Shalom Hamou's  Instablog

The Market Crash being a switch from a period of Irrational Exuberance to a period of Deep Depression I decided to try to draw a parallel between a collective bipolar disorder in order to predict the occurrence of a Market Crash, the stage of the switch between a maniac state to a depressive state.

_{The Expression Operation TWIST Again I minted has been the subject of abundant yet shameless plagiaries. I consider them a tribute by those who have neither the creativity nor the intelligence to understand the concept.}

But how do we know when irrational exuberancehas unduly escalated asset values, which then become subject tounexpected and prolonged contractions as they have in Japan over thepast decade? And how do we factor that assessment into monetary policy?We as central bankers need not be concerned if a collapsing financialasset bubble does not threaten to impair the real economy, itsproduction, jobs, and price stability. Indeed, the sharp stock marketbreak of 1987 had few negative consequences for the economy. But weshould not underestimate or become complacent about the complexity ofthe interactions of asset markets and the economy. Thus, evaluatingshifts in balance sheets generally, and in asset prices particularly,must be an integral part of the development of monetary policy.

Let's look first at the definition of a bipolar disorder.

As any psychiatrist knows a bipolar, although he knows exactly when heis a depressive state he is the last to know when he is in a manic state.

Financial crises are characterised by discontinuous breaks in market pricing the timing of which by definition must be unanticipated - if people see them coming, then the markets arbitrage them away.

We have to detect what are the symptoms which lead to the switchbetween that manic state to depression.

^{Deus in Machina: Alea Jacta Est.}

In order to detect a collective pattern I have tried different Google Trends on several themes that are common to people who are in that state. I couldn't find something that would be meaningful enough. TillI asked the Doctors. The first fact that tells a Doctor that a patient is switching is the fact that he start to feed himself again. I tried a Google Trend on Food and I found my leading indicator.




As we can see in the chart above in the news reference volume the 2008 crisis was lead in May-June 2008  with the crash proper in October. Similarly another top occurred in March 2010.


^{Definitely we have the symptoms of an impending depression.}



_{The Conundrum of the Invisible Hand of Irrational Exuberance.}


Disclosure: No Positions