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America’s Rapid “Mood Ring” Reversal?

August 18, 2021

“If you consider the dominoes, and the domino effects on supply chains and ultimately on global GDP, that’s all the market needs right now, is something to cast doubt on the all-time highs in the leading equity indices. So you get economic and financial market strength, which is tenuous at this point. We know that reversals and markets are typically sharp, but in this case they would not be unexpected.”

 — David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. 

Wow. It’s an amazing thing when you see mood shifts. Last week we talked about the summer of 1929, and what a high it was, before the incredible low of the October crash of ’29. And David, it reminds me, you and I both own a little book called The Mathematics of Humor. And it’s almost funny, just even the name, to think that math might apply to humor, but there’s something explained in there, how a joke builds, and how tension builds in the joke, and that can actually be displayed with mathematics or with charts. But when that tension reaches a point of collapse, it’s called Catastrophe Math. Now, granted, that sounds very technical, but that’s when we laugh, we get that belly laugh. When shifts occur, like from the summer of 1929 to the October crash of 1929, that’s not really a belly laugh, is it?

David: No. And there’s some coincidence last week, in discussing the change of mood in the summer of 1929, and the negative news which was emerging in that timeframe but was consistently ignored until October of that year. The consumer sentiment numbers, which were out this last Friday, were just awful.

Kevin: So, does it remind you of that shift that we saw? I mean, the shift in ’29 was awfully hard. This is probably overstating that the shift was this hard at this point, but it does portray something coming down the pike in the future.

David: It certainly suggests that there is a frailty underlying the market, and it doesn’t take much to have people on edge. When sentiment shifted in 1929, it swung hard from positive and bullish, that is in the market, to negative and very bearish in the stock market. And we mentioned the decline in equities taking until 1953 to recover from.

Kevin: But they didn’t really have central banks at the time to print money and just flood the system with money. Aren’t we in a different period of time right now?

David: That’s right. So, we’re not likely to see the severity of declines we saw in the 1930s. This is what makes the current environment more like the 1960s, where a major currency adjustment in compliment to a bear market and recession, it takes a less obvious bite out of the hide of investors and savers alike. It’s still a bite, and when all is said and done, it may in fact be worse than the 1930s, accounting for all the categories of loss. But the nominal numbers are not likely to advertise as poorly as we saw in the 1930s.

Kevin: Well, why don’t we talk then about what you’re looking at for the mood shift, because that actually is a scientific study that people follow, and it’s out of the University of Michigan.

David: Exactly. So, when I talk about confidence or discuss the mood shift from last week, to describe the University of Michigan sentiment numbers from last week as a disappointment is a massive understatement. You also, at the same time, had small business optimism which dropped in July, but the negative swings in sentiment, particularly from that University of Michigan, we’re talking about, on a scale we have only seen a handful of times. 

So, the decline from expectations was 13 and a half percent. The number was 70.