The bottom line of the new science of socionomics is that mood governs
events, and not the other way round, as economists believe. It is our view
that economists put the cart before the horse in assuming that “events”
govern mood. This is such a difficult concept for many people to grasp,
not because it is complex (on the contrary; it is very simple), but because
a compliant public has been conditioned to the (erroneous, in my opinion)
mainstream view of economists by manipulative (and manipulated) media over
such a long period of time, that the error has been entrenched in the subconscious.
Discovering that nearly everything you have been told about financial markets
is wrong is like discovering that the earth is round, after having believed
all your life that it was flat. It is not that a round earth is such a difficult
concept to grasp. The only thing that makes it difficult is if you have
been conditioned all your life into believing that the earth is flat. It
is not getting the new idea into your head that is so hard. It is getting
the old one out.
Or it’s like finding out for the first time that Santa Claus is not true.
Once the penny drops, it all makes sense and you wonder how you could have
been so silly as to believe such nonsense. But you have difficulty for some
time because of your entrenched former mistaken belief.
It is the same with the entrenched mistaken belief we have that economic
and geopolitical “fundamentals” are what make financial markets go up and
down, when they have little, if anything, to do with it. Hence I am always
looking for ways to illustrate the socionomic concept as simply as possible.
Here’s another one:
Oh, my head!
For a large part of my life I suffered from cluster headaches, which, a
doctor told me, are worse than migraines. So I know a bit about headaches.
Imagine I wake up one morning with a blinder. I can barely see, let alone
walk. The pain is so great I wish I were dead. I should stay in bed, but
I feel I must go to work. I take pain-killing medication (which is also
stupefying, so now I am feeling even less able to think straight) so I can
stagger to work.
I have only been at work a short time, when I walk into a door and cut
my head, which starts to bleed, and does nothing to help my headache. Conceding
that I should not be there, I finally admit defeat and go home to bed.
How would the media report that incident if an economist was asked to “explain”
what happened? Simple:
Man walks into door, cuts head, goes home to bed with
headache
As far as the economist is concerned, an “event” (walking into the door)
is what “caused” my headache, and that’s why I now feel pain. Yet that is
back to front. The blinding headache is what caused me to walk into the
door. The economist doesn’t ask me. He doesn’t do any research at all. He
just assumes that is what happened from what appears to be the case, and
everybody else believes him because he is an economist.
Be honest. If you had read the headline above, or heard or saw the item
on the news (if they reported such trivia), would you question it? Almost
certainly not. It’s quite plausible. I walked into a door, cut my head,
got a headache, and had to go home to bed. The “event” (walking into the
door) “caused” me to “feel” the way I do.
Only trouble is, it’s completely wrong. It’s back to front. It’s putting
the cart before the horse. It was because of the way I was feeling that
I walked into the door and caused the event. The feeling (or mood) caused
the event, not the other way around.
It’s the same with the mass social mood. The way the public is feeling
at any given time is what causes them to act a certain way and thus create
“events” in the economy and in geopolitics. It is not the other way around.
Because of the way we have been conditioned, it may appear to be at times,
if not most of the time, but it is not. And every day the media entrenches
the nonsensical economist view in our subconscious, to such an extent that
our acceptance becomes automatic.
For example, last month the price of gold rose, following the terrorist
bombing of trains in Mumbai,
India. On
the television news the next evening and in newspapers and on the internet
wire services the “explanation” was the same – the price of gold rose because
of the terrorist attacks in Mumbai. Gold is a “safe haven” in times of trouble,
so frightened people rushed to buy gold, and this forced the price up, etc.
etc. Right? Did anyone question this? Of course not. It was a plausible
explanation. An “event” (the bombings) caused people to rush to the “safety”
of gold, and this “caused” the gold price to rise.
Only problem is, it is absolute nonsense. The rise in the price of gold
had nothing whatsoever to do with the terrorist attacks.
You don’t believe me? Okay, if the bombings “caused” the gold price to
rise, then they would also surely have “caused” the Mumbai share market
to fall. Right? I mean, there were suggestions immediately after the bombings
that one motive behind the attacks was to frighten foreign investors away
from India.
Anyone who owned shares in Indian companies would surely rush to sell them
before they thought about buying gold.
Just how much can a share market fall in one day? We waited, with trepidation,
for the Sensex (the major share market index in India)
to open. It was not a matter of whether it would fall, but by how much.
But what happened? The Sensex rose 3% on the day immediately following
the bombings! One of the largest one-day rises in the history of the share
market! What “caused” this? Obviously not the terrorist attacks. Any more
than they “caused” the gold price to rise. Yet at first blush the economist’s
line about gold sounded quite plausible, didn’t it? It is only when you
think it through that you realise it is patently wrong.
Don’t terrorist attacks affect the gold price?
On the strength of this I decided to do a little research into how the
price of gold “reacted” to terrorist bombings on other occasions. How interesting!
Following the 9/11 attacks on the US
in 2001, and also after the Madrid
train bombings in March 2004 the price of gold rose. A little. Not a great
deal. (See next charts).
Figure 1
Figure 2
But immediately after the bombings in Bali,
Indonesia in October
2002 and the London
train bombings in July last year the gold price fell (see next charts).
Figure 3
Figure 4
What does this tell you? It tells you that the price of gold is not affected
by terrorist bomb attacks, even though economists will conveniently try
and tell you, via the media, that it is, when it suits them. When it doesn’t
suit them, of course, they say nothing.
What does make the gold price rise and fall?
What makes the price of gold rise and fall is the same thing that makes
the price of houses, shares, and any other investment rise and fall, namely
the underlying mood of the crowd in the market that is buying and selling
that asset. It is the behaviour pattern of that crowd that you need to study,
not “events” in the economy or around the world, if you want to know which
way the price will go next. As I so often say, any apparent “reaction” to
“news” will be short lived and completely retraced. The market will always
get back to doing what it was going to do anyway, according to the underlying
mood of the ‘herd’ in it.
Think it through
Unfortunately very few people do think through what they view and read.
They imagine that they do, but they don’t really. There is an old saying:
“Believe only half of what you see and none of what you hear.” That is not
as silly as it sounds.
Back in 1993 it became popular to argue that what drives the stock market
is demographics. The theory claimed that when people reach 45 years of age,
not only their productivity, but also their spending peaks. So the huge
increase in the birth rate after World War 2, from 1945 to 1964 (the “baby
boomers”) ensured that the economy, and thus the stock market, would keep
soaring until 2009.
I said before that often if you think it through, you can come to the realisation
yourself that the economic “explanation” for market moves is patently wrong.
What is wrong with this “explanation”?
And the answer is Japan.
Did Japan
not also have a generation of “baby boomers” who were reaching that magic
age? Would they not also now reach their productive peak and start spending?
But did this prevent the Nikkei from falling 80%? Were the “boomers” able
to prevent the collapse in the real estate market or Japan’s
plunge into virtually continuous deflationary recession (or even depression),
which was to last for 15 years? Hardly.
No economic fundamental holds the key to the share market or any other
financial market. Not even demographics. Population changes are an “event.”
Events don’t govern mood. Mood governs events. Even with demographics you
can see that the horse comes before the cart. Why did people have more children
after WW2? Because they were feeling safer and more secure. Their underlying
mood was on the up and up.
Why is this important?
The fascinating pattern
One of the things about cluster headaches is that there is a pattern to
them. They come in “clusters” (hence the name). In my case, I might go for
three months without a headache. Then in the space of a few weeks I might
get half a dozen. I knew when I was in the “headache phase.” So there was
a pattern to the way I would be feeling. Once the headache phase began,
I knew what to expect for the next few weeks.
It’s the same with the public mood. There is an amazing pattern to the
way they are feeling. And how they feel determines what they will do, and
what “events” they will cause by their actions, and not the other way around.
And, like cluster headaches, because of the patterning, they are, to a certain
extent, predictable. Human crowds go through alternating cycles (waves)
of optimism and pessimism that are as regular (though not as precise) as
the tides and moon phases. It is nature. It is the “rhythm of the universe.”
Economists get it back to front even after the event. What chance do they
have of getting forecasts right? Yet the public slavishly follows the “orthodox”
line pushed by the media, and economists and their followers would be the
first to criticise and ridicule the likes of we who make forecasts on the
basis of our knowledge of largely predictable patterns (waves) of mass social
behaviour.
How do economists “know?”
When the news anchor on television or some economist quoted in the financial
press or interviewed on television or radio says: “The share market rose
(or fell) today because … or gold was up (or down) because of … “ and
goes on and “explains” why the market rose or fell, how does he know? Does
he or someone else go around and ask all the people who bought or sold shares
that day why they did so? No? Then how does he know? Could it be that he
guesses? He invents his “reason?” He bases it on what appears to be the
case? How does he get away with that? Because no one ever questions him.
By Graham Dyer, Editor of Editor of Graham Dyer's Newsletter (Australia)
JULY 2006