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Why Putin Really Called a Bottom in Russian Stocks


Policymakers react to social mood. What they say and do can be very helpful tools for investors

This weekend, Barron's columnist Randall Forsyth had some fun at the expense of Russian President Vladimir Putin.  Writing in Saturday's issue, Mr. Forsyth questioned aloud whether the Russian head of state may have front run the Russian news agency's tweet on Friday morning that read, "Russia Seeking to De-Escalate Ukraine Conflict."  As Mr. Forsyth shared, "S&P futures immediately vaulted higher on the prospect of the lessening of tensions over Ukraine, and continued to rally on Friday after the Interfax news service reported that Russia's military had ended its exercises near the Ukraine border."  The S&P closed up more than 1% on the day. 

Mr. Forsyth wonders aloud in his column that had Mr. Putin purchased some equity derivatives (or better yet a few thousand derivatives) ahead of the tweet.  If he had, he'd have had a heck of a day.

While I will leave the activity in Mr. Putin's personal trading account for forensic accountants, I would like to focus for a few minutes on the Russian news agency's well-timed tweet.

In the early afternoon on Thursday, I posted this tweet:

What prompted my tweet the day before Mr. Putin's news was this chart of the major Russian stock market index, the Russian Trading System (RTSI):

While I didn't know what specific action Mr. Putin would take, the deeply oversold condition of the Russian market strongly suggested that the Russian leader would do something.  Political leaders follow social mood, and the 20% drop in the RTSI over the past month indicated that investor confidence was falling quickly.  Putin would have to do something to boost confidence at home. 

Or at least he would think he would have to do something.  Again, Mr. Putin was not leading social mood, he was following it.  He was reacting to how people felt around him and thinking that he needed to do something in response to falling confidence.  And when political leaders feel pressure to act, one of the fastest and easiest ways they can is to jawbone the markets.

To be fair, Mr. Putin is hardly alone in resorting to his jawbone in response to very weak social mood and markets in deep decline.  President Obama on March 3, 2009 - six days before the market bottomed after the banking crisis - said "What you're now seeing is profit-and-earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it."  Twelve days later, Federal Reserve Chairman Ben Bernanke, in an interview with CBS' 60 Minutes said he was seeing "green shoots" in the economy.

More recently, as European markets were struggling in mid-2012, ECB president Mario Draghi took to his jawbone and pledged in a press conference that the ECB would do "whatever it takes."

But notice the specific timing of Mr. Draghi's comments.  His statement actually occurred weeks after risk premiums had topped.  As is often the case with public policy makers, particularly public policy committees, they lag the markets because once they react to extremes in social mood/the markets it takes time to pull a plan together and to announce it.  In Mr. Draghi's case in the summer of 2012, I am sure that he had to have all of his ducks lined up, particularly with German policymakers, before he delivered his "whatever it takes" statement. 

Having watched Mr. Draghi closely over the past few years, earlier this May when I shared this thought with my clients:

"With the euro closing in on $1.40, it should not have been much of a surprise when Mario Draghi took to his jawbone this week.  Central bankers only act at extremes in sentiment.  Besides, as the chart below shows, heightened deflation risk provided the perfect cover.

Needless to say it is now only a matter of time before the ECB reveals its choice of monetary policy weapon.

With the euro down two and a half cents to $1.375 over the past two days, I would not get in front of the decline that is afoot.  When the ECB ultimately acts, it will only pour gas on a fire that is already well aglow."

As this chart shows, since Mr. Draghi first took to his jawbone in May, the Euro has fallen almost 7 cents against the dollar.  As I offered was the case, Mr. Draghi was acting because sentiment had reached an extreme.  He and others may think that he caused the euro to fall, but he didn't.  The euro was going to fall with or without his comments.  He merely put an exclamation point on the turn.  Just like President Putin last week, Mr. Draghi was pouring gasoline on hot coals that were already about to burst into flame.

But please appreciate how often, over history, you see political leaders and policymakers act at extremes in social mood.  Last week, Alec Tyson, a senior researcher at Pew Research tweeted a chart showing Richard Nixon's popularity from 1969 to 1975.  Included on the chart were significant US political events as well.

What interested me was how closely not only President Nixon's popularity tied to consumer confidence and the markets, but how well different political events tied as well.  President Nixon's historic trips to China and Russia occurred in February and May 1972, respectively, just as confidence and the markets were peaking.  In January 1973, the same week that the markets peaked, President Nixon announced the end of the Vietnam War.

President Nixon, though, hasn't been the only US president to react to extreme social mood when it comes to the military.  As this chart shows, America's entry into and exit from Iraq occurred at major turning points in the market as well.

While the decision to enter and exit Iraq marked very major turns in the market, less significant actions can and often due mark smaller extremes in mood.  For example, I would put President Putin's action last week in the minor camp.  If Russian mood and confidence fall further, history suggests that President Putin's actions will turn decidedly more negative.

In January, just before the Sochi Olympics I was very concerned that falling confidence in the region would lead to terrorist activity at the games similar to what we saw during an equivalent decline in social mood during the Munich Olympic Games in 1972 and to a lesser extent the Atlanta Games in 1996.

In hindsight, I woefully underestimated how extreme weak social mood in Russia would manifest.  Rather than terrorism at the Olympics, we witnessed Russia's invasion of Crimea and the beginning of distressing events in Ukraine.

Finally, while often it is the actions of an individual policymaker or political leader that gets credit for calling a significant peak or trough in the markets, at most turns, it is a broader mosaic of extreme social mood indicators.

I couldn't help but notice for example that in the same Barron's issue that Mr. Forsyth took Mr. Putin to task, the magazine's own "Review & Preview" column had nothing but negative events listed for last week: the US re-entry into Iraq; a historic banking crisis fine of Bank of America (BAC); a Russian ban on food imports; a public criticism of Deutsche Bank's (DB) compliance procedures; an "Ebola Emergency;" the cancellation of Rupert Murdoch's bid for Time Warner (TWX) and Sprint's (S) bid for T-Mobile (TMUS); resumption of Israeli airstrikes in Gaza; more problems at General Motors (GM); and a deadlock in Argentinian debt negotiations.  None of the ten items selected was positive.

Last October I noticed the same widespread negative mood as the markets bottomed.  The markets fell along with mood and it wasn't until mood and markets fell considerably (and drew attention in the media) that Congress reacted and resolved their budget differences.  The first rumors of the resolution marked the bottom.

For investors, policymaker statements and actions (along with their related media coverage) can serve as very useful indicators of extremes in the market.  (And I offer many more examples in Moods and Markets, too.)  As I offered above, policymakers react to social mood, they don't make it.  By what they say and what they do, policymakers are reflecting the mood of their nation.

This week we saw that in real time with Russian President Putin.  He acted just as Russian markets and mood were bottoming.  If history rhymes as Mark Twain suggests, I have no doubt we will see many more cases ahead.

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
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