Ahead of the Social Mood conference in Atlanta, the market analyst who invented socionomics explains how his theories are playing out in today's "long top" market.
Editor's note: Next month, the Socionomics Institute will host the Social Mood Conference in Atlanta, Georgia. Speakers scheduled for this year's event include the institute's founder Robert Prechter, famous for developing the socionomic theory of finance, and Minyanville's Todd Harrison. Last week, Robert Prechter joined Todd Harrison for an exclusive webcast focused on exploring the role of social mood in history and how it continues to drive market trends. The following is a transcript of that webcast.
Todd Harrison: Welcome, everybody -- and thank you -- to this special edition of the Minyanville Fireside Chat. I’m here with a man who really needs no introduction: Bob Prechter is a gentleman whom I have a huge amount of respect for. I think he’s a trailblazer in terms of how we think about things and how we can apply that thought not only across the financial markets, but across the socionomic landscape. It is a train of thought that I’ve actually practiced for quite some time without knowing that it was a different way of thinking, which shouldn’t come as a shock to anybody -- that I like to think a little bit differently.
Bob—Mr. Prechter, or Bob, is the man behind Elliott Wave. He’s the author of According to Wikipedia, 14 books and just an all-around forward-thinker who we’re very happy to have here in Minyanville. Bob, welcome to the Fireside Chat. Thank you for your time today.
Bob Prechter: It’s nice to be on a program called Fireside Chat. Usually they’re putting my feet to the fire, so maybe this will be a little different.
TH: It might be a little different. I can’t promise you. We’re taking questions from the audience, so I’ll do what I can, but I’m not worried. So, just to set the context we’re going to drill down into a lot of particulars because that’s why people—and we have a record amount of people here today—they want particulars, but, please, just as a starter, can you talk a little bit about—briefly—about the Socionomics Institute, how you got into this field of study and research, social mood and just a little bit of background for people who may be unfamiliar with your work?
BP: Well, something you just said really resonated with me, which is that you’ve been thinking this way a long time. The first time I wrote down some socionomic ideas was 1979. And I thought a lot of analysts in the market must be thinking this way and believing that the market had a mind of its own apart from the so-called fundamentals, economic events, political events, and so on, because you could look back through history and you couldn’t find any of those on the chart. None of the dramatic moves were associated with any particular type of event, whether it be rising oil prices or falling oil prices or speeches by senators or even economic events that were special. And when they were correlated the market was ahead of them. So, something was driving the market in front of the economy.
So, I began to study the charts of the market and realized that they also seemed to correlate with some more interesting things, such as taste in music and the fashions that people were wearing. And slowly it dawned on me that there was something independent about what was driving the market. And it was also driving other expressions of something that I finally designated as social mood. I think social mood waxes positive, turns negatively. And when it takes a direction it changes the events that are occurring in response, so that when people feel in a more positive mood they do a number of things all the same way. They buy more stocks because they’re more optimistic. They’re a little more productive, so the economy improves. They wear flashier clothes. They listen to happier pop music and things like that.
When the trend is on the downside you get the opposite type of behavior, and it manifests in what you end up reading in the newspaper. For example, when the trend is up readers and corporations are heroes, and when the trend is down, you get corporate scandals left and right. When the trend was up in the ‘80s and ‘90s, people were very tolerant, for example, with immigrants. And since the high it’s been more and more passing laws about we need to send them back home and this is a terrible scourge and everything else. Those are strictly a reflection of the social move. Nothing changed underneath, so the fundamentals are really not causal. They are results based on—socionomics and about what got me started on the Institute. TH: And I think the best way that I can talk about it is I’ve always believed that the Great Depression caused the stock market to crash as opposed to the crash causing the Great Depression. And I think that’s one of the—a very subtle, but an extremely valid point in helping to explain the difference between socionomics and socioeconomics. I’ve believed that for a very long time. And it wasn’t until I came across your work -- and I thank Kevin Depew, I thank Peter Atwater and others within the Minyanville community or have been a part of the Minyanville community -- for bringing that to the forefront of a lot of things we talk about and write about in Minyanville in helping to educate people on that train of thought.
