Bull market heroes become bear market scapegoats. Every hero and hero-wannabe should internalize this socionomic* understanding and never forget it. For example, the large-degree shift in social mood that is driving the current bear market is also transforming Former Federal Reserve Chairman Alan Greenspan -- formerly known as the Maestro and the savior of the world -- into “The Master of Disaster.”
Bob Prechter's October 2003 Elliott Wave Theorist anticipated this bear-market collateral damage and said so, bluntly:
"The Federal Reserve chairman will be labeled a fool who is greatly responsible for the collapse."
In February 1999, near the peak of his popularity, Greenspan was celebrated on the cover of Time. Paul Montgomery’s “magazine cover indicator” often identifies popular sentiment extremes and market turning points because it reflects the marketing efforts of editorial staffs that cater to the popular mood. Time accurately reflected the popular mood in this issue: Greenspan had “saved the world.”
A few months later, on June 10, 1999, Alan Greenspan spoke to Harvard's graduating class, saying: "The true measure of a career is to be able to be content, even proud, that you succeeded through your own endeavors without leaving a trail of casualties in your wake."
Catering to today’s bearish popular mood, the Huffington Post recalled that quote in a February 19 article: “Now, three years after he left the Fed, Greenspan confronts a catastrophic legacy. All around him is the evidence of an extraordinary ‘trail of casualties’ left in his wake -- men and women losing their jobs at a rate of half a million-a-month; foreclosures forcing Americans out of their homes; and the Dow plunged by 46.7 percent….”
Greenspan bashing has almost become a marketing strategy. The January issue of Vanity Fair ran a story by economist Joseph Stiglitz that featured the above caricature with the caption: “Treasury Secretary Henry Paulson and former Federal Reserve Board chairman Alan Greenspan bookend two decades of economic missteps.” Stiglitz blames the crisis on lack of regulation and oversight due to Greenspan and others’ “flawed economic philosophy.” EWI has demonstrated that governments consistently de-regulate during bull markets and RE-regulate during bear markets, yet Stiglitz seems unaware that he is blaming today’s crisis on a natural tendency of bull markets.
Greenspan, on the other hand, admitted a flawed philosophy before Congress, agreeing that his ideology of markets was not working. Lately, he seems to be considering a more socionomic perspective. On February 17 Greenspan gave a speech in New York that sounded familiar to Shawn Inman, one of our subscribers. He alerted us with this note:
“In listening to Greenspan's speech to the Economic Club of New York this evening, he more or less blamed socionomic factors (he obviously didn't use this word, but his comments were 100% consistent with it) for the wild swings in equity prices, and even stated that Socionomics was responsible for the underlying economic issues that markets eventually 'react' to. He expounded on this topic in ways befitting an Elliott Wave Theorist publication...”
Greenspan said: “A significant part of stock price dynamics is driven by the innate human propensity to intermittently swing between euphoria and fear, which, while heavily influenced by real economic events, nonetheless has a partial life of its own. And, in my experience, such episodes are often not mere forecasts of future business activity, but are an important cause of that activity." (Italics added.)
Bob Prechter's insightful Wave Principle of Human Social Behavior explains why we at Elliott Wave International don’t think “real economic events” influence markets or social mood. But we have written many times about how markets, in Greenspan's words, “swing between euphoria and fear,” and that the market has “a life of its own.” For example, here’s a quote from Chapter 19:
Once you can demonstrate to yourself that the stock market has a life of its own, you will begin to feel, as rightly you should, that it is the guys peering at and poring over each new statistic relating to the course of the economy or each new political nuance who are the real “tea leaves and entrails” bunch when it comes to anticipating the next move in the stock market. Conventional analysis is not a sound, reasonable approach; it is nonsense. It does not analyze the fundamental; it analyzes the extraneous.
The market’s “life of its own” is our collective mood, the social dynamic that determines price trends in financial markets. The economy (as well as popular culture, politics and other areas of collective human life) follows its lead. It seems Greenspan is beginning to gain this core understanding -- that policy action can’t control the fluctuations of social mood. But it's too late to salvage his tarnished legacy.
*What is socionomics and social mood? Watch this free documentary to find out.