Redstate

In fact, that's something I say to people all the time: the market is like a moody person.

There are at least two reasons to pay attention to the market's mood swings:

First, they represent reality as the world understands it. And people make decisions based on perceived reality. In an environment that is as uncertain as this one, that translates into less risk-taking, and ultimately less economic activity.

Second, market psychology has a powerful impact on economic policy. And since this intersects with politics, it's a core concern of this web site.

It's perfectly good and correct to understand the market as psychological. In one sense, this might lead some people to consider that there is a more rational or scientific way to approach the various issues affecting the economic activity that we all depend on for our material wellbeing.

These people often become economists.

That's a problem because psychology is reality. It's ephemeral and hard to model, but it's what people base their decisions on.

But let me give you your due: you might perhaps be saying that today's markets are one thing, and tomorrow's will be completely different. That's a perfectly fine way to think about markets.

But what I try to do instead is to understand the basis for the psychology. That gives you some clues as to what it might do when it shifts. And the implication of a massive rotation out of the stock market by large institutions, is very different if it's based on simple uncertainty than if it's based on real expectations for a recession.

Where to begin, where to begin...

The importance of psychology to the market is one of the things I do worry about from time to time. We, especially conservatives supporting free, transparent markets, continue to believe in their effectiveness at distributing the most goods and services at the highest qualities while maintaining the lowest prices because we believe that somehow either a) the markets overcome the psychology of the irrational individual, or b) somehow that psychology is as important as a bean counters cash flow and balance sheet statements. I do believe they are at least the least bad method we've found for this, and yet I have these nagging doubts. Sometimes the market seems to exhibit mass hysteria in its swings. But mostly these days I am concerned about the institutional investors. They control large chunks of money in the market, large enough to make the so called robber barons look like, well, if not small fish, at most, medium fish in the pond. And we like to think they are pouring over the spreadsheets, the business forecasts, the management plans, the market conditions, etc. and basing their decisions about where to invest the money they've been entrusted with according to rational, even cold hard equations. But are they? Or is their psychology even more important to their decision making, and because of their relative influence on the market, more important to the economic state of the country?

Oh well. Oh the bright side, I've always thought that much of what Ronald Reagan accomplished when he came into office was psychological. He sort of gave us permission to be optimistic again, and with that optimism, we plowed through the tough times needed to get to the good times. The actual changes he made were still critical, but I'm not sure the changes would have been as effective were it not for his optimism. So maybe after we've been in the coming lean years for a while, someone else like him can come along and fix it again.

Which of course brings us to today and my other thoughts about market psychology and where things are going. The other day as I contemplated my measly twice monthly contributions to my 401(k) and whether or not I wanted to reorganize where my money was within my 401(k) my thoughts went sort of like this:

"Well, with Pelosi and Reid planning a Keynesian stimulus to the economy, knowing the knowledgeable poster on Red State thinks the US is already exporting its inflation, Fred out of the Presidential race effectively if not officially, and Dems controlling both houses of Congress and most Republicans heading for the high grass in defending our policies, where do I want to put my money for the next four years? Because at this stage of the game, it doesn't even matter if a Republican won, because of the Republicans, the only one with a Reaganesque plan for the economy is Guiliani and he'll be a disaster on the rest of it, and if he doesn't win Florida where McStifled speech is once again leading the polls, the Republican economic policy won't be any better than the alternative. I wasn't old enough for the Carter years to really affect me, but I do remember them, (and at least Iran didn' have The Bomb, which they will before the end of the next President's term) and they weren't exactly fun to come through... Ah! That's right, in times like these Gold is the answer! ... Wait a minute... I can't invest in gold via my 401(k). So I'm pretty much screwed no matter what. Guess I'll just adjust my future contributions to the Value Fund instead of my current split, and no reorg on the rest of it."

Now, I expect because of the way investments have been marketed for most of my life, that at least some other people who are anticipating the economic trouble ahead (with all of The Fed, Congress, and the White House are pushing the wrong solutions you can't avoid trouble) have forgotten that while unemployment was high under Carter, inflation under those policies were even worse. And even though my mother was making a hefty 12% on that money market fund that was my future college education, it was losing ground in real terms because inflation was even higher. So I wouldn't be surprised if they, and institutional investors were moving to bonds to stave off an anticipated stock market decline.

We live in interesting times.

Now the question becomes, does the Fed cut next week, or do they say "we cut last week, we'll wait" and if that's the case, watch for the market to drop like a rock on the news. Does a 25bps cut do enough? Is the market already pricing in a 50bps cut?

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Two thirds of the world is covered by water,
the other third is covered by Champ Bailey.