According to this very interesting article in The Sacramento Bee, the Global Economy [is] in Worst Shape Since 2009. Noting that six of the seventeen countries that use the Euro are in recession [including Spain, where protesters are pretending to be V], that the U.S. economy is struggling [yet again], and that the economic superstars of the developing world (namely, the BIC) are in no position to come to the rescue — since they are struggling too, the article claims that this crisis is knocking at all our doors.
But the reality is that crisis, while coming, will not occur until the world accepts it. Economies no longer follow GDP and growth, they follow market exuberance — the kind where housing prices double, where billions are made on junk bonds and collateralized debt obligations, and companies with zero sales get 100 Million valuations, and then go public with massive debt for no apparent logical reason. And it’s not the economic exuberance measured by CERES last year in their Index of Economic Exuberance where they tried to measure what’s been happening to whom since the financial crisis of 2008. (In this one-shot analysis, CERES developed a metric to measure whether a country’s macroeconomic performance is stronger or weaker relative to the prevailing performance prior to the advent of the global financial crisis in 2007 using output, unemployment, domestic demand, bank credit, inflation, and the real exchange rate.)
As long as markets are trending up, investment money flows freely. As long as investment money flows, people keep borrowing. As long as people keep borrowing, they keep spending. And as long as they keep spending, the economy goes up, even if production is falling, unemployment is high, and the cost of living is skyrocketing. And if the feds keep pumping money into the economy, the press keeps painting a rosy picture, and corporations take efforts to keep prices down, the economy can keep chugging along at an upward pace for months, and in the past, even a year or two, after everything should come crashing down. (The Zeroes proved that!)
Robert J. Shiller tried to capture the underpinnings of this phenomenon in his book, Irrational Exuberance, first published in 2000, and then revised in 2006, but even behavioural economics, in its current state, can’t capture the absurdity of what drives today’s market-driven economies.
But a technology may be near at hand. In the marketing domain, we have a new technology called sentiment analysis which uses NLP (natural language processing), CL (computational linguistics), and text analytics to identify and extract subjective information in source materials. Enabled by technologies such as the AlchemyAPI, which attempt to identify positive or negative sentiment within any block of text, the goal of sentiment analysis is to determine the attitude and tone of a document.
If we could apply such technology to all market analysis and market sentiments from investors, media, and influential self-publishers (journalists, analysts, and bloggers), it might be possible to see how the markets are moving and detect not only exuberance, but irrational exuberance. This is not as far fetched as it seems. As per an article in the MIT Technology Review in late 2010, the (gasp!) Twitter Mood Predicts the Stock Market (and since stock markets are among the primary drivers of economies, it’s a great start). According to the article, research conducted by Johan Bollen and colleagues determined, with an analysis of almost 10 Million Tweets from 2008 on, that stock market movements could be predicted with this data up to 6 days in advance! (Using a calmness index, they found an accuracy of 87.6% in predicting the daily up and down changes in the closing values of the Dow Jones Industrial Average. That’s a success ratio that will make your average trader blush!)
Twitter data alone would not be enough, but as we are better able to harness distributed computing power and the limits of Big Data approach the realms where even Chess becomes a solvable problem, analyzing all market related data for a day will become possible, and maybe we will be able to create an exuberance index and get a better grip on when a recession, even if overdue, will be upon us. (And then, as Supply Managers, determine the best times to sign contracts, lock in prices, and guarantee supply.)