While, as our readers are aware,1 we derived from recent stock market micro behavior that there was a significant risk for a further stock market melt-up (and since we published our post, the S&P 500 is up more than three percent once again), this additional ascent seems, on the face of it, little less than “surprising” given that news headlines are dominated by violent unrest not only in the United States but around the world.
Is appears little dared to note that the direction of the violence goes, in some ways at least, against the rule of law, specifically as one prominent demand by protesters, already starting to be heeded in part by public institutions, is to “defund the police”.2
The rule of law, according to the logic of the matter, is an essential requirement for attracting and enabling investments, as investments require the ability to plan far into the future. Productivity gains and with them an increase both in corporate profits as well as in the average standard of living require investments. So why would the stock market rise in the face of efforts to undermine investments, productivity, profits and overall societal wealth?
Possibly, just possibly, because those risking their own money in financial markets (need to) try to incorporate as much dispersed pieces of critical information as at all possible in a logically consistent manner – the traditional meaning of “to speculate” – in order to make profitable decisions. And maybe a slight majority of financial market participants has taken notice of research showing that “Extreme protest actions reduce popular support for social movements.”3
Investors might “speculate” that the more violent the protests targeting – to some extent at least – the rule of law, the less likely it may become that the Republican presidential candidate who appears to have said that he “wants law and order” will lose his bid for reelection in November. This may appear to be “thought around two corners” if you will, but science always needs to ask for explanations for observed phenomena. Investors typically hate uncertainty and, therefore, unrest. But as is so often the case, the reasonable answer to a question may once again not be one of “either/or” but rather of “how much”, may hinge on the logical category of measure. Chaotic systems such as those governed by mass psychology do not behave in linear ways but prominently exhibit the core constituent of actual logic: the (often sudden) change of a given quality, mediated by measure, into its (own) opposite._____