Why Kim Kardashian Matters to the Stock Market
Understanding social mood as a leading indicator of risk appetites.
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.
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 firstname.lastname@example.org.
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