So, getting to a few questions. We’re seeing the Dow Jones at an all-time high here. At the same time we’re seeing events that we’d normally associate with negative mood. We could talk about Nazism in Europe. We could talk about what we’ve been talking about for a long time in Minyanville, the Tricky Trifecta of societal acrimony, social unrest, geopolitical conflict, whether it’s Occupy Wall Street, whether it’s the Tea Party. How do you explain that chasm between perception and reality where the market’s at all-time highs, but for most people they’re not really feeling like we’re at all-time highs?
BP: Well, in the United States we’ve got some indexes at new all-time highs. Now, if you inflation adjust them they’re pretty much not at new all-time highs. But still we’ve had a four-year recovery in social mood toward the more positive. You could see results in that in the fairly easy reelection of President Obama. Now, you brought up the idea of the growing taste for Nazism in some countries in Europe. Well, it’s interesting if you look at those countries where the concentrations are.
We just saw an article that said people in Austria are saying if Nazism where legal they think they would have a good chance of electing a lot of Nazis in Austria. Well, take a look at the Vienna Stock Index for Austria and you’ll find it’s down 50% from the 2007 high. That would be in the United States as if the S&P were not at 1,500, but were at 750. That’d make a huge difference in the way that people feel, or at least would reflect a huge difference. And the other big area where they’re actually making headway, of course, is Greece. And Greece is the singular stock market in Europe that’s down 90% from its high.
So, those reflections of social mood—and I use the stock market as the best gauge for social mood. There are others. But we don’t have as much data on the others. So, you take a look at a Greek stock market. I think that explains what’s going on politically. It has nothing to do with any of the antecedents that people usually link to it. It’s an expression of mood, and their mood is very negative.
TH: But getting back to the question, now, I get that question a lot because I talk about how when the U.S. government decided to embark on this grand experiment, which there’ll be victory laps; we’re at all-time high. AIG is making money. Cats and dogs singing in the rain. We have Nazis—and Chicago Nazis, notwithstanding because there’s nothing worse than Nazis than Chicago Nazis. But I’ve tried to piece together what I think is this chasm between perception and reality, which is different than how I trade just so it’s said. I trade two-sided. You trade the market that you have, not the market that you want, but stepping outside of the nuts and guts of everyday, trading and making money in this mechanism. I think there’s a much more—I don’t want to say pernicious, but there is a much more—a deeper chasm, a deeper-rooted disconnect between what we’re seeing and what we’re feeling. So, if the Dow’s at all-time highs, but there are a lot of people who are not feeling that way, is it a lame answer to say, well, the government just pumped 15 trillion reasons why the market’s at an all-time highs and that’s helping to explain the chasm in social mood. That’s my first question. The second question is—
BP: Wait a minute. I’m not that sharp—I’ve got to do one question at a time.
TH: Okay. So, that’s the first one. Is that a cop-out? I mean, I’m not—
BP: No, it isn’t. No, no. I think the very clear explanation, but you have to bring in the Elliott Wave model to understand it. You might remember the market was very hot in 1967, 1968. Under the Wave model that was a bear market rally. In fact, the Dow came up and nearly matched its high of 1966, but the Value Line Composite Index was flying to new highs. There was a whole lot of speculation. But under the Wave model that was what we called Wave B. In other words it was a counter-trend rally within a bear market. And you had things like the riots at the Democratic Convention. Bear market rallies are fundamentally different from a social mood point of view than the actual impulse, what we call impulses or true bull markets. And in my view the true bull market just as it ended in 1966 after rising from 1942, in this go-around it ended in 2000.
