Zbigniew Piekarski on The herd mentality
"Fear is the foundation of most governments."
- John Adams, leader of the American Revolution, 1776.
A central hypothesis in socionomics postulates that changes in social mood power economic, social and historical events. Economic activity, the types of laws that we have and even outbreaks of war are not the causes of social mood change, but the result of changes within it. The effects then feed back into the social mood and produce even more heightened emotions, which then demand even more extreme measures. The stock market can be seen as being a thermometer of that social mood. When optimism prevails, it rises; when pessimism rules, it falls.
We are animals that herd, and any explanation that does not take this into account is mere commentary. Herd instinct prevails and demands conformity. This can be seen time and again, especially at market peaks. In late 1999, all brokerage houses in the USA fired their bearish analysts and Louis Rukeyser (who can now be seen on CNBC) fired Gail Dudak from Wall Street Week for warning of the possibility of a rapid decline. In August 2000, Tony Dye, who was a chief investment officer for Phillips and Drew in London and had one of the best fund performance records for over 15 years, was forced out of that establishment for continuing to maintain his bearish stance. In January 2004, the Wall Street Journal kicked out Gary Shilling, a long-time participant and the only consistently bearish economist from its panel. Extremes of conformity are the first signs that not all is right with the social order.
Perhaps March 29, 2004 will not be treated as a day of significance by historians in the hallowed halls of academe, yet two events in the cradle of Roman Catholicism and one in the time center of the World suggest that the positive optimism that had prevailed is about to change towards the negative.
In the Republic of Ireland, the smoking of tobacco in all workplaces and public places was banned, and this ban had the support of the majority of the population, including smokers. Also on that day and in the same place, over 5,000 individuals voluntarily declared that they were liable to tax on their offshore bank accounts. This is happening in a country whose popular culture revolves around smoke-filled public houses and where in June 2002 an investigative report running to more than 10,000 pages implicated Charles Haughey, a former prime minister, and many of the political and business elite of large scale and systematic tax evasion running for over 20 years.
The significance of these two acts are as follows. The Republic of Ireland was one of the first to experience an unprecedented economic boom. Now there are signs of stress and of it ending. The subconscious belief of the herd is that the good times will continue only if they can reform and improve human nature and their own cultural predisposition.
The other event of significance happened in the UK in the realm of the prevention of money laundering regulations.
Unknown to many, this legislation arose in order to curb the excesses of a committee who took secret cash donations to run the re-election campaign for a president of the USA. They succeeded and Nixon won by a landslide as the social mood was buoyant, the stock market high, and peace was declared in Vietnam. Towards the end of 1972, the mood changed, the market started to fall, and then came the OPEC oil embargo and Nixon resigned. In 1973, the term 'money-laundering' was first used by newspapers reporting on the Watergate allegations, and in 1982 it first appeared in a political and legal context.
By 1993, the prevention of money laundering had evolved into a tool to trace the illegal gains of crime, such as drugs and prostitution, and various bodies appeared in each and every country and each international organization designed to provide a solution with their own set of rules. The events of 9/11 added another dimension, and terrorist financing became yet another reason why the various acts had to be modified and improved upon.
Initially, the whole paraphernalia of money laundering reporting was confined to financial institutions, but in the UK, as of March 29, this has been extended to include all businesses that accept large cash payments, such as car dealerships, auction houses, art galleries, jewelers and estate agents.
Companies are now required to confirm the identity of customers paying large sums in cash, appoint a money laundering reporting officer and train staff in money laundering detection procedures. All records of transactions must be kept for five years, as companies must be able to respond to document production orders served by the law enforcement community in the event of an investigation, and firms will also have to pay an annual fee for each of the premises they are obliged to register.
If they do not have the proper systems and controls, then the penalty is two years' imprisonment. If they fail to report a suspicion of money laundering or tip off the offender, then the penalty is five years, and should they actually assist a money launderer, then it's prison for up to 14 years.
For accountants and other advisers, the new definition of the legislation now covers any financial crime, and has - crucially - no minimum limit. People are now taken to be engaging in money laundering if they conceal, disguise, convert or transfer criminal property; if they enter into any arrangement which they know or suspect facilitates the acquisition, use or control of criminal property by another person; or if they acquire, use or take possession of criminal property themselves. Criminal property can be the proceeds of any one of the thousands of crimes on the statute books, including tax evasion and the proceeds from bribery and corruption.
In all of this, accountants are in a very difficult position, as they are unable to claim legal professional privilege (as solicitors can) and must report any suspicions to the National Criminal Intelligence Service (NCIS). Otherwise, they are committing a criminal offence.
