreclosure abuses, and the NHL reached an agreement to end a four-month lockout.

Now it would be easy to suggest that the first two merely represent banks’ kitchen-sinking their 2012 fourth-quarter earnings in a desire to boost 2013 results. But in combination with the NHL strike, I’d offer that there is even more happening here, especially coming on the heels of last week’s “voluntary” anti-trust settlement by Google (NASDAQ:GOOG) with the Justice Department.

Settlements, whether in hockey or with regulators, all reflect generosity and a willingness to compromise. None of these agreements had to happen right here or right now, yet they all did. In each case, both sides had to give in order for these to happen. Adversaries had to find common ground. While there is no doubt that tough negotiations took place, folks finally found agreement somewhere in the middle.

But note, too, the coverage of the settlements themselves. Google’s anti-trust settlement was seen as a wrist slap (with Google’s behavior characterized as somewhere between “aggressive” and “evil” by James Stewart in the New York Times) and the editorial team at the Wall Street Journal suggested that Monday’s foreclosure settlements represented “shakedowns.” These are high confidence reactions, which suggest either regulatory weakness or overreaching. If mood were lower, not only would the punishments have been harsher, but the reaction would have been that the punishments weren’t severe enough.  (And while on the topic of reactions, I’d also note how little uproar Frank Partnoy and Jesse Eisinger’s cover story last week on bank balance sheets in The Atlantic received.  Rather than outrage, the response to their excellent investigative reporting has been more like, “So what else is new?”)

If you had picked up yesterday’s Wall Street Journal, you would have seen that it was not just bankers, regulators, and NFL owners and players focused on compromise solutions somewhere in the middle. On the political front, Neil King Jr. offered two stories in the Wall Street Journal focused on current issues in the Republican Party, noting in the first that former Florida governor Jeb Bush may be “the ideal person to widen the [Republican]  Party’s message, while expanding its reach,” and in the second story highlighting a potential gubernatorial run by Virginia Lieutenant Governor Bill Bolling.  Per Mr. King, Mr. Bolling is considering an independent run, fueling concern among conservative Republicans that this could “wound the GOP as it seeks to broaden its reach among independent voters in a state where Democrats have made big gains.”

That two moderate Republicans – particularly a “dynastic” personality like Mr. Bush – are now making news is yet another indicator of high confidence. Politicians only move to the center when confidence is high. (And to consider what this looks like at the opposite end of the mood spectrum, here is what I offered last May on the Greek elections, just as social mood was bottoming.) While on the surface this may seem like a contradiction, I’d also offer that President Obama’s decision to propose former Nebraska senator Chuck Hagel for Secretary of State also reflects a high degree of confidence. Coming off his re-election and fiscal cliff victories, the president is very confident and deliberately proposing Senator Hagel “in the face of intensifying opposition from Republican lawmakers” speaks to just how confident he is.

I believe that there are few individual roles that reflect US confidence better than that of the president. Presidents are the face of how we feel. Don’t believe it? Just consider for a moment that President Obama ordered the mission into Pakistan last year to take out Osama Bin Laden just as the US equity markets were peaking. Conversely, just as the markets were bottoming in September 2002, a year after 9/11, former President George W. Bush ordered the Iraq invasion.

But note that President Obama is not the only policymaker responding to high confidence. Yesterday the Basel Committee on Supervision announced significantly watered down rules on bank liquidity. Not only will banks now be able to include blue chip stocks and mortgage-backed securities as “liquid assets,” but the liquidity “run” assumptions were significantly reduced. But perhaps the best indicator of global regulatory confidence might be the change in the deadline date for compliance. Not only did the regulators delay the date, they pushed it off by four years!

Few groups respond to changes in social mood like banking regulators. History shows a very clear pattern of bank de-regulation during periods of rising mood – with the greatest acts of de-regulation at the very top (such as Glass-Steagall repeal). What we saw from the Basel Committee this week is very consistent with what we have seen from the ECB and the Fed near peaks in mood.

And to that point, I couldn’t also help but notice the excitement of Citigroup (NYSE:C) and Bank of America regarding their pending capital plan submissions and both banks’ confidence regarding the near-term potential for dividends and stock buybacks.  Maybe it is just me, but given the troubled history both banks have with regulatory approval, I can’t imagine that their recent comments were offered without some level of assurance from the regulators.

But note that at the same time the banks are highly confident about dividends and stock backs, they are also more eager to lend money.  Last week, the Financial Times quoted Bank of America CEO Brian Moynihan, noting that “he had directed bankers to be ‘more aggressive’ in lending to companies.”

And there are plenty of other high confidence stories in the news. Google Executive Chairman Eric Schmidt’s trip to North Korea despite objections from the US State Department and AIG’s (NYSE:AIG) public consideration of joining a class action against the US government (what one reporter called an "audacious display of ingratitude") both reek of brazen uber-confidence. And then there are the “record” collapses in the VIX  and all-time highs in small cap indices, and news reports that junk bond prices are “averaging more than 105 cents on the dollar.”  Meanwhile, apartment vacancy has shrunk to its lowest level since the third quarter of 2001 – despite record rents in many markets.

Put simply, the news reflects very strong levels of confidence.

Does this mean that markets can’t go higher from here? As always, time will tell. Market tops are a process, not an event. But the behaviors I see across business and politics suggest that caution is due.

Finally, I hope the examples of “coincidental behaviors” offered above provide some background as to how events like the 2008 banking crisis occur. At peaks in confidence, everyone believes that what is good today will only be better tomorrow and their actions reflect it. And by everyone, I mean everyone – bank executives, lenders, borrowers, analysts, investors, the rating agencies, bank regulators, etc. At the top, high confidence is saturating.

Maybe it is just me, but with this week’s settlements, it feels like everyone finally feels like 2008 is behind us and it will only better from here. 

Needless to say, as a socionomist, I hate that feeling.

Peter Atwater's groundbreaking book "Moods and Markets" is now available 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

Twitter: @Peter_Atwater
Position in SH and JPM.

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