Saturday, April 25, 2015

Review of Moods and Markets: A New Way to Invest in Good Times and in Bad by Peter Atwater

We talk fairly often about social mood, which is a concept that comes from Prechter and his idea (he thinks it's a new science) of "socionomics".

The simplest explanation of social mood is that rather than social events determining the tenor of mood, social mood determines the tenor of events.

I think that social mood is a very, very valuable concept, and that if you pair social mood with Falkenstein's Batesian mimicry hypothesis of the business cycle you have an extremely powerful mental model of the economy that is going to outperform over full market cycles.

The problem is that if you read about social mood through Prechter, it comes packaged with kooky Elliott Wave Theory. Whether or not you think EWT is wrong, it sounds nuts to most people. (I am a skeptic of EWT and I don't use it in investing.)

Peter Atwater wrote a book in 2013 that's about social mood and doesn't use Elliott Wave at all: Moods and Markets: A New Way to Invest in Good Times and in Bad.


  • Atwater has come up with a spectrum he calls "Horizon Preference" that goes from "me, here, now" (negative social mood that is focused on present, personal, local concerns) to "us, everywhere, forever" (positive social mood that is generous, trusting, inclusive, globalist, and permanent). The "us, everywhere, forever" behavior that he describes sounds just like Silicon Valley today. In fact, it reminds me of Gavin Belson's line in the new season of Silicon Valley: "I don't want to live in a world where someone else makes the world a better place better than we do!"
  • Both Prechter and Atwater think that there is "an entirely different pricing dynamic for assets purchased for their fundamental utility value versus assets purchased for their investment potential." That is, for a product like gasoline for your car, the lower the price the more you buy. But that microeconomic supply/demand logic is inverted in investments.
  • Something that I had never heard before: in August 1932 for the first time in U.S. history emigration exceeded immigration. Great bottom indicator.
  • His discussion of mood-driven accounting principles is very important. "Rather than predestined laws, financial accounting standards are nothing more than regulations that were established, like all other regulations, in response to changes in mood. The result is that we deregulate accounting all the way up in a bull market and we re-regulate all the way down. The consequence is that it is much easier for a corporation to generate $1 of earnings at the top of the market than at the bottom of the market."
  • Related: "Never underestimate the inverse correlation between scrutiny and social mood."
  • He does group talks where he asks the crowd "when were things better than they are today?" and "when were times far worse?" The good and bad times are remarkably consistent and coincide with economic peaks and troughs (and hypothesized peaks and troughs in social mood).
  • The Bloomberg Consumer Comfort index peaked in 2000. The stock market peaked then too - except it went on to hit even higher highs in 2007 and now today - unless you look at real stock market, i.e. deflated by gold. Then they track each other much better.
There was a paper presented at Prechter's socionomics conference that really supports social mood theory, where the authors found "a strong correlation between a 'literary misery index' derived from English language books and a moving average of the previous decade of the annual U.S. economic misery index", meaning that "[Fiction] Books Average [the] Previous Decade of Economic Misery".

I can give Atwater's book to give to people to get them up to speed on social mood without all the EWT baggage that would come from a Prechter publication.


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