So, on the left side of 2000 you had all sort of positive mood events, including amazing euphoria where the Dow got down to yielding 1.4%, the lowest ever in history. And since then you’ve had periods of extreme upset, such as we had in 2007 to 2009. And you’ve had these periods recovery, such as we’ve had into ’07 and now are having again in 2013. But I think both of them are bear market rallies just like we had big bear market rallies in the 1968, 1973. And that’s why you’re getting this sort of mix of social mood that’s negative and positive. The long-term trend is still down. The intermediate trend for the last four years has been up. Now, when the trend turns back down again, that’s when you’re going to see everything line up on the negative side.
TH: And that fits. I mean, listen, I could argue and I’m of the view that this is a cyclical bull market within a secular bear market, but I feel silly saying that out loud when we’re at all-time highs on the Dow. And I think a lot of it is that it’s a multi-linear dynamic. And I will say this just to put it out there: you had mentioned earlier that being held your feet to the fire. There are people out there who are saying, well, this is not—this has been proved wrong, whereas I as a believer in this process will argue that this is a context for risk, not a catalyst per se. and things are ever changing from an input standpoint. But it does fit what you just said with the idea—and we just this chart on Minyanville—where we’re now on the S&P approaching 1,580. And if you look back over the last 15 years, we’ve had this process that continues to rinse and repeat where investors are getting punished at the top and the savers are getting punished or screwed at the bottom. Does this fit with what your Elliott Wave analysis is projecting? I mean, do you see—what is it telling you right here on March 12, 2013?
BP: Well, first of all as you know the average investor always does the wrong thing. And at the low—on March 9, 2009 on that exact day was the lowest reading ever in the percentage of bulls in the DSI, the Daily Sentiment Index. Only 2% bulls; Ninety-eight percent of traders thought the S&P was going to go lower on the exact bottom day. So, now we’ve had this very long recovery. It’s much further than I thought it would be, but it’s one thing to have an indicator. Socionomics says that the stock market is an indicator and it predicts the kind of society, the kind of social actions you will see. I think that is pretty much carved in stone and that is the reflection of the power of socionomic theory. But it’s quite another to predict your own indicator. It’d be like saying a Gallup article will tell us when the poll is going to change. Well, that’s a whole other discipline. I think using the Wave model to try to assess the extent of these trends. And in the past 12 years, 13 years, the extent on the upside has surprised me every time.
In fact, once we fell in 2002 I’d imagine that we would have the peak of the real estate occur in the middle of this topping process. People were going absolutely berserk. But look what happened when it finally folded. The biggest drop in real estate since the Great Depression, the weakest recovery in housing ever on record, even though we had a four-year recovery in the stock market. And now, okay, some people are saying—and, of course, they ran a whole page on this in the theories that I just published. People are saying, “Oh, it’s just begun. It’s just started. We’re at the starting gate of a great bull market;” some people are saying in an issue I published 16 different charts of sentiment indicators that are either matching or exceeding all-time extremes of optimism. So, I think that’s a classic B-wave indication, I don’t think it’s going much higher. And you have to take things in context. In other words, would you want to buy any stock today? I would say don’t touch it with a 10-foot pole. There’s going to be a great low, probably even better than the ’09 low sometime in the next year. Wait for that. TH: Yeah, and I do not disagree with you. I mean, I do see the optimism. There was a great post today on Minyanville from Elliot Wave on the Buzz and Banter (subscription required) talking about the optimism out there and how it’s being measured. I have a question and this is actually not my question. This came through a reader, Cynthia, who says, “Due to the over-widening income equality in the U.S. the social mood of the top 1% has been excellent while the social mood of the 99% has been trending down since 2007. This would especially been true of the bottom 80%. How do you reconcile or utilize the social mood of these two groups in your evaluations and what would be their influence on the markets?” In other words, there’s a certain amount of us who trade—so how do you reconcile the people who make the decisions about the money and the people who are living in the rest of the world with us?
BP: There are not two areas of social mood. One of the aspects of socionomic theory, at least as I think it pertains, is that the agents are homogeneous. Human beings are all together in society, their moods fluctuate together. That doesn’t mean that their incomes will change at the same time. So, while some multimillionaire is really optimistic and buying stocks, you might have someone on the lower end of the income scale who is buying Taylor Swift records and those are the kinds of iconic people who are really love near tops. You get the teenage icons and that sort of thing. It doesn’t mean that the economy has responded. In fact, I think the fact the economy’s responding so weakly is directly related to the idea that this is a B wave or a bear market rally. So, I don’t think there are any dichotomies to blame here.
