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What Are the World's Headline Writers Inadvertently Telling Us About This Market?

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A real-time assessment of social mood -- and what it means for the markets -- based on the last three days of news reports.

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While on the surface this may seem like a contradiction, I'd also offer that President Obama's decision to propose former Nebraska senator Chuck Hagel for Secretary of State also reflects a high degree of confidence. Coming off his re-election and fiscal cliff victories, the president is very confident and deliberately proposing Senator Hagel "in the face of intensifying opposition from Republican lawmakers" speaks to just how confident he is.

I believe that there are few individual roles that reflect US confidence better than that of the president. Presidents are the face of how we feel. Don't believe it? Just consider for a moment that President Obama ordered the mission into Pakistan last year to take out Osama Bin Laden just as the US equity markets were peaking. Conversely, just as the markets were bottoming in September 2002, a year after 9/11, former President George W. Bush ordered the Iraq invasion.

But note that President Obama is not the only policymaker responding to high confidence. Yesterday the Basel Committee on Supervision announced significantly watered down rules on bank liquidity. Not only will banks now be able to include blue chip stocks and mortgage-backed securities as "liquid assets," but the liquidity "run" assumptions were significantly reduced. But perhaps the best indicator of global regulatory confidence might be the change in the deadline date for compliance. Not only did the regulators delay the date, they pushed it off by four years!

Few groups respond to changes in social mood like banking regulators. History shows a very clear pattern of bank de-regulation during periods of rising mood – with the greatest acts of de-regulation at the very top (such as Glass-Steagall repeal). What we saw from the Basel Committee this week is very consistent with what we have seen from the ECB and the Fed near peaks in mood.

And to that point, I couldn't also help but notice the excitement of Citigroup (NYSE:C) and Bank of America regarding their pending capital plan submissions and both banks' confidence regarding the near-term potential for dividends and stock buybacks. Maybe it is just me, but given the troubled history both banks have with regulatory approval, I can't imagine that their recent comments were offered without some level of assurance from the regulators.

But note that at the same time the banks are highly confident about dividends and stock backs, they are also more eager to lend money. Last week, the Financial Times quoted Bank of America CEO Brian Moynihan, noting that "he had directed bankers to be 'more aggressive' in lending to companies."

And there are plenty of other high confidence stories in the news. Google Executive Chairman Eric Schmidt's trip to North Korea despite objections from the US State Department and AIG's (NYSE:AIG) public consideration of joining a class action against the US government (what one reporter called an "audacious display of ingratitude") both reek of brazen uber-confidence. And then there are the "record" collapses in the VIX and all-time highs in small cap indices, and news reports that junk bond prices are "averaging more than 105 cents on the dollar." Meanwhile, apartment vacancy has shrunk to its lowest level since the third quarter of 2001 – despite record rents in many markets.

Put simply, the news reflects very strong levels of confidence.

Does this mean that markets can't go higher from here? As always, time will tell. Market tops are a process, not an event. But the behaviors I see across business and politics suggest that caution is due.

Finally, I hope the examples of "coincidental behaviors" offered above provide some background as to how events like the 2008 banking crisis occur. At peaks in confidence, everyone believes that what is good today will only be better tomorrow and their actions reflect it. And by everyone, I mean everyone – bank executives, lenders, borrowers, analysts, investors, the rating agencies, bank regulators, etc. At the top, high confidence is saturating.

Maybe it is just me, but with this week's settlements, it feels like everyone finally feels like 2008 is behind us and it will only better from here.

Needless to say, as a socionomist, I hate that feeling.

Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.

"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world." -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation


Twitter: @Peter_Atwater
Position in SH and JPM.
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