Most of us view the world as more benign than it really is…
—Daniel Kahneman, Thinking, Fast and Slow
Message from a friend I haven’t seen for many years: “Maridel (my daughter) told me about your blog. I see you are still gloomy.” Oh, well…he’s talking about my market forecast. I’ve been in cash for over a decade. But that’s an investment decision, having nothing to do with my mood, which is pretty chipper, these days.
My own mood doesn’t matter at all in investing. To make money, I have to evaluate the mood of the crowd, so that I can get into the market when the crowd is gloomy, because that is when they undervalue investments. Then, when social mood and valuations reach optimistic extremes, I have to sell. Presently, the crowd is still pretty gung-ho, but sentiment figures are beginning to slip as the lack of performance grinds them down. A forthcoming seige of losses will send the crowd’s mood crashing again.
Anger and recrimination are the first reactions to big portfolio losses. We got a whiff of these in ’08-’09, but nothing like what is coming down the road. Next leg down–which gets started anytime, now, will be when the crowd gets majorly pissed. By the time the Dow is down below 6,000–probably before the year is out–the crowd will be wanting to string up portfolio managers, investment bankers, and their sheepishly apologetic advisors.
The socionomic hypothesis holds that social mood drives all of the activities of a society, including politics. There is a moment in the cycle when the process is dominated by what Kahneman calls the Affect Heuristic: where judgement and decisions are guided directly by feelings of liking and disliking, with little deliberation or reasoning. Are we there, yet?
Politically, yes. Newt Gingrich has tapped into a seething cauldron of discontent. Overnight, in South Carolina, his candidacy came from way back and surged to the front by a wide margin, just because he told a journalist to go screw himself on national TV. Exit polls indicated that most of the people who voted for Gingrich changed their minds in favor of him instantly, upon witnessing Newt’s tirade. No rational deliberation involved. It was, “never mind who the guy is, dammit–I just want someone to go to Washington and kick some ass!”
My view is that the national mood is a tinderbox on the verge of a conflagration. This election stands to be about ass kicking. The political attitude the next four years could be like my mother’s, some mornings: “Whatever you want, the answer is no!” Along about 2016, after four years of tearing Washington asunder and cannonading Wall Street, the market will be down 90%. And, sick and tired of being sick and tired, the electorate will run the disrupterator out of office and vote for the wise old uncle who, they imagine, will deliver them from the maelstrom.
The mood will be gloomy. It will be time to move cash–if we have any– into the market. Damned if I know whether I’ll be able to do it. I’ll be gloomy, too.
The author makes no representation as to the accuracy of the quoted material, but believes the sources to be reliable. No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.