Even people on the lower end are feeling it; don’t forget to take the positive social mood to pass the kind of legislation that gets people unemployment insurance and extends them for another year and another year. Like I say, people are still paying their rent. They’re still buying groceries and they’re using food stamps and everything else. So, the society as a whole, it’s still reflecting this relatively optimistic mood, but when it changes it’s going to be much more like Greece or Britain where they’ve just take austerity as the path that they want to follow. And ultimately it is psychology that makes the politics. The fact that we’re in a more positive social mood is shaping the political response, which, of course, is don’t cut the budgets, we’re going to hang in there, don’t worry about it. But those will change. And when the trend turns back down again you’re going to see many more calls for austerity, and then you’re going to see the results of that as well.
The savings rate is so low I believe it’s gone negative. And, of course, the borrowing rate of the government has gone up as well. So, that’s what you’ve got behind this rally. People are thinking, okay, I can survive a little bit longer. I just need to do more borrowing, more spending. That’s a reflection of optimism. Back at the low in 2008, 2009 people were saving again. So, once we turn down it’ll be saving again and things will change.
TH: Yeah. And it’s along those lines—you brought this up and apologies. I understand there are some audio difficulties. We’re working through those right now. I’m speaking at your conference next month in April in Atlanta, and thank you for that. I’m looking forward to that. And we’ll have information if anybody would like to—for information to join us. Both in my presentation I talk about—
BP: Well, I’d love to talk about that a little bit.
TH: Yeah. No, I talk about it was 2007, I half-jokingly, to be honest with you, talked about how Paris Hilton, Lindsay Lohan, and Britney Spears all fell from grace, and I asked a question is this indicative of a shift in social mood and literally got laughed off of the screen. What do the fortunes of three starlets have to do with the inner workings of Wall Street? Of course, in the last few years we’ve seen Tiger Woods. We’ve seen Twinkies. We’ve seen Elmo. We’ve seen Lance Armstrong. We’ve seen Oscar—the blade runner from South Africa. All of these things are now starting to—all these icons are starting to fall from grace again. Do you think there’s a correlation here? Is this a bit of a redo that we saw in 2007?
BP: Well, I think it’s just kind of an under-the-surface change from that major trend changes that started in 2000. But that kind of thing is going to accelerate torrentially when we turn down. And as you know, for example, Alan Greenspan was making magazine covers in 1999. He was the maestro. He was a genius. He knew how to run everything. He was conducting the economy like he’s running it himself. And then when we got to the bottom in ’08, ’09 the Fed was jeered, and then they said they don’t know what they’re doing and they’re behaving irresponsibly and it appears they’re failing. Here we are four years later and now Bernanke is somewhat of a hero again. He’s making magazine covers. And he’s being credited with the recovery. I think you can’t follow the Fed to determine what the stock market is going to do. But you can follow the stock market. You could put blinders on—if you could only look at a stock market and you would know what people thought of the Fed. That’s a direct reflection of social mood.
So, I think you have pointed out some very important changes, but even Tiger Woods is starting to recover his image because we’re at this peak of social mood feeling right now. So, everything I look at says we’re nearing an extreme, but it’s a counter-trend move. So, the bigger trend is down.
Social mood is always a myth. There’s no such thing as a completely one side. The question is where are the scales are weighed. And in 2009 everything was negative. That’s when the Tea Party started. Remember all those protests, and then even on the way up we had the Anti-Wall Street protests. Well, now we don’t have any protests. Those are things that indicate that even the lower rungs of society are not as unhappy as they were two, three and four years ago.
