Bad Moods Are the Other Global Migration Problem
The unsettling reality of today’s world is that a bad mood can move readily from one country to another, even when events on the ground call for moderation or optimism. Or in the language of financial economics, emotional and ideological contagion is becoming a more important source of systemic risk. The spread of revolutions during the Arab Spring showed how trends can move from one nation to the next, and now it seems similar processes are influencing wealthier nations as well.
Consider Australia. The country has not had a recession in 25 years, unemployment is currently a modest 5.8 percent, and the country has handled the China slowdown and the decline in commodity prices fairly well. The boom days are gone, but Australia is still growing at an annual rate of slightly over 3 percent.
Yet political dissatisfaction runs rampant. A recent survey from the University of Canberra and the Museum of Australian Democracy estimated that public satisfaction with Australian democracy was about twice as high in 2007 than it is today. This was reflected in the July 2 Australian elections, where the smaller parties garnered almost one-quarter of the votes.
Over half of the respondents said they believe Australian government is run “entirely” or “mostly” by “big interests.” In reality, the data suggest that, of all the OECD countries, Australian policy is most like to redistribute income to the bottom fifth, rather than to the middle or upper classes.
Australia does have problems and identity crises of its own, but still it seems the country has caught a dissatisfaction bug from abroad, most plausibly from the pro-Brexit forces in the U.K., the Trump and Sanders movements in the U.S. and the common global feeling that much of the world is slanting askew.
For some time now, equity returns in Australia have had one of the highest correlations with equity returns in the U.S., and some of this probably has to do with the transmission of moods and not just shared economic shocks. What’s changing is that the risk of negative mood transmission may be going up, even though the Australian economy still appears to be fine.
It is a common theme in political science that low levels of trust in government tend to translate to inferior political performance. Trusting citizenries give their governments the resources to produce valuable public goods, as is often the case in the Nordic economies, but falling trust leads to higher social conflict and corruption. And so, because of its recent pessimism, Australia may be on the verge of losing some of the good governance it has enjoyed for the last few decades.
The broader and more disturbing implication is that the entire global economy may be more vulnerable to mood swings. Our peers influence our moods, but today’s peers are more global than ever because of social media and the spread of satellite and cable television. That could make a given mood swing in one nation or region more potent and further-reaching than before.
Insofar as pessimistic moods spread across borders more readily, the notion of safe havens will weaken. There is a longstanding result in financial research that in bad times national stock markets move together more closely, and in ways that may not be justified fully by fundamentals. It is now common for some cross-country stock indices to have correlations as high as 0.8, which was unprecedented several decades ago. In the 1970s those same correlations might have been 0.4 or lower yet.
Unfortunately, contagion may be more dangerous than in the past, because right now the world is not in such an ideal place. There is slow productivity growth in most of the wealthiest nations, an increase in the overall global rate of violent conflict, and a measured decline in political freedom around the world.
As for finance and investment, higher contagion rates will mean that many assets have higher systemic risk and lower diversification value, because they are not well insulated from the travails of the global economy. “Decoupling” is now recognized to be largely a myth. That may be one reason why negative nominal yield securities are so popular and seem to be sustainable, contrary to expectations but a few years ago.
The growing contagion of mood swings also may be a factor behind the slowdown in economic globalization. Why go to the trouble of investing abroad, for instance, if those assets do not yield much risk protection compared to one’s home market?
The most disturbing possibility may be that in today’s world, bad moods spread across borders more readily than good moods. The most nefarious sign of this is the apparent effectiveness of social media in radicalizing some people at a distance and turning them into violent perpetrators.
If more financialized forms of negative emotional contagion grow more broadly, the pessimistic sentiments in today’s global economy may be around for a long time to come, even when they are not fully justified by the facts. Pessimistic expectations can turn into self-fulfilling prophecies by limiting investment and risk-taking.
Most likely, we’ll have to get used to a more mood-ruled world, and those will start off as being the moods of others, not our own. How do you feel about that?
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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