The difference between mass psychology and economics in predicting markets

Tom Petty's "Don't Come Around Here" video seems the perfect lead into this post.  In the economics and social world, we're down the rabbit hole, and everything is crazy and hard to predict right now.  But that just makes it more interesting...

For over 30 years now, when I explained to average people why I read a lot of business books, real estate books, futurist books like those by Alvin Toffler, and studied the Forbes 400 magazine every year, I would tell people I'm an "economics geek."  That shut people up, and they'd leave me alone.  Even traditional geeks don't want to talk economics.  I got interested in real estate in 1986, when I moved to Southern California, and the market was hot.  I thought it might be a way to earn extra money as a young man.  I started reading books on it, and kept following my interests, from there.  I never went to college, I'm self-educated in this respect.

Being totally shy, scared of losing money, and a horrible salesman as a young guy, I wasn't able to raise money, or earn enough, to buy any houses then.  In 1990, we went into a long recession, and I started getting more interested in the long term dynamics of real estate, business, and the financial markets.  I began to watch the stock and precious metals markets daily, just seeing what happened, and trying to figure out why it happened.  Rather than just "get rich," I wanted to grasp the long term dynamics of why different markets moved, and truly understand them.  Then I could eventually invest in things when prices were low, and wait until the values rose, and make a profit.  Without realizing it then, my natural way of thinking about business and investing was very similar to Warren Buffet and Charlie Munger's style of investing, at Berkshire Hathaway.  Study, watch, wait for the prices to drop on things with inherent value, and then pounce and buy.  Then wait for the markets to return, and prices to rise. 

Basically, I wanted to truly understand markets, so I could predict the future of where they were heading.  I predicted the 1993-94 interest rate spike that sent Orange County, California into bankruptcy.  By late 1998, I sat the DotCom stock craze was getting ridiculous, and started talking about the eventual crash, which everyone then thought would never come.  In 2000, it came.  By late 2005, the California real estate market was going nuts, and I thought the inevitable crash was a year or so away.  It took until 2008, but it came, big time.  In all of those events, I was living on a low budget, and had no money to invest, but the dynamics of markets still fascinated me.  I watched them from a distance, and kept reading, and kept learning. 

When I saw the forces building for this current economic downturn, back in 2017, I was able to watch things much closer, and share my thoughts in my personal blog.  I actually got threatened by a group, they were one step away from a lynch mob, because of my blogging, in North Carolina, in May of 2018.  Despite the threat of being beaten by clubs, I kept blogging about the economy (and art and Old School BMX).  Southern lynch mobs aren't used to people standing up to them, so the beatings didn't happen.  Instead I managed to spend three days in jail in solitary, for heinous act buying donuts (after being told to leave a store, 2nd degree trespassing), and then get sentenced to $600 in fines, 50 hours of community service, and a 30 day suspended sentence.  Pretty crazy for my first criminal offense, EVER, at age 51.  These charges were dropped a year after I left North Carolina.  The South is still The South.  But I digress...

Anyhow, with years of watching markets, a few hundred books read, and a growing understanding of market dynamics, I had more time, and the internet and YouTube for research, heading into this recession (now actually a depression, technically).  I decided to do my best to predict what I saw coming our way in the economy as this recession headed our way.

But this economic crisis is unlike any before in my life, or anyone's life.  We headed into this downturn already living in Economic Never Never Land.  Interest rates had been held incredibly low since the Great Recession.  Major corporations, many former Industrial Age blue chips among them, loaded up on debt billions of dollars in debt, in the low interest rate environment.  The Trump tax cuts, signed by the most corrupt president in modern history, were yet another windfall for major corporations, and high net worth people.  Meanwhile, government bonds around the world went negative in many countries, and were ultra-low (and still are) in the U.S..  All the while, since late 2008, The Fed has been propping up Big Business and Wall Street, with the low interest rates and  trillions of dollars in quantitative easing.  The Fed is the "crack dealer" letting cheap money flow to the major economic players, who are now addicted to cheap money.

