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Five Things You Need to Know: Stop Fighting the Last War


The All-One-Market Meme is ending. It's time to move on.

1. Stop Fighting the Last War

Correlations have never been higher, they say. Watch out! Because... they've never been higher... or something. It's the stuff of the All-One-Market meme, the last war. Let me show you what I mean. The Correlation Matrix below shows correlations between key sectors and commodities, including gold and silver, between 2003 and 2008. The correlations between stock sectors and S&P 500, as one would expect, were significant and -- throughout the time period in question -- increasing. Correlations between gold and silver and the ThomsonReuters CRB Index were also significant, which you would expect given the liquidity flow into commodities as an asset class during that Reflation period.


The next Correlation Matrix is from 2007 to 2010 when we saw correlations increase even more as part of the credit unwind. This kind of increase is typical of bear markets where the move to liquidity scatters across all asset classes. Only gold was able to stave off very significant asset class correlations.


The reason the All-One-Market meme in 2006 was important to highlight and understand was because the Reflation attempt and housing boom were masking the underlying debt problems and structural credit issues. But we're now partially through that ensuing crisis. It's time to move on.

The point I want to stress is that correlations are now backing off but this dispersion is not evident in the typical matrices shown above, largely because those indices are capitalization-weighted. Naturally, the largest stocks in the cap-weighted indices dominate the price movement. Where dispersion is really beginning to show up is within the sectors themselves. You can see this on a longer-term basis in DeMark indicator counts and even within subsectors. For example, does the long-term chart of Avalon Bay (AVB) versus KB Home (KBH) look like all-one-market to you? During the run-up to the debt crisis, everything merged to a single correlation because the debt crisis was the only thing that mattered. That is no longer the case.


What this means from a practical standpoint is that while we have major indices on MONTHLY sell setups within the next 12-week window, there are stocks with different DeMark counts that are diverging from the indexes. On a long-term correlation matrix this will show up very late. I'd look at spread charts and daily percentage-change correlations to identify the strongest actors during this period of weak market action. Those will be the winners on the next leg higher. Eventually this too will translate to correlation divergences among asset categories, such as Growth and Value or Large Cap and Small Cap, but it is still too early to spot those divergences right now.

2. The Federal Reserve System: The Keystone of America's Financial Structure

The New York Fed site, Liberty Street Economics, has some fascinating images of Fed-produced branding posters from the mid 1920s, when the Fed "was still new and the nation's economy was plagued by a growing number of bank failures." The posters were apparently made available by the San Francisco Fed archive. A sampling below. The rest are here.

3. Against the (9-to-5) Day

Recently Conor Sen and I have spent a lot of time discussing non-linearity and how technology, time and distance compression are illuminating the inefficiency of structures that were installed as part of the industrial revolution. One such structure is the 9-to-5 day. Recently there's been a growing line of inquiry into how technology has reshaped our perception of time. There is actually nothing new about time perception shifts, even very large societal shifts in time perception. As this article shows (a good backgrounder on the origins of the 9-to-5 day), people have always been concerned with how we perceive time and how technology of the age helps reshape these perceptions. What is new, however, is that our time perception may be shifting in a more radical manner due to how technology today increasingly exposes non-linearity.

This article from VOX looks at time and work at the Bank of England and is a good backgrounder for how we've come to perceive time.

"Much can be learned about the workings of the early modern financial system from this report. One aspect, however, that is particularly striking is the extent to which time mattered in the operation of this business. The majority of those who worked for the bank would have been constantly aware of the clock and conscious of their obligation to complete work by specific deadlines.

This is important because historians have long argued about when the clock began to shape the day of British workers and whether time-discipline improved productivity. The debate has been dominated by EP Thompson (1967), who argued that work discipline was transformed by the industrial revolution since the clock measured labour at machines and caused changes in the way individuals perceived time."

4. Zombies and Werewolves and Changelings

At the Socionomics Institute's inaugural conference in Atlanta in April, I presented "Zombinomics: How Social Mood Has Us Hungry for Flesh and Brains." The discussion centered on the Socionomics aspect of zombies, whether a shift in social mood could be predicted and whether such a shift could also predict renewed interest in zombies, one of the darker forms of the horror genre, versus something more bullish such as vampires.

In the Wave Principle of Human Social Behavior, Bob Prechter included a terrific table showing some cultural expressions of social mood trands. Of particular interest are the cultural expressions of falling transition and peak negative mood trends. Among the various classifications, from Creativity to Fashion Colors, to Film/TV/Literature, to Political and Sexual Imager, we have the following associations with social mood all of which I will maintain are present in the zombie genre of horror films: lack of creativity, slow tempos, drabness, riots, destruction, heroes trashed, no bad guys and no good guys, or everyone is a bad guy, there is no one left to judge the morality of actions, weaknesses are magnified, anarchy, ugly, heaviness, sedation. What I have just described here, of course, is everything present in zombie culture and zombie lore.

In many respects, the zombie genre is nothing short of a critique of capitalism itself. Film historian Robin Wood (Hitchcock, Hawks, Bergman) wrote that he viewed the flesh-eating scenes of Night of the Living Dead as a critique of capitalism. In Wood's view, zombies represent capitalists, and "cannibalism represents the ultimate in possessiveness, hence the logical end of human relations under capitalism." He argued that the zombies' victims symbolized the repression of "the other" in American society, namely civil rights activists, feminists, homosexuals and counterculturists in general.

Below was one of the charts I used in the presentation showing how much zombies have eclipsed vampires in popular culture.

During the Q&A following the presentation, I was asked what subgenre of horror might we anticipate suddenly outperforming zombies as social mood begins to shift again? I said shapeshifters, the ability to alter physical appearance, whether intentional or not. As we progress through the economic crisis and look to reshape the world around us and rebuild, expressions of this will begin to show up in popular culture. Hence, this NYT Magazine cover story from over the weekend.

"The horror genre has always been where the culture goes to process the issues of the day via fake-blood-spattered psychodrama. AMC's zombie-survival serial, "Walking Dead," is about economic collapse and our sense that we've been abandoned by institutions; torture-chamber flicks like "Saw" are about our guilty complicity in reality TV's soft sadism. But the teenage-monster movie works with more evergreen subtextual materials, making metaphorical the weirdness of adolescence - of waking up one morning with uncontrollable urges, new and troubling hair growth and a sense that the whole world hates and fears you. "

5. Readers Write

Kevin -

Based on your Five Things article from May 15 (The Mediocrity of the Wisdom of Crowds...) - an interesting conundrum of our is that youneed to be a "node" in the social networked world in order to be relevant today, yet at the same time - as research implies, it'spulling us toward a center of mediocrity.

In the "Crisis of Non-Linear", you mention the non-linear forces being present but not apparent. Very true - increasingly our experienceswill be following the network logic which Kevin Kelly speaks of in his prescient 1998 New Rules for the Economy.

I think having deep understanding of these general rules of network's is going to be a must have for your cognitive toolkit. My perceptionis there is a collective ignorance about the attribute and characteristics of "networks".

Groupon is the first of to have benefited from the emerging "networked' economy. Creation of companies that experience exponentialgrowth brought upon by rapid communication (and social herding) enabled by our infrastructure (continued march towards cheaper andhigher performing computing, storage, and bandwidth, and mobile devices) is going to create a wealth of opportunities.

I think we'll see more of this groupon pattern in the near future. The massive amounts of interconnected global individuals, the data theyare able to generate with their devices and sensors, and the new ways to structure relationships based upon this - very bullish long term.

- Brandon McNamara

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