The event of significance is as follows: the NCIS has admitted that it has been swamped with accountants reporting their clients for suspicious activities. You too are affected in more ways than you think. To be continued next week...
- John Adams, leader of the American Revolution, 1776.
A central hypothesis in socionomics postulates that changes in social mood power economic, social and historical events. Economic activity, the types of laws that we have and even outbreaks of war are not the causes of social mood change, but the result of changes within it. The effects then feed back into the social mood and produce even more heightened emotions, which then demand even more extreme measures. The stock market can be seen as being a thermometer of that social mood. When optimism prevails, it rises; when pessimism rules, it falls.
We are animals that herd, and any explanation that does not take this into account is mere commentary. Herd instinct prevails and demands conformity. This can be seen time and again, especially at market peaks. In late 1999, all brokerage houses in the USA fired their bearish analysts and Louis Rukeyser (who can now be seen on CNBC) fired Gail Dudak from Wall Street Week for warning of the possibility of a rapid decline. In August 2000, Tony Dye, who was a chief investment officer for Phillips and Drew in London and had one of the best fund performance records for over 15 years, was forced out of that establishment for continuing to maintain his bearish stance. In January 2004, the Wall Street Journal kicked out Gary Shilling, a long-time participant and the only consistently bearish economist from its panel. Extremes of conformity are the first signs that not all is right with the social order.
Perhaps March 29, 2004 will not be treated as a day of significance by historians in the hallowed halls of academe, yet two events in the cradle of Roman Catholicism and one in the time center of the World suggest that the positive optimism that had prevailed is about to change towards the negative.
In the Republic of Ireland, the smoking of tobacco in all workplaces and public places was banned, and this ban had the support of the majority of the population, including smokers. Also on that day and in the same place, over 5,000 individuals voluntarily declared that they were liable to tax on their offshore bank accounts. This is happening in a country whose popular culture revolves around smoke-filled public houses and where in June 2002 an investigative report running to more than 10,000 pages implicated Charles Haughey, a former prime minister, and many of the political and business elite of large scale and systematic tax evasion running for over 20 years.
The significance of these two acts are as follows. The Republic of Ireland was one of the first to experience an unprecedented economic boom. Now there are signs of stress and of it ending. The subconscious belief of the herd is that the good times will continue only if they can reform and improve human nature and their own cultural predisposition.
The other event of significance happened in the UK in the realm of the prevention of money laundering regulations.
Unknown to many, this legislation arose in order to curb the excesses of a committee who took secret cash donations to run the re-election campaign for a president of the USA. They succeeded and Nixon won by a landslide as the social mood was buoyant, the stock market high, and peace was declared in Vietnam. Towards the end of 1972, the mood changed, the market started to fall, and then came the OPEC oil embargo and Nixon resigned. In 1973, the term 'money-laundering' was first used by newspapers reporting on the Watergate allegations, and in 1982 it first appeared in a political and legal context.
By 1993, the prevention of money laundering had evolved into a tool to trace the illegal gains of crime, such as drugs and prostitution, and various bodies appeared in each and every country and each international organization designed to provide a solution with their own set of rules. The events of 9/11 added another dimension, and terrorist financing became yet another reason why the various acts had to be modified and improved upon.
Initially, the whole paraphernalia of money laundering reporting was confined to financial institutions, but in the UK, as of March 29, this has been extended to include all businesses that accept large cash payments, such as car dealerships, auction houses, art galleries, jewelers and estate agents.
Companies are now required to confirm the identity of customers paying large sums in cash, appoint a money laundering reporting officer and train staff in money laundering detection procedures. All records of transactions must be kept for five years, as companies must be able to respond to document production orders served by the law enforcement community in the event of an investigation, and firms will also have to pay an annual fee for each of the premises they are obliged to register.
If they do not have the proper systems and controls, then the penalty is two years' imprisonment. If they fail to report a suspicion of money laundering or tip off the offender, then the penalty is five years, and should they actually assist a money launderer, then it's prison for up to 14 years.
For accountants and other advisers, the new definition of the legislation now covers any financial crime, and has - crucially - no minimum limit. People are now taken to be engaging in money laundering if they conceal, disguise, convert or transfer criminal property; if they enter into any arrangement which they know or suspect facilitates the acquisition, use or control of criminal property by another person; or if they acquire, use or take possession of criminal property themselves. Criminal property can be the proceeds of any one of the thousands of crimes on the statute books, including tax evasion and the proceeds from bribery and corruption.
In all of this, accountants are in a very difficult position, as they are unable to claim legal professional privilege (as solicitors can) and must report any suspicions to the National Criminal Intelligence Service (NCIS). Otherwise, they are committing a criminