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Todd Harrison Interviews Robert Prechter: 'When Social Mood Turns, the Fundamentals Will Follow'

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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.

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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 13th Part 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?
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 todd@minyanville.com.

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