TH: But if we look back to pop culture as a bit of a harbinger of social mood—and you said something earlier that in my ADD-ness forgot to talk about. But I’ve always believed that the stock market is the biggest thermometer in the world. And that’s the biggest measurement of how we feel in the world. But I don’t know—that’s what I used to think. I’m not quite sure that still jibes, but my question—if you look around and you look in television, you have a lot of zombies. You have The Walking Dead. You have Breaking Bad, the movie Les Misérables. You have all that—I don’t know if that was a good French accent or not—but it seems to me that the social construct in terms of the arts and entertainment seems to be getting darker. Does that factor in at all to the social mood?
BP: Oh, absolutely. Yes. But think about the nuances of this. The mood started getting darker in 1999 when the Blair Witch came out. I mean, we hadn’t had a really good horror movie for a long, long time, and then suddenly there was a flood of them in 2001, 2002. And not only that they expanded their scope and started putting out torture. I mean, zombies have been around for a while and almost treat them like they’re buddies. They want to put their arms around them. They’re doing love movies about zombies, too. That’s part of the recovery process and the bouts that we’re in now in social mood.
So, we don’t quite have that incredible torture movie type of thing. Hostel and Saw, they’re not in the theaters right now. You’ve got these somewhat—a lighter sort of fare on the horror genre. So, you’re looking—first look at the big picture. Look at the change from 2004. Suddenly horror movies are a big deal. There weren’t really a big deal in the ‘80s and ‘90s except for the ones where it was Friday the 13thPart 12 and stuff like that, but nothing new, nothing really scary. And when we turn down again you’re going to see that kind of trend I think reach depths that we can hardly even imagine. I’m not a horror movie fan. You will not get me to the theatre when we meet the next bottom again.
TH: No, we share that as well. I’m not a big horror movie fan. I’m just watching some questions come in here. A question for you, Bob. “Would you consider the government part of the social mood and their actions as part of the social mood?” And the question is as said in context, “Why do they resort to money printing as opposed to more constructive policies?” I guess we can debate what a constructive policy is, but when you say social mood is all-encompassing are we including the decision-makers who are pulling the policy strings? BP: Well, I think the ideal world is a free world from one end to the other. So, in my view all policies using force are detrimental. Government is very late in what they do. The Fed, which as a quasi-arm of the government was completely caught unawares by the collapse of 2008, 2009. And in fact there are quotes on record from the Fed chairman and other members of the board in 2006, 2007 that show that they saw nothing but blue skies ahead. We’ve even been tracking something called The Laughter Index, which is the amount of times that they’re bursting out with laughter, the Fed, and that dried up quite a bit in 2008, 2009. So, yes, every branch of the government is reflecting social mood just like everybody else. It’s just that some of them have a lot more power than you and I have so they can wave their hands around and create another $1 trillion a year by buying government bonds in one case or deciding to spend $750 billion on infrastructure, which as far as I can tell was just to buy signs saying we’re working on the infrastructure. So, yeah, there’s a lot of money wasted in bear markets that I think this is just getting us further out on the limb, the amount of debt the government is absorbing and in fact encouraging. They’re encouraging $1 trillion worth of new student-loan debt, which by the way you cannot get out from by declaring bankruptcy.
So, what they’re doing is they’re putting this harness on the next generation that says you’re going to be working for nothing for so long. Now, all of these things I think is cumulative. They’re the results of social mood and overall long-term darker area right now. And that’s going to come home to roost in the fundamentals. Right now the fundamentals, people think, are improving, and they are because they’re following the social mood that’s been going on for four years. But when that social mood turns back down, the fundamentals will follow as they always do. And I think socionomic theory explains why fundamentals follow the stock market and social mood. In fact, the new studies that came out on Twitter, the new studies by the RAND Corporation and studies showing time and again that the mood changes prior to the events hitting the streets: protests in the streets, riots in the streets. They see the changes in social mood on Twitter and other areas. The only theory that explains that, I think, is socionomics, although there is some time-honored attempts by economists to explain why the stock market is ahead of the economy. I don’t really think that they work.