 In addition, we have widespread smartphones, the internet, and a level of inter-personal and business connectivity never seen in human history.  The newer, high tech businesses cluster together in a handful of major metros, like the San Francisco Bay Area, New York City, Boston, Seattle, L.A./SoCal, and Austin, Texas.  A huge percentage of the U.S. economy is centered in those metros, while rural, small town, and small city America struggled to recover form the Great Recession.  This helped create a huge economic polarity, which helped create a huge political polarity.  In the lead up to this current economic collapse, we had crazy stuff happening that most business people and economists had never seen before.  This wasn't going to be "just another recession."  It was all new territory, and nobody knew what would happen.  

In this chaotic mix, as stocks soared to all time highs on Fed created money in January, I predicted the unthinkable (here's that post), that the Dow would drop about 40%, and slide below 19,000 points.  It was at about 28,800 and rising when I made that prediction, and other predictions, in my blog post.  But I saw a change in momentum coming, soon.  Three weeks later, a "black swan event" came, the Covid-19 pandemic hit U.S. shores, and businesses were forced to shut down for a couple of months.  My "crazy" predictions for the Dow, the S&P 500, and the Russell 2,000, all came true within 8 weeks.  I missed on my Nasdaq prediction, because that's where investors put their money as the market dropped.

Then shit went crazy, because the official financial world didn't see this crisis coming.  Most of the "experts" didn't think there would even be a mild recession in 2020.  As most people sheltered at home, the business news channels tried to make sense of what was going on.  Being homeless, I struggled to simply find places to power up my laptop, and then find wifi spots I could use.  You can't shlter at home, when you don't have a home.  In yet another crazy aspect to the 2020 stock market crash, it was me, a homeless man, who accurately predicted the crash, and the depth of the crash.  Nothing makes sense now.

As the reality of the pandemic, and the much needed, but financially catastrophic, business closures set in, everyone in the business media tried to figure out what happened. Then they try to find some happy ending to this mess.  Everyone had opinions, and economists and public officials weighed in on this growing crisis.  By late April, I was able to start consuming these ideas from others, and to try to find accurate information on what was actually happening.  

I quickly began to figure out that, as I predicted the interest rate spike in 1993-94, the coming DotCom crash in 2000, and the real estate crash/Great Recession in 2008, I wasn't using hard number, nuts and bolts economics to make my preicitons.  Most of what I was looking at was actually the mass psychology of investors, and the public at large.  I did look at all kinds of economic trends, but I never got deep into the actual numbers.  

So I've been learning more about actual economics, as I tried to figure out where we're going now.  Economics is the study of financial data (technically, the study of "scarce resources").  But economists are notoriously not known for accurate predictions.  They look at the data after events happen, and analyze what happened.  I wanted to understand the dynamics, dig into the myriad of forces at play in the financial markets, and then be able to get a good idea of what's coming next. 

Ideally, I will actually have resources to invest at some point, and make some money off of my thinking. My drive has always been to try and figure out what's coming next.  And all that thinking led me to seeing a bunch of forces at work, social trends, social cycles, and things no one else pays attention to.  But financial markets, even completely manipulated markets, like the stock markets right now, held up entirely by Fed money creation, are still a result of human psychology.  Humans look at things, they make decisions and take actions, or don't take action.  Lots of actions, driven by mass psychology, drive the markets.  When the thinking in a large group of people changes, markets change soon after.  And when you study the trends, and try to figure out what idea caused a market change, you begin to get an idea where things will head in the coming days, weeks, months, and years.  

So I don't really tell people I'm an "economics geek" anymore.  I'm really a futurist, fascinated by Big Picture social dynamics and economics.  I try to accurately see the long term, mid term, and short term social trends going on, and get a grasp on the dynamics of these different trends, and how they affect and interact with each other.  Then I look at the economics world, and lay the economic trends on top of my world view of social trends.  That gives me some sense of where things are going.  That's how I made the call that the Dow would drop below 19,000 in January, when most people were expecting Dow 30,000 and Dow 35,000 soon after.  My thinking is a lot more like the late futurist Alvin Toffler, and his wife Heidi, than it's like Paul Krugman's, for example.  

