M-words: Monopoly and Mob Mentality

Posted on Sunday, February 22nd, 2009

This post is a reply to Greg Sterling’s post, Perception & Reality : Naming Names. It started out as a comment on his blog but became rather long winded and moved more in the direction of broad market commentary than just about Google and the “M-word”, monopoly. So I posted it here instead.

It is at times like this, deep recession, that the public becomes more protectionist, and politicians become more populist. Rightly or wrongly (mostly wrongly). Google best tread lightly in its M&A activities so as not to provoke the wrath of a nervous public, labeling them with the dirty “M-word”, and opportunistic politicians out to give the people what they think they want (the real reason, of course, is they want a moment in the lime-light and perhaps forward their careers with some higher political office appointment later on). Nor must they give reason for a competitor to play dirty by trying to sway things into that direction.

I do however disagree with the idea of comparing this economic period to the Great Depression creates a self-fulfilling prophesy. The collective mood of society swings up and down between optimism and pessimism, fear and greed. It drives markets, creates and pops bubble’s. Always has, always will. If we had no “Great Depression” to compare this too we would still be seeing the same consequences of such a mood shift.

We created some rather large bubble’s in recent years (decades). Real estate, basic commodities (energy and metals), stock market equities, developing economies (China, India), etc. All fueled by a huge credit bubble. All combining to create one big massive global liquidity bubble. Much like we saw in the “Roaring Twenties” leading up to the “Great Depression”, but even grander in scale.

Giving significant economic events a specific name, like “Tulip Mania” (1637), “South Sea Bubble” (1720), “Great Depression” (1930’s), “Asian Flu” (1997), etc. or keeping them nameless, using them for comparison, or not, still puts us squarely in the moment we are in.

That all said, what drives mass psychology are circular feedback mechanisms. A negative mood makes people more negative, thus causing more people to become more negative, and so on. Being afraid to compare this to the “Depression” can amount to burying your head in the sand. Instead, calling a spade a spade can get us (the mass collective mood) right to where it eventually needs to be in order to let the pendulum start to swing the other way.

Mass psychology does not shift into the other direction, back to optimism, till it reaches a bottom. Bottoms and tops are relative, we can’t know when we’ve actually reached one till after it has passed. Once at the bottom it has nowhere else to go but up. We see this directly in the stock markets all the time and very successful investors live by the contrarian mantra: “buy when everyone else is selling and sell when everyone else is buying”.

Stocks reach their major peaks and bottoms during periods of extremely high transaction volumes. The masses move in to buy when prices are high, after seeing prices rise continuously, and everyone singing the praises of “company X”, they finally believe it can only continue to go up. But now that everyone and their dog has bought in there is no one left to keep pushing prices higher, so it starts to fall. Panic sets in and more sell, driving it lower. At the point where the majority gives up we see another huge volume spike as they all sell out, capitulation, and everyone is claiming that “company X” is a piece of crap. This is however one hell of a buying opportunity for those willing to take a risk.

We are our own worst enemies and get sucked into doing what everyone else is doing. So many people are in trouble over their homes because they paid too much as they bought into the real estate market, and it’s hype, right at the top. They maxed out credit cards because it was easy to do and everyone else was doing it to buy the latest and greatest flat screen T.V.’s, gas guzzling SUVs, over priced stocks, etc. Speculative investors rushed in to buy oil contracts as it was soaring well past $100 a barrel. Large financial institutions were scrambling over each other to buy ABCP (asset backed commercial paper - or all those bad mortgages, on over priced homes, bundled into chunks). Money was flowing around at lightning speed and it looked like there was no end in sight, to those blinded by it.

The chickens have only just started to come home to roost. Years (decades) of that kind of excess does not unwind itself in a matter of months. Though today’s internet connected society and instantaneous digital currency transfers seems to speed the overall process up. Expect volatility as we have entered “The Age of Turbulence” as Alan Greenspan puts it in the title of his autobiography.

But we still need to be careful with the terminology we use, and don’t use at times like this. Mass psychology can become dangerous when a mob mentality kicks in. Major periods of deep global pessimism have sparked wars, at its extremest of examples. When the collective mood reaches it’s bottom, the gloves come off.

With millions of people facing job losses the talk of monopolies, should that sentiment grow, could bite Google in the ass.

Posted on Sunday, February 22nd, 2009

Topic = Internet

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