TH: Yeah. And you used one of my favorite words: cumulative, which I think is a very important word and it’s a word that we learned the first time in 2007, 2008 and, in fact, I think it’s a word that we’re going to learn and re-learn again—to incorporate one of my phrases into what I think you just said—until we stop taking drugs that mask the symptoms and start taking medicine that cures the disease. And I think that medicine is time and price, again, separate and apart from trading the stock market intraday. But you mentioned Twitter, and my question is does this new social media landscape—does that offer any predictive value for us as we measure social mood? And if not, what are some of the better measurements of social mood in this new technology digital landscape that we live in?
BP: Well, we can’t measure social mood directly because we can’t hook up electrodes to people’s brains—well, not yet anyway—and follow them around in life. So, the only thing that we can really track is their actions. So, the actions are probably having a bit of a delay. And that’s what Johan Bollen found in his study that he thought according to Twitter, anyway, mood changed about two or three days before the stock market did, which is perfectly compatible with what we think is happening. But it’s very difficult to quantify, and the other problem is most of the people looking at social mood data are looking at very short-term changes in the way people feel. Now, the stock market is a fractal, and we’ve been talking about that for the past half an hour, the fact that you can have a long-term trend that’s down, but short-term trend that’s up and so on. But what they’re mostly looking at here is short-term changes.
Now, under socionomic theory, social mood is a fractal construct shared by everyone in society. And we’re sharing our moods with each other, and that’s the fundamental cause of social action. But we also see upon occasion people have emotional reaction to external events. Social mood is endogenous. It’s internally regulated. Sometimes even when the events do occur, people go through a very brief emotional reaction. That’s a very different thing. It does show up in the stock market, but only over a few minutes or an hour when people are waiting for some ridiculous number in the morning or something like that. But it immediately melts away, and you’re right back to where you would have been without it. And I think this thing is happening in some of the readings that we’re seeing on the short-term social media data. So, it’s not pure social mood. You’re getting a lot of short-term emotional response mixed in, and they are too separate to really understand what you’re looking at.
TH: Okay. I understand. So, from one of your subscribers and one of your followers who has been with you over 10 years and this has just come in. They asked the question—they asked me to ask you please—when you talk about recommending maximum short exposure, how does that translate to the average—I know it’s different for everybody—but how does that translate into a marketplace where we continue to make new highs every day? How do you measure your risk in this type of environment?
BP: Well, there’s no way to directly measure risk. As we all know, the stock market can do just about anything in terms of its quantitative movement. So, you have to look at the results and compare the history. So, that’s what we do. We look at the extremes. Now, if you’d asked me in 2010 if I thought that we would see the same extremity of optimism toward stocks that we saw in 2000 and again in 2006, 2007, I would have said, no, it’s highly unlikely. If you’d asked me that in 1967 I might have said the same thing, and yet we saw it twice before the final bear market wave took stocks down by 50%. And that was a much smaller corrective degree.
We’re talking about a whole new topic here, which is Elliott Wave and stock prices and all that stuff, so kind of getting away from social mood. But when the market is making a top the size of a grand super-cycle the last time we’ve seen this magnitude was the South Sea Bubble in 1720. And that was a spike high. It went down very quickly; erased virtually the entire thing in two and a half years. This time we’re building a very long top, but it does indicate, I think, that the degree of wave structure that A.J. Frost and I talked about way back in 1978 in our book, I was talking about 1976 when I started writing reports, is correct. Normally, if you have just run-of-the-mill top, you might pull back 20% or something like that. But this is a huge top, and so far we’ve had two very large declines within it. And the extremity is so extreme right now on the positive side tells me there’s a real long, big decline coming. I don’t think we cleared out any of the excesses.
You just said something very important. You talked about cumulative effects. The cumulative effects, for example, of borrowing for real estate. Now, people were borrowing for real estate from all the government agencies: Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Home Loan Bank, all the way back to the 1930s. So, decades of lending to the point where they’re lending out most of 98% of what you needed for the mortgage, was such a cumulative effect that when real estate started to tumble it was tremendous. It’s not over yet, too. There’s massive inventory to take care of.
