Waves, Markets and the Confidence Game

There is a school of thought that sees clear patterns in economic activity, especially as measured by markets in stocks and commodities. One group coalesces around the Elliott Wave Principle. 

In the 1930s, Ralph Nelson Elliot, an American accountant, observed that markets move in clear cycles, commonly called Elliott waves. His analysis identified the key attributes of these cycles -- dominant-trend 5-wave patterns and corrective-trend 3-wave patterns. Moreover, this pattern self-replicates fractally as you move to larger or smaller time scales, from minutes to centuries. The patterns themselves, as it turns out, also reflect some interesting mathematical affinities: fibonacci progressions and golden ratios. 

To his credit, Elliott did not try to identify a cause, other than a collective human personality, or "mood", that reflects the cycles and mood swings of countless individuals. He accepted the fact that the entire system was massively complex, chaotic even, and the cycle was way bigger than any individual actors. His goal was to build in a certain patience, as observers use an understanding of the cycles to pursue their own ends.

In the ‘70s his work was rediscovered by Robert Prechter, a trader at Merrill Lynch, who published Elliott’s findings and became an important theorist for the stock market for the last three decades.

What really interests me about the Wave Principle is that it assumes the dominant role of the collective (un-)consciousness, and that the market indices, like the Dow, are accurate indicators of the general mood.

In the online journal The Scionomist (www.socionomics.net) , an article I found by Euan Wilson, "A Parting of Peaceful Ways: A Socioeconomic View of Civil Wars," correlates market performance and/or GDP per capita to major social events, like civil wars, back as early as 1695 (pretty much the beginning of capitalist markets). The point was that major disruptive events, like wars, follow market declines, and declines follow gains. And that these declines are then manifested in popular fashion and entertainment (“news”), and then, eventually in indicators like peace and war. 

The cycles work in both directions, in terms of mood, in a dynamic pattern: every movement is a correction, positive to negative to positive, down to the smallest scale. If you get the scale right, you might have a picture of the next week, or decade, or century, and place you bets accordingly. Wilson also recreates Robert Prechter’s timeline for these peaks and valleys stretching  back to 0 AD.

I can not judge the accuracy of Elliott’s theory or Wilson’s vision, either as a look backwards or as it comments on our current situation and outlook. In the numbers-driven world of financial markets it seems to have been well tested and is still highly regarded. That said, I’m still not sure that it doesn’t work better after the fact than as a predictor. Or wouldn’t there be a sizable group of people who made a lot of money on this last finance kerfuffle? Oh, wait, there were some people who made a LOT of money on the “meltdown,” weren’t there. Lol.

Looking at these graphs, it’s hard not to think that the “market” is not just analogous to the general mood, it is inseparable from it. The larger the market, the more widespread the cycle. As soon as Rome started to depend on grain from Egypt and other colonies, it was pretty much downhill for the Empire. A bad harvest on the Nile affected the price of grapes in Germany, as well as confidence in the future. "Maybe those barbarians at the gate wouldn’t be such a bad change." Enter, stage right, Dark Ages.

I also get from these graphs that the trend is remarkably up. There is something that drives human beings to consume more, to have more. We have not got past the lesson of the cave: life is fragile and we are in a constant battle for an advantage just in case the harvest does fail. And the cycles tell us the harvests will fail, sooner of later. The models also suggest that this particular crisis has a long way to fall to actually reset to Zero.

By the way, other research I’ve done into these cyclical patterns suggests that perhaps an even better indicator than the Dow or S&P indices might be the ratio of employment to population. Not many of us actually buy or sell equities, but we are all aware if we are employed or not. And it might give us a more meaningful metric in this oxymoronic “jobless recovery.”

In the meantime, this constantly competitive market means there always losers as well as winners. And concentrations of capital mean many more losers, though in capitalist democracies there is also turbulence, so even a loser might think he’s going to be a winner in the future. 

And, that I think, is the driver behind public “mood” -- Confidence. As in, this is in fact a confidence game. The declines we see in financial markets are closely related (if not identical) to confidence in the future -- "this time the lottery will give me what I deserve." So what disruption are we heading for? What sack of Rome awaits us?

I didn’t find much idea in that article of what we should actually do if we do recognize the current trend as a decline. But another Socionomist article, “Sports Scandals and Signs of Shifting Mood” by Gary Grimes, might give us some guidance. Especially if we are celebrities.

Grimes starts by tracking the Tiger Woods story, and especially the point that a number of people knew something about Tiger’s extra-curricular sex life five or six years ago, but the stories never gained any traction with the press or the public until recently. He also makes the point that Tiger began to lose endorsements after the stock market started its decline in 2007. People in a more negative mood were more willing to believe the worst and so his current crisis is another reflection of the deepening bear-market mood.

In fact, Grimes sees a general trend of disillusionment with sports and its stars tracking the emergence of the down market. And he points to one star -- Andre Agassi -- who played the cycles in significant ways. In the bear-market ‘80s he was the wild-child rebel. As the market turned positive he wore white at Wimbeldon and founded a charity. And now he’s back with a tell-all autobiography just right for declining market -- sex, drugs and attitude. Grimes’ advice to Tiger is to consider toughening up the ol’ image, Tiger as predator, perhaps (like the recent Vanity Fair cover shot?).

My advice would be aimed more at the political arena. If we see this as a period of decline, then we understand the appeal of any mad-as-hell rabble rouser. That’s how Obama ran, even if he was an unusually academic sounding rabble rouser. So all that anger may be swirling around out there, and while it hasn’t yet coalesced around anything, it doesn't need to coalesce to disrupt. The wave theory tells us increased bad news will give more credence to somebody who can focus that disaffection. So, we're looking at either chaos or a despot.

Looking at the data, the only thing that really matters is the public mood, and the one way to swing public confidence is to increase employment (and not necessarily GDP, for instance). That would be good for incumbents, and for the country. But for the current opposition party what’s good for the country would be bad for their ambitions, and would be playing against the cycle. And I think we can see how that’s working.

Toyota FAIL: What Toyota Should Know, and Still Doesn't Get

I have spent a fair amount of my professional life talking about the meaning of “brand.” In my experience, everybody knows what a brand is. And nobody knows.

On the one hand, a brand is what we think of a product, how we react to it, emotionally and rationally. And the evidence is that it is mostly emotional reactions that define a company’s brand, just as what makes your friend unique is not their appearance but how that person makes you feel.

The key is, if people trust a brand, they keep buying it. And people trust brands that have a unique identity, providing some reason to buy it rather than a competitor. If customers at some point decide you aren’t true to your brand identity (as they see it), they will go elsewhere. And all the evidence is that once that trust is gone, it’s almost impossible (it takes more than money and time) to regain it.

So, everybody knows what brand is, because a brand is the sum total of what people think about the product. It can be strong or weak, positive or negative, but it’s only “everyone” who defines brand. Companies build strong brands by combining product, advertising, service, etc. into a set of experiences that all reinforce a “personality.” A brand makes a promise. Strong brands keep that promise all the time, every time. A weak brand is almost always an inconsistent brand. One failure can destroy the trust built by many successes. And it’s all up to the customer.

And so when I see companies react the way Toyota is reacting to its current challenges (and Toyota’s reactions are not unique) I’m convinced virtually no one knows what brand really is.

Over decades, Toyota built a strong brand by focusing on product quality. The growth of the Toyota brand was jump started when Toyota made the commitment to entering the US market. By making workers active partners in identifying problems and improving processes, Toyota built quality cars, while cutting the cost of production enough that they had a clear competitive advantage over their competitors. And customers, especially in the tough US market, came to trust the Toyota brand.

Customers flocked to Toyota dealerships, and if they didn't great memorable service, who cared? They got an exceptional product -- reliable, durable -- at a great price.

But now there are other brands that have high quality, like Hyundai, who can push Toyota with lower prices, longer warranties, etc. The brand line up is changing, becoming more "commidified." In this environment, the thinking is that brand differentiation will hinge more and more on the service provided. And the service has to more closely align with the promise made by the brand.

To see your clear advantage in product quality already challenged, and then have the current recall campaigns unravel like they have, Toyota be a feeling shared by a lot of people these days, looking into an economic abyss.

This could be bad. Okay, this is bad, but I think there some things they can do, in fact must do, one way or another, to stop the slide.

The obvious problem, beyond product issues, is Toyota’s perceived coverup. Whether it’s because of Japanese liability laws or attempts to control costs, consumers are clear that they cannot trust Toyota’s assurances, even if they don’t blame the company for the problems. If they can't believe the problems are fixed now, why would they buy a product anytime before they have proof?

Now here’s the point: Toyota has actually been in this situation before. And they pulled off a stunning feat of recovery. In fact they raised their brand perception by an order of magnitude. Only it wasn’t the Toyota brand, exactly. And it was not exactly the Toyota structure, either.

In the mid-80s Toyota, prodded by US dealers and management, decided to compete with Mercedes and Cadillac in the luxury car segment. Most observers thought the move was nuts, but Toyota committed a big chunk of money to design and build entirely new vehicles that could compete with the best vehicles (and brands) in the world. In 1989, after years of work, they launched Lexus. While critics and customers were impressed by initial impressions, they were looking for flaws.

After a couple of months on the market, while the pipeline was full of Lexus vehicles to be delivered to dealerships, Lexus learned there were a few reports of cruise controls that impeded braking and high-mounted stoplights that overheated. Every Lexus sold had these components. To fix the problem every one would have to be recalled – a PR nightmare. Or they could just keep quiet, fix problems as they occurred, and hope it would all blow over.

Lexus management made the decision, counter-intuitive to many, that they would move aggressively to recall every single Lexus. Every customer got a letter, hand-signed by Lexus GM Dave Illingworth. Lexus offered to pick the recalled cars up and provide the customer a loaner (another Lexus). Every fixed car came back washed and with a full tank.

These decisions established Lexus as totally unique, a brand that went far past the expected promise. Instead of a disaster, Lexus had a brand success. The fact that they were forthcoming with information only built the trust with their customers, and the millions who didn’t own one but read about it in Time or the The Wall Street Journal.

So if it worked 20 years ago, why isn’t Toyota doing something similar now? At least in spirit?

Obviously, I don’t know why, though I suspect one issue is that Lexus was, in most respects, an American brand. Outside of a few execs, the parent company never fully accepted Lexus as a part of Toyota. If they were even aware (on a cultural level) of the lessons of the Recall Campaign, they never saw how it might apply to a much larger organization. Even though every brand, at every level, has learned the values represented by the Lexus approach.

Using that experience, and a general knowledge of how successful companies operate, I can suggest some effective ways to protect, if not improve, the Toyota brand. I’m going to ignore Toyota’s concerns for limiting financial and legal liability — but I don’t think they should really affect what I'm proposing anyway. And I’m aiming this at the US market (which is where Toyota’s brand problem seems to be greatest).

First, come clean with customers. I don’t mean releasing sensitive internal memos or memos (at least, not yet). I just went back to the Toyota web page on the recall, and it’s still strictly corporate, “this is what we’re doing,” with no context about the scope (large or small) of the problem or the larger conversation. If I were in charge I would have links to key articles and blogs from across the spectrum. I would make it clear Toyota has nothing to hide, or rather, that Toyota values facts and honesty more than plausible deniability. In other words, I would demonstrate trustworthiness.

Second, consumers need a way to connect to Toyota, to engage when necessary in a conversation with somebody who can answer questions. From Toyota’s point of view, following the principles of the TPS, I would think it critical to get more information about problems directly from drivers, even if it means uncovering more problems. Actually, in the spirit of TPS, especially if it uncovers problems.

Third, I would make dealers an integral part of the process. Make sure that they know exactly what customers know, and make it easy for them to funnel me information about their clients’ needs and concerns.

So far, I grade Toyota’s reaction as a FAIL. Their current TV ad seems to be an apology from the production line workers, which is exactly not where the problem is. Akio Toyoda, the family member who just took over the company, has made some brief apologies, and asked for forgiveness. For what? This may be tuned more to a Japanese audience, but he will probably need a different approach when he gets to Washington in the next couple of days.

As of February 10, based on Toyota’s actions and the chatter out there (you can follow #Toyota on Twitter), they have a real problem. And unless there is some fundamental change in the way Toyota connects to its customer base, Toyota will have a tough row to how. And they should know better than to let this happen.