In 1972, I was a graduate student in economics in London. As an American living overseas in the midst of a Presidential election, I tried to learn everything about what was going on back home. I distrusted Richard Nixon and was not comfortable with George McGovern. I became an avid reader of The Guardian. In his column Letter from America the Guardian’s American correspondent Alistair Cook reported on the implications of the Watergate scandal in the months preceding the November 1972 election. Cook opined to his readers that this was not a “third- rate burglary” as the White House claimed, but rather a major political scandal at the highest levels of government.
Incongruously, the International Herald Tribune (“IHT”) reported on the Watergate story with much less frequency or commentary. At least during election season, IHT reporting relegated the Watergate break- in to “third-rate burglary” status. The litmus test for the Watergate story was Nixon’s soaring popularity in the polls and subsequent November land slide victory.
The Road from Landslide to Impeachment
Post-election, a different mood emerged. Events cascaded out of control for the beleaguered Nixon Administration: January 1973 convictions of Nixon aides, G. Gordon Liddy and James McCord Jr.; May 1973 start of the Senate Watergate hearings; July 1973 Nixon refusal to turn over White House tape recordings; December 1973 discovery of an 18.5 minute gap in one of the subpoenaed tapes; July 1974 Supreme Court order for tapes to be turned over to Congress and House articles of impeachment, followed by the August 1974 Nixon resignation. See Washington Post Chronology. The public mood traveled from landslide support to ignominious impeachment in approximately twenty months.
Also in May 1973, recovering from a bear market low, the stock market hit an all time high. The final bottom of the multi-year bear market did not occur until late 1974.
The Ongoing Financial Crisis
This blog has discussed the origins of the financial crisis. Despite protestations of “who could have known” many spotted the crisis ahead of time. See Too Much Information and Too Little Knowledge. Reckless residential and commercial real estate lending, trade deficits, rampant speculation, credit derivatives, deficits and a host of lax regulatory practices led to the crisis. All of these behaviors were building over several years. Collectively, these indicators didn’t matter until they did.
Now, after a stock market recovery, Larry Summers, CNBC and other experts have declared the recession over and “mission accomplished.” But the same imbalances in the economy have remained. Barron’s recently polled twelve eminent market strategists on their predicted closing price for the S&P 500 Industrials on 12/31/2010. Thier predicted low was 1125 and the high 1350. Friday, December 18th, the S&P 500 closed at 1102.47. Amazingly, not one analyst believes that a stock market decline is possible in the next twelve months. And some of these analysts pointed out the structural problems with the economy which would slow a recovery and hurt corporate earnings.
Percolating Ideas and the Collective Consciousness
As humans we are not conditioned to hear and react immediately to bad economic or political news. Perhaps news has to seep into the collective consciousness and anger has to build before the ultimate collective response. Robert Prechter has postulated that social mood drives financial, macroeconomic and political behavior. He coined the term socionomics for this combination of behaviors. Thus some commentators and critics (like Alistair Cook in the 1970’s) or like Prechter, Michael Shedlock, Karl Denninger and a handful of others during the current financial crisis see the developing events, the implications and the inevitable outcomes of today’s market declines before the general populace does. Rather than applaud these commentators after the event, would it not benefit all to become more expert in “socionomics”?
What Does this Mean for Investors?
The above commentators may be the intellectual equivalents of the proverbial “canaries in the coal mine.” That is, these commentators have a greater acuteness and perceptual ability than the rest of us. However, translating their acumen into investment advice is more difficult. I use their advice not to sell markets short, but rather to move my own investments out of harm’s way. Sifting through the mass of data, the more difficult task is to continually discern what does not matter, what does, and when the former becomes the latter.
loading...