I think the entire country—indeed entire globe—is a macrocosm of that real estate picture. We’re extended. Cumulative debt’s piling on debts. The answer for the government is to go into even more debt and encourage even more debt. This is a cumulative thing that’s going to have a very bad result. And that accumulation is the result of a decade’s long, super-cycle in positive social mood. People said, “Oh, I can borrow more money. I can pay it back.” The lender said, “Oh, I’m happy to lend this person money. I’m sure he’ll be able to pay me back.” It takes amazing optimism to be able to lend somebody 98% of a mortgage. And now we’re slowly seeing results on the other side and we’re not done yet. TH: I’ve been saying this since 2007 that credit of a different breed not of credibility is going to ultimately be the issue at hand for markets at large. And it’s truth and trust that are the ultimate commodities in a globalized, finance-based economy. But I have to step outside my own cognitive biases for a second because I agree with you to such a degree that I have to almost take the other side just to make this a conversation because I agree with everything you’re saying. But how were we wrong? Jeff Saut, who is somebody who I think is very good at what he does, better at who he is, very, very smart guy. He thinks—if I’m not misinterpreting him—he thinks we’re on the cusp of a much broader move higher in stocks. And he’s the first one who will tell you that where you stand as a function of where you sit. And he’s over at Raymond James, but he’s one of the people who I really pay attention to what he has to say.
And I’m always trying to see both sides of any trade. I agree with everything you’re saying. I really do, in my heart. What makes us wrong? If housing turns up—it’s a borrower question—if housing starts to really move high—and I don’t think it does and I don’t think real estate or unemployment can be manufactured the same way as stock prices can be manufactured, but when and how were we wrong that this comes up? Mark Dow is another guy very smart, a bit of a policy wonk—is it possible that all the paper of the government buys will expire worthless? If Cisco could write off billions of dollars of expenses, can’t the government write it off? Does the dollar come in? How are we wrong?
BP: Let’s put it this way: people are depending on the government and the Fed, saying the Fed may succeed and it’s going to come out great, the biggest crash in the history of the United States came with the Fed in full progress, completely unaware of what was about to happen. The stock market lost 89% of its value from 1929 to 1932 with the Fed in control of all the spending it wanted to do, and the government as well. In fact, Hoover tried to spend a lot of money during that period. He was building dams and doing all kinds of stuff. All right, what about the 1970s? Did the Fed predict that we were going to get 16% to 20% interest rates? No. they thought, “Oh, we’re just calmly going to increase our base about 5% a year. We shouldn’t have any problems. And, of course, we had this incredible acceleration in inflation during that period.
So, the third biggest event of probably the past 100 years was the collapse in 2007, 2008. We just talked about that, the Fed caught completely unaware. So, again, I think people saying that the government and the Fed are going to solve all this and we’re going to be fine are echoing the current social mood. With it being elevated, suddenly the people that we think they’re at the helm look like heroes. “Yeah, they’re pretty smart. I think they can handle it. This is great.” People didn’t feel that way in 1979 when we had runaway inflation. They didn’t feel that way in 2008, 2009 when deflation was coming to the fore, and they certainly didn’t feel that way in 1933. So, what we’re doing really, I think, is hearing people taking positions that reflect the current extremely positive mood. Again, remember that date, March 9, 2009. It was hard to find a bull. In fact, some famous bulls got extremely cautious and afraid at that low. They thought maybe the whole system was falling apart. And that’s a reflection of the mood at the bottom. And now we’re hearing reflections of the mood at the top.
TH: Of course, and we’re seeing some well-known bears capitulate, and I get that. I hear you. And, again, for the record, you and I are completely in lockstep in terms of our forward thinking. I’m just trying to advocate that there are two sides of every trade. I’m trying to see in my mind’s eye what am I missing that the market could double from here or something to that effect? I guess, it remains to be seen. Again, for the record, Bob, you and I are very much aligned in our thought process.
BP: You and I really don’t think the markets can double from here, but neither one of us could say it’s impossible. Maybe instead of being 200% invested or let’s say 30 times leverage in the hedge funds, they’re going to go to 50 times leverage. We don’t know for sure. We do know that those are extremes of optimism that are never at before and we’re not going to buy. So, it tells you the environment.
TH: Right, and I’ll again say much like in 2007 when I was asked what worried me most was that we’re all-time highs in the Dow, but nobody was really feeling it. I feel like I’m having a moment of déjà vu. We’ve got about five minutes left, if I can, and thank you so much for your time. This has been great. And I can talk to you for a lot longer, and I plan to talk to you a lot longer on April 13 in Atlanta. Talk a little bit about The Social Mood Conference. I’m going to be down there, obviously. You’re going to be down there, obviously. Let’s talk about what type of takeaway value folks that are going to be at the conference are going to leave with.
BP: Well, for one thing, the kind of people we’re inviting you’re not going to get to see at most other conferences. And I’ve got my little cheat sheet here, so I’m going to go through a couple of the names. We’ve got Joe Clifton and Joe Daly with the Gallup Corporation. Now, these are people are who are beginning to realize that their polls on social mood questions are preceding, the results are preceding events that actually are occurring. They’re pretty excited about this, and we’ve got a theory that helps explain why they’re seeing what they’re seeing.
We’ve Tobias Preis, who’s an associate professor at Behavioral Science and Finance at Warwick Business School. He’s been analyzing Google trends. Mark Buchanan, he was an editor at Nature and New Scientist magazine. His latest book is Ubiquity: The Science of History. That’s the same subtitle that I use in my socionomics book. We’ve got Phil Maymin, assistant professor of Finance and Risk Engineering at NYU Polytechnic. Even though he’s got degrees from University of Chicago, the University of Harvard, he’s running his own hedge fund. And, of course, you used to run a hedge fund as well. So, not many people really know that. And in fact I’m going to put in a little bit of appreciation for Minyanville. It’s so rare to have a media outlet run by someone who is a market person. Usually they’re journalist majors, and it makes a very big difference. And I think that’s why Minyanville’s been so successful. But, of course, for all your listeners, Todd, Todd Harrison is going to be there and he tells me he’s been working on a PowerPoint quite a while, so I’m looking forward to that.
Michelle Baddeley, I’ve met her a few times. She’s a PhD, a behavioral economist at the University of Cambridge. And her big thing is herding. We write a lot about herding, and she’s done a lot of studies that relate to herding, so we’re going to hear from her on that. Rishab Ghosh, who started First Monday, the most widely read peer-reviewed journal on the Internet. Kevin Armstrong, he’s going to be very interesting. He was the chief investment officer for ANZ Bank in New Zealand. He ran or helped run $8 billion, and he was using all kinds of herding and social mood theories that helped him there. He’s written a book on the connection between ups and downs in the field of golf and the stock market. We’ve got Murray Gunn, Head of Technical Analysis at HSBC Bank.
So, and not only that we’re losing money on the deal as I’m sure you know, we care about this from an intellectual point of view. We’re not trying to make money. I think it’s $199 to come. It probably costs us $25,000 to put on. So, you’re coming for less than cost to have a good time, rub elbows with some very smart people and get to meet both guys on the two sides of this camera here.
TH: Well, I will tell you, Bob, I’m looking forward to it. Time management is not my strong suit, but when I was asked by your team to come I was—one of the greater honors that I’ve had. As I told them as I’ll tell you, I will join you in this campaign and this mission to further the understanding of socionomics until such time that it’s not flagged on my spellcheck every time I write about it. I would like to thank you for your time, Bob, and for everybody who is here and spent the last 45 minutes with us, excellent. I look forward to seeing you in Atlanta, and please continue to do what you do because you’re changing the way we think. And I think that’s very important in today’s day and age. Thank you very much.
BP: Well, you’re changing the way people look at markets and where to understand them. I look forward to seeing you in early April as well—seeing you again I should say. So, enjoy until then.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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