I came to my conclusion that we're heading into an actual great depression from underlying, long term, social trends, combined with economic trends.  I'm working on putting the basic idea into a concise report.  But there are so many tangents and offshoots to what's happening today, that I'm going to dive deeper into pieces of the big picture in this blog.  This was not the blog post I sat down to write, but I hope it helps you readers get a better idea on where I'm coming from.  Much more to come...

The Phoenix Great Depression concept in a nutshell

You just can't beat this scene from Harry Potter when looking for a visual representation of the phoenix of myth.  

The idea is simple... huge, old, no longer needed parts of our Industrial Age society are breaking down, to be reborn into a new, Information Age version of American society.  The most chaotic part of this transition will happen in this decade we're entering now, the Tumultuous 2020's as I'm now calling them.  That's The Phoenix Great Depression in a nutshell.

On October 1, 2019, nine months ago, I first used the term, "phoenix recession," in this blog post.  For three years, in that personal blog, I had been writing posts about the coming recession, and some of the big economic and societal issues that I realized would affect all of us, in a big way.  I'm a geek on economics and big picture social dynamics, and an amateur futurist.  Since childhood, I've been fascinated by trying to figure out what's going to happen in the future.  A lifetime of watching and learning led me to the conclusion that a major economic crisis was coming in the late 2010's. 

In short there is this convergence of some ultra long term trends and cycles, shorter term trends and cycles, and then the Covid-19/human corona virus pandemic also fell right into the mix, like a societal atom bomb, to force the change needed on so many levels.  The Universe is weird like that.

On one hand, we have the long, sticky transition from an Industrial Age society into an Information Age society, described by futurist Alvin Toffler, in his long forgotten book, The Third Wave.  In addition to that, we have a transition from the Acquisitor, or businessmen-dominated age, as the dominant mentality in American society, to the Laborer, or working people's mentality.  This concept is described in The Law of Social Cycle by P.R. Sarkar, a 20th century thinker from India.  In that theory, this is a time of a major populist uprising, which we've now seen in a series of increasing waves, since Occupy Wall Street in 2011.In addition to those two huge transitions, we have the rise of the Creative Class, described by professor/author Richard Florida, an aspect of the rising Information Age where the economy is dominated by ideas, and the clustering of creative people into creative scenes who come up with those ideas.    In addition to  that, economist Ravi Batra found 30/60 year cycles of economic depressions in the U.S., and wrote about them in the late 1980's.  The best known is The Great Depression of the 1930's.  Then the cycle skipped 1960, and in 1990 we had a long "double dip" recession, six years of stagnant economy.  2020 is the next point in that cycle, so we're due for a depression or great depression.  And what do you know, things lined up again and we dropped into what is now officially a recession, right in line with that cycle.  It takes 3 years or a 10% drop in GDP to make it an "official" depression.  We'll probably get the 10% GDP drop in the Q2 numbers.  In addition to all of that, our U.S. (and most of the world's) economy is floating on the highest levels of government, corporate, and personal debt in human history.  Oh, and we're at the end of the traditional 4 to 7 year business cycle.  This cycle was highly manipulated, and stretched out for 11 years.  So by late 2019, we were due for a major economic crash, and some major social movements as well.

So all those things somehow converged into the set-up for a major economic downturn, which would jump start a period of major economic and social change.  Basically, a massive pile of shit is sitting in front of the biggest fan ever, and it was waiting to be plugged in.  Then... like a late night infomercial, "And that's not all folks, as an added bonus, here's Covid-19, a 100 year, worldwide pandemic."  The fan got plugged in, and a historical shitstorm began.  We're going to see a level of change, all throughout society, like none of us alive have ever seen, in the 2020's. 

This incredible period of breaking down of the old, the no longer useful, and the just plain fucked up aspects of human society, will usher in changes of all kinds.  It's happening, like it or not.  Change.  More change than any of us can imagine now, even after the last 4 crazy months.  This is just the beginning.

Change.  Lots of change.  The old is breaking down, and we have to figure out something new, and hopefully better, and build it.  Quick.  Death and rebirth from the ashes, on a societal level.  That's The Phoenix Great Depression in a nutshell.  We've got at least 5 to 7 years of craziness ahead, maybe more.  Buckle up, it's gonna be a wild ride.