are creatures of fashion.
of us dress to fit into the roles we play in the dramas of our individual
lives. The term fashion can be appropriately applied to far
more than clothing, hairstyle, and footwear. Dress is only the proverbial
tip of the iceberg.
act that appears to go beyond the strictly utilitarian minimum could
be ascribed to fashion, and often such acts attain a degree of irrationality
that can only be described as "herding behavior" by a
disinterested observer. Tongue
piercing might suffice as an example.
behavior of investors often gives the appearance of irrationality.
A view of the chart pattern for the NASDAQ Composite stock index
from 1994 to the present would strongly suggest "reason"
had little to do with investor behavior. In the first quarter of
2000 a steady string of market cheerleaders appeared in print and
broadcast media to give numerous reasons why, though the market
was a bit frothy, there were solid reasons to buy and hold common
stock. Remember the party they had on CNBC when the index breached
5000 going up? The hangover has been murder.
its peak, the NASDAQ Composite then fell 80% into October 2002.
A rally of 400% was then required to return the index and its component
stocks to their recent peak. That leaves 300% or so to go as of
now, two years later.
were the experts and writers for business media uniformly bullish
in early 2000? Because "up" was "in" and "down"
was "out." The process for determining what would be news
was and always will be governed by demand…by fashion. Bearish
analysts were rejected because their conclusions didn't conform
to the dominant expectation.
much for the Efficient Market Hypothesis. Conversely, at the low
point for the stock indices in October of 2002 there was considerable
worry present in business reports. Reports of corporate malfeasance
were everywhere. The fashion had changed.
the writers at CNBC and CBS Marketwatch make a determination that
the content had to shift? Not likely. Such media outlets prosper
in rallies, not bear markets. Like all entrepreneurs, they must
offer what their audience desires lest the audience take its money
elsewhere. No, it was the viewing public whose tastes had shifted
by late 2002. Actually, since there must be a lag between the masses'
changing tastes and the media's offering, the shift had occurred
when the market topped and had run its course (obvious in hindsight)
by October 2002. Then the fickle public changed again and, using
the NASDAQ Composite as a barometer, has had quite a run of euphoria
during the past two years. Today's refrain is of a certain kind
of fear, that of missing a profit, that characterized life
in early 2000.
investor lives in a land of stunning complacency. In the stock market,
the Chicago Board
of Options Exchange volatility index, or VIX, offers one view
of investor worry. A chart of the VIX for the past eight years reveals
an unusual situation: Volatility, often synonymous with investor
fear, has all but leaked entirely out of the market during the past
year. People may talk about worry, but their actions reveal the
VIX was high at market bottoms and low near tops, and when it dropped
below 20 it signaled little fear among market participants. What
does it mean now when the VIX is closing in on single digits? It
means that bad news is on page two or not published at all. The
evolving scandal at Fannie Mae has so far elicited no more than
a yawn from the corporate news organizations.
same fashion affects politics, too.
the public is in the mood for good news there's little coverage
of the occupation of Iraq. Troop losses are noted but few details
given, and reports of civilian casualties and U.S. atrocities are
all but absent. The press as a whole is a tame pet of the Pentagon
and the Executive Branch. Political leaders are given grudging praise
from quarters thought usually hostile.
Only a few stalwarts hew to principle and resist the fashion of
showing respect where none is merited. When the pressure to conform
is strong enough we see the political equivalent of plus-sized micro-miniskirts
on the covers of fashion magazines. In fact, the pressure to conform
in politics is far greater than in fashion. Trying to set your own
style in politics can get you jailed, or perhaps even killed.
does Victor Hugo's "No army can withstand an idea whose time
has come" attain a slightly different meaning.
what does this mean now?
to investors, members of the public at large also appear to have
lost all of the Founding Fathers' fear of that pervasive institution
of legal force, government. Those who wish to live their lives free
from hassles with petty dictators note that there is no groundswell
of public opposition to National ID Cards, the Patriot Act, imprisonment
of U.S. citizens without due process, or a host of other erosions
of our supposed protections from the fist of government power. Recent
LRC columns detailing how this Land of the Free and Home of the
Brave imprisons a larger share of its citizens than totalitarian
despotisms show how easy it is for our neighbors to ignore unfashionable
facts – few care.
might the typical LRC reader reconcile this state of affairs? Sometimes
it seems like we've fallen through the looking glass and now live
in a place where wrong is right and up is down. We risk ostracism
if we are careless enough to broach this subject in polite company.
One might as well show up to the office, not in a normal business
suit but in a thong bikini (men included) with hair dyed fluorescent
green and a stripe of bright blue paint from hairline to chin. After
all, that's not the current fashion. People whose appearance
(or political views) sticks out usually make others uncomfortable.
at the level of political discourse assumes attributes of superstition,
where inanities like "We should trust the President because
he has access to information that we don't," are akin to primitive
peoples who rub blue paint on their faces to ward off evil spirits
or protect them in battle.
times our world seems not so much through the looking glass as it
does a land of savages and superstitions. Many members of the tribe
may wear expensive suits and sport advanced degrees from prestigious
institutions, but their embrace of the inane notion that the whole
(the state) is greater than the sum of its parts (fallible people)
reveals their primitive perceptions. They watch news of tens of
thousands of deaths in overseas military action and change the channel
to a sitcom. Even people who voice opposition to the state
often belie their own words by lobbying for some aspect within the
state's monopoly, most often today for so-called national
defense. Words mean nothing if they conflict with the reality of
our grand technologies, awe-inspiring artwork and cosmopolitan lifestyles
there is no real difference between the minds in modern society
and those in prehistoric tribes. Any outward difference is merely
a façade of rationality on top of shared fantasy. The only
theory for this that makes sense is that in many capacities, the
actions chosen by people are dictated by the emotional part of their
brains. The urge to adopt the views of people surrounding them,
to herd, is almost irresistible.
what use is this?
fashion, herding impulse, and emotion are the drivers of what ideas
are accepted and what collective behaviors are ascendant, much is
explained of the otherwise inscrutable trends we see around us.
It may not allow us to know with certainty how far the pendulum
of these trends will swing, but it offers hope that observation
may reveal when the fashion has shifted. Since the kinds of fashion
we're speaking of can carry the seeds of Cultural Revolutions, Bolshevism,
and National Socialism, having a notion of what may be on the road
ahead could be priceless on a personal level.
if it was possible for a nation's Central Bank to create credit
from nowhere. New reserves would be credited to member banks that,
while they represented no actual previous productive activity, could
be loaned and thus used to place claims on assets either real or
financial. As long as members of the public at large were relatively
sated in their desires for trinkets or basic goods, or if
manufacturing overcapacity for trinkets and basic goods was so great
that a deluge of product supply prevented demand from raising prices
across the board, CPI inflation might well be absent.
fashionable, members of the public might see this situation
as the best of all possible worlds. Prices for assets like stocks,
bonds, and real estate would rise rapidly as these items received
their fair share of the newly created credit. As long as CPI inflation
was tamed, people would feel richer with each passing day. It might
even be fashionable to use the increasing asset values to
leverage purchases higher via additional borrowing.
such an environment, what could ever upset this process? The Central
Bank would have hit upon the ultimate invention: A Perpetual
Motion Machine. People would get richer and richer while prices
for financial assets and real estate took flight and left prices
for food, gas, clothing, and possibly even cars behind. The only
class of goods that might not remain static would be those in the
luxury category. Luxury foods, luxury cars, luxury vacations, and
luxury jewelry, all things at the highest end of the consumer's
wish list might well begin to accelerate higher in step with financial
assets and real estate.
so, who'd complain? If anything, it would mean that people farther
down the economic ladder who were willing to tap their available
credit could emulate those on the cover of People Magazine and enjoy
the same fashions. More and more people could join the ranks
of the rich, if not the famous, by possessing some of the
same things. Plasma TVs would fly off the shelves at Best Buys across
the land. Bank branches would spring up on every street corner and
offer mountains of credit to even the weakest borrowers. No one
would be denied the American Dream of home ownership, and interest-only
mortgages (presumably with infinite terms) would be offered to help
manage cash flow.
a scenario, though unreal sounding, couldn't be more ideal for incumbent
politicians. Happy, rich people are fans of the status quo, so politicians
would be overjoyed to see H2's in every garage and big diamonds
in every earlobe. Why talk about a chicken in every pot when the
real dream is a vacation home in Telluride or a second condo on
Clearwater Beach? The Congressman who delivers on that could count
on a very rich retirement.
question remains: If nearly everyone stood to gain from this condition,
what possible cloud remains to rain on the parade?
the factories that represent overcapacity go out of business
when dollars are flowing in torrents their way, courtesy of
the Central Bank?
the torrent of dollars created from nothing be rejected by those
producers who have no other ready market, when they can take
those same dollars and join in the fun of owning U.S. assets
that are the beneficiaries of the flood?
foreign firms really care all that much about the value of the
dollar relative to their home currency, when as long as they
can get raw materials and pay their employees, nobody needs
to repatriate those depreciating dollars anyway, at least in
the short run?
there's nothing to go wrong with this, why hasn't anyone done it
all know the answer to that one. It has been done…time and again…always
with the same result, from tulip mania to John Law's Mississippi
Scheme. When financial prestidigitators are the ones getting rich
and the welfare/warfare state redistributes ever more, the lesson
taught is that personal prosperity does not require production,
thrift, or hard work. People inevitably respond to this and change
their lives to accommodate the new fashion, so conditions change
– social pathology blossoms. Fortunately we haven't seen any
then the original question returns: What is the limit? Whose idea
is it to stop spiking the punchbowl?
late 1990's taught the rational folks among us a very hard lesson.
The truth is, there is no way to know in advance how high is "up."
Irrationality sets its own limits, and trends often last far longer
than reason could possibly expect. Sometimes hemlines of skirts
rise until more than just irrationality is revealed.
the dynamics of this process is useful, however. Governed by collective
emotion (for that is what animates fashion), we know the trend will
end. Trees don't grow to the sky, despite the experience of the
NASDAQ Composite from November 1998 through February 2000. We can
use this insight to avoid getting trapped when the collective mood
changes. We can continue to speak the truth and avoid the inclination
to tilt at windmills. One can't know when Liberty will again be
the idea whose time has come; only by maintaining its presence
on the "fashion circuit" is there a chance for its adoption
by the massed members of a society should the right time occur.
of all, we can understand how to live as social individuals surrounded
by savages whose elaborate rationalizations cover a core superstition:
That only by human sacrifice to an abstraction does the sun rise
each day and shine down upon us.
December 23, 2004