The growing contagion problem from bad moods

Here is my next column from Bloomberg View, here is one excerpt:

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…

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.

Do read the whole thing.


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