Understanding social mood as a leading indicator of risk appetites.
Last month, I was scheduled to attend The Social Mood Conference in Atlanta, Georgia, when an unexpected need for surgery forced me to cancel my plans. Instead of flying to Georgia, I created the following presentation for conference attendees. Below, please find the slideshow and full transcript of my talk. The focus? Social mood as a leading indicator of the market's appetite for risk. I discuss what Lindsay Lohan, Kim Kardashian, and other celebrities mean to the markets, especially in this period of record-setting new highs. And I'm not kidding when I say that what happens on TMZ matters to the S&P.
Hi, I’m Todd Harrison, and I’m here today to talk to you about social mood as a leading indicator of the stock markets: bucking conventional wisdom.
As it pertains to social mood, I'll point to one of the most misunderstood dynamics in the financial history, the stock market crash of 1929. Conventional wisdom dictates that the crash of 1929 caused the Great Depression. I would offer that the Great Depression caused the stock market to crash. In other words, social mood and risk appetites shaped financial markets.
We look back over the last 20-odd years, and we see an all-too-familiar pattern in the marketplace, whether it’s the Nikkei (INDEXNIKKEI:NI225) in Japan in the ‘80s or the Nasdaq (INDEXNASDAQ:.IXIC) into the Y2K bubble and bust; more recently, Shanghai, when we saw the bubble and bust in China. Crude, same thing, and I threw Apple (NASDAQ:AAPL) in there because the stock has been in the news, and at $700, it could do no wrong. I could add gold when it was trading at $1900 as well. You get the idea: The more things change, the more they tend to stay the same; or as some have said — Mark Twain, I believe, coined it — history doesn’t often repeat, but it often rhymes. We can see through these charts of bubbles and busts that history has rhymed all too often.
Moving on, just to kind of take a snapshot and a step back, I wanted to play a piece of an interview from 2006: it’s from December 2006, as it pertains to the chasm between social mood and the stock market at the time; the Dow Jones (INDEXDJX:.DJI) was trading near all-time highs, but nobody really felt as if we were trading at all-time highs:
I’m curious, if you think that we are living in a bubble in any way right now.
I think that we are living in a bubble. I think that we’ve lived in concentric bubbles for quite some time. I think the real estate bubble now is what we’re going through, and I think there’s a difference between housing stocks as a proxy for real estate and what’s going on in real estate. I think we’re in a sentiment bubble. I think our whole society is ADD, immediate gratification. Live now, pay later. The debt bubble — I mean, we have tremendous amounts of debt. How and when that manifests, I’m not smart enough to know, but I’ve always said that to understand where we are, we must understand how we got here, and the DNA of this market is much different than a legitimate economic expansion.
And so what part of it concerns you the most?
All-time highs on the Dow, but nobody’s really feeling like we’re living in all-time highs in terms of financial performance. I think that we have the haves and the have-nots. I think the middle class has been completely eradicated, or is in the process of being eradicated.”
So, that was coming out of 2006, in December 2006, and the chasm between perception and reality was pretty noticeable. And I remember in 2007, more toward the end of 2007, I, tongue in cheek, wrote an article for Minyanville.com that talked about how Paris Hilton and Lindsay Lohan and Brittany Spears had all fallen from grace. And the notion seems somewhat silly on its face: The obsession with the whereabouts of a trio of social starlets couldn’t be any further removed from the inner workings of Wall Street, one would think, right? (Also see: The Short-Sale of American Icons.)
Well, we asked that question in 2007, and with the idea that social mood and risk appetites indeed shape financial markets. And this was before I caught the socionomics bug. I just had an intuition that the way folks were looking at the world was a bit backwards, and that the causality of the world and the financial markets was a bit backwards. But it was more gut than it was really subscribing to any train of thought, and certainly before I really had learned more about socionomics. But, sure enough, we know what happened after that. In 2007 and 2008, the markets stopped (going higher), the tape cascaded lower, and that sort of planted the seed for me to look at the chart of the S&P (INDEXSP:.INX), 2007 and 2008, which was so not hot, Paris; the market got crushed. So that planted the seed inside of myself, and I said, well, there’s a different way we can look at things here, and we can learn a lot just by watching.
And so, fast-forward a bit, 2010, to look at Tiger Woods, Ben Roethlisberger, and Jesse James — this was during a period in American history when there were just a lot of people who were really pissed off and angry. And this societal acrimony, as we came to call it, really started to percolate between the haves and the have-nots and the red states and the blue states, Main Street versus Wall Street. It was pick a side or stand aside. But when you looked at these high-profile icons, whether it’s Tiger Woods, who probably stood out above the rest, it started to suggest that the socionomic tide was starting to turn once again, right? I mean, that’s what I thought. That was my gut at the time. And sure enough, it wasn’t that easy.
The policies that were put in place after the first phase of the financial crisis started to kick in. The social mood was turning lower; the markets — or the free markets, I should say — would presumably follow it down. But there were a lot of synthetic reasons why the market didn't trade lower. It is what it is; you trade the market you have, not the market you want. This was 2011. The market could have gone down — I won’t say should have gone down, because the market’s always right — but the market didn’t go down, and I think that you could have learned a lot just from watching that.
So, the new world order started to take shape, and that new world order is familiar to anybody who follows the markets with any repetition. It seems to repeat in the same sort of process, a circular process, that seems to continue. As the market sells off and the outlook deteriorates, people get a little bit more bearish. The policymakers spring into action, the markets rally. All of a sudden things are getting better. The policymakers back off, the markets sell off, and around and around we go, and we continue to go, as I sit here and talk about this in late April of 2013.
In my opinion, and this is one man’s humble opinion, in 2008 there was a fork in the road. There were two ways we could have gone in response to the first phase of the financial crisis: There was the medicine that cured the disease, in my opinion, which is debt destruction; and there were the drugs that masked the symptoms, which was the accumulation of more debt, or the same type of behavior that got us into this problem in the first place — the idea that we could continue with this behavior at an accelerated pace, and somehow it would solve the problem.
But that is neither here nor there. We all know what path we took. The first path would have been deflation and it would have been a bitter pill. Asset classes would have remained under pressure. The debt would have been destroyed. The strongest would have survived. Asset classes, as we said, would have taken it on the chin. The dollar would have rallied. A lot of folks were in debt and they would have had to repay that debt in dollars, which would create demand for more dollars, and once the debt settled, we’d see this outside-in globalization, “outside-in” meaning the US doesn’t necessarily have to lead this recovery, we could have participated in the recovery, and do so with some class, for lack of a better word. We could have been part in the solution rather than feeling that we needed to lead the recovery, so to speak.
But that isn’t what happened. It’s hard to say what would have happened. By definition, decisions that are made in the heat of a crisis are rarely well-thought-out. But sure enough, we continued to give the markets more drugs, another drink, whatever analogy you want to use. The stock market is at all-time highs. The dollar has not declined, as one might expect, due in large part to the problems in Europe.
But the takeaway — and I’m not here to weigh in on policy, but more to observe the ramifications of that policy, and that’s what this presentation is supposed to be about — is the friction that has emerged in this bifurcated world and how that’s manifested through social mood as a consequence of policy.
We at Minyanville tend to look at things such as unintended consequences and moral hazard because they’re not the types of headlines that you hear covered very often. But they do matter in our everyday lives, and they matter in terms of the forward path that we’re going to pave and the world that we’re going to leave for our children. I remember with clarity back in 2005, 2006, when we were at the Minyans and the Mountains events in Ojai, California, and Vail, Colorado, respectively, and we talked about this notion of societal acrimony and the potential ramifications that it would have for us. And I said at the time, my fear was that "the probabilities of a prolonged socioeconomic malaise was entirely more depressing — that is entirely more depressing than a recession — are higher than most folks have factored into their risk assumptions." In other words, that for every action, there’s an equal and opposite reaction, and that the imbalances that we witnessed in the system, and I would argue even to this day, are cumulative. And there is a consequence for those actions, whether it’s consumption or the debt; that there is another side to that trade.
Can’t really tell, by looking at the markets at all-time highs here in late April of 2013, but there's something that we need to see, as we always strive to see both sides of every trade. But it’s important to remember that markets shape mood to a degree, even though what we’re talking about right now is that the causal inferences that we all make are seemingly backwards, but to a degree, folks don’t want to talk about what could go wrong when stocks are at all-time highs. Nobody wanted to talk about the housing bubble in 2006, 2007,or the looming financial crisis, for that matter.
Even though it was no great mystery when the Financial Accounting Standards Board started talking about bringing level 3 assets back on the balance sheet, it didn’t take rocket science to say, wow, these financial institutions are really over-leveraged. But nobody wanted to talk about that, and it wasn’t until after the first phase of the financial crisis arrived like a clap of thunder that folks — and by “folks,” I mean investors, policymakers, and politicians — nobody really wanted to talk about it until it had already arrived.
So, my hope with this presentation is to maybe open our eyes a little bit to what’s going on around us so we can prepare for what could happen on the horizon before it actually gets here. But to get back on point, we mapped what we called the “tricky trifecta” back then, and that’s something that I’m going to talk about a little bit, because the tricky trifecta still much remains in play. The tricky trifecta, in short, is three phases of the social mood that is manifesting throughout society right now: societal acrimony, social unrest, and geopolitical conflict or strife.
Societal acrimony, we can look back at the way financial institutions were perceived, the backlash against banks coming out of the crisis, the BP (NYSE:BP) oil spill, the vernacular that we were hearing at the time, the rejection of wealth. It was pretty pervasive back in 2008, 2009.
And we saw then the second phase, the social unrest, start to manifest. The Tea Party, Occupy Wall Street. The riots we saw in Greece. The all-too-familiar shootings that we’ve seen in schools and movie theaters and the like. All symptoms of this social unrest that seems to be picking up in pace.
And finally, the geopolitical conflict or strife, the third phase. I don’t know what that looks like, whether it’s the Middle East, whether it’s cyber-warfare. Unfortunately, that still is playing out, but it’s something that we need to be increasingly aware of, not only as citizens, but as fathers and mothers and brothers and sisters, as we start to move forward.
And we look at what’s going on within our borders, and for me personally, a couple of years agoI moved my family out of New York City because I was concerned about the forward direction of social mood. And for me, one of the events that hit home the most was the Newtown tragedy, because that could have been Anytown, USA. And it’s not just Newtown that stands out; I mean, it wasn’t just the one senseless act that’s so horrifying. Through my lens, it’s the rate and the pace at which these events have transpired since 2008.
I have a laundry list here, and I’m not going to go through each one of them because it would take up the rest of our time together. Whether it’s Memphis, Tennessee, or Ft. Lauderdale, Florida, or Madison, Alabama, or Tucson, Arizona — it goes on and on. Blacksburg, Virginia; Jacksonville, Florida; Oakland, California; Aurora, Colorado, and The Dark Knight Rises — and right back to Newtown, where a gunman killed 20 children and six others at Sandy Hook.
These are not random acts of violence. These are symptoms of a much larger and pernicious disorder, in my view, The Devolution of American Social Mood. And this is in many ways a detachment from reality and an erosion of the family construct, and a marked change that we must be diligent and aware of if we ever hope to change this course.
History books will depict this period with the benefit of hindsight and an absence of emotion. But for those of us who are living it here in 2013, we must figure it out as we go, in real time, and prepare ourselves for what’s to come. So, much like the Great Depression, in my opinion, this is an era. It’s not an event; it’s not a one-off. And we’ve learned all too often, whether it was 9/11or the Boston Marathon a couple weeks ago, there is a big difference between loss and loss. So, for those of you listening to this and watching this, if you had a bad day trading, let’s keep it in perspective. For a lot of people, it is worse, and there is a difference between loss and loss, and it could always be worse, and for a lot of people, it already is. So let’s keep it in perspective, but at the same time, let’s be aware and keep our eyes open, because there are ways that we can start to assimilate the world and be proactive in our approach.
I’m not talking about one-off suggestions. I’m not talking about a ban on assault rifles or testing for mental illness or child safety precautions. This is not a political discussion. This is through a broader lens, and understanding the fundamental differences between socionomics and socioeconomics. Socioeconomics posits that the economy drives social mood, whereas socionomics argues that social mood drives financial, economic, and political behavior.
So here we are, late April 2013, and the markets are trading near or at all-time highs, and you have a lot of fund managers and money managers out there who are looking at corporate balance sheets, which are quite healthy by any measure, and they’re convinced that the Greenspan put has turned into a Bernanke call, and there’s no stopping the upside. It’s seemingly as if there’s uniform belief that the market is going higher, and subject to change, but as I’m sitting here on April 29 and recording this, the market can do no wrong.
We could note, or we should note, that this type of optimism, this type of behavior in the financial markets, has been created by the same policies that have been in play for some time, and that’s shifting risk from one perception to another. And as a function of that, in my opinion, the chasm between a stock market rally and a legitimate economic recovery is becoming increasingly apparent.
In a bifurcated world, with the haves and the have-nots, there are a lot of different ways to look at it, but for most people, it doesn’t feel like we’re at all-time highs, much like the interview we did in December of 2006. But policymakers, politicians and the like, they’ll take solace in the fact that the markets are at all-time highs, the housing market has seemingly bottomed. That employment, or at least the method in which it’s measured, is moving in the right direction. They’ll look at things like AIG (NYSE:AIG) and say, look, we made money and all is well, kumbaya.
Listen, more power to them. I hope that’s the case. As a father, I hope that the better days are ahead of us. But there are questions that remain that are not being discussed that have massive implications, not only for us but for our children. They relate directly to consequences, the social consequences of policy and the direction in which we’re going, and its social mood that dictates the price of financial assets.
When does this dynamic come home to roost? When will it express itself through the world’s largest, if not entirely free thermometer, that is the stock market? We’ve all seen the societal acrimony and the social unrest, unfortunately, but what’s the third phase look like? What does that mean to us? What does that mean to our kids? I don’t know. Those are three words that I’m fond of because they sum up a lot: I don’t know. I’m not smart enough to know when this will come home to roost, or if it will come home to roost, for that matter.
But I do believe that what goes around comes around, and for every action, there’s an equal and possibly larger reaction, and I think we would be wise to respect the unexpected. Oftentimes I’m asked, “How does this period in your opinion relate to the Great Depression?” And I always say that it I think it’s entirely more profound — that FDR did not know what a derivative was. So, it’s a much more complicated, interconnected world that we live in, and there’s no easy solutions, I think, which is one of the reasons why we keep seeing the same repeated behavior, which we’ll continue to see most likely until it doesn’t work.
Peter Atwater, a writer at Minaynville and the President and CEO of Financial Insyghts, who is just a tremendous thinker, posed a few questions a couple years back that are really quite profound. At what point does an industrialist become a robber baron, or a savvy speculator a profiteer? At what point does success become privilege? And I bring these up now because the answers to these questions have profound implications for the future of free-market capitalism, particularly given the quadrillion dollars’ worth of derivatives on a notional basis that’s tying the global economy together. And if calmer heads don’t prevail, then ultimately, our trading performance, our investment performance might pale in comparison to some of the other ramifications that seem to be on the horizon.
But let's fast forward a bit. Let’s move on to 2012 and some of the social sets that I look at or have looked at, as we continue to find our way, whether it’s Joe Paterno or Twinkies, as absurd as that may seem, or Elmo or Lance Armstrong — all icons, longstanding icons that have fallen from grace or otherwise come upon hard times, and as we move on, whether it’s Anne Hathaway or Kim Kardashian or House of Cards. You can see how social mood is starting to wrap itself around American society again. The zombies as a cultural icon — I mean, what does that tell you? Or Blade Runner? These are all significant shifts in the social significance of all of these different elements that in my opinion, whether it’s Manti Te'o or A-Rod — you can go down the list, but I think it bears repeating.
I’ll tie it up by looking at a chart of the S&P 500 index from 1995 to 2013, and we’ve all seen this chart, or at least you should have seen this chart by now. But it’s a repeated pattern of behavior where investors get punished at the top and savers get screwed at the bottom, and we’ve seen it over and over again. And as I sit here again on April 29, 2013, the market is peaking through these levels and trading at all-time highs, which is undoubtedly going to bring through a new rash of speculation and that the worst is behind us.
But as we look at the markets — and we respect the price action, of course — the price action in my view is the ultimate arbiter of variant views. So you could be bearish or you could be bullish, but at the end of the day, you gotta trade the market that we have, not the market that we want; and the market that we have is trading at all-time highs.
But let’s not just take that on its face. Let’s look around us. Let’s pay attention to some of the things that are happening, some of the social icons, some of the social elements that in my opinion are a precursor to the price action, not a result of the price action.
In sum, and in tying this up, and out of respect for your time, I’ve listed 12 cognitive biases that I’ve found have endangered investors, or at least in my opinion have endangered my investments over the course of my 23 some-odd years of trading, and they’re listed here for your review.
And with that, I will simply say that I appreciate your time. Thank you for spending this time with me, and I wish you and your families and your friends nothing but the very best of times ahead. Thank you very much.
Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter
No positions in stocks mentioned.
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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