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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: 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.

TH: Thank you, you as well. Thank you everybody.

Twitter: @todd_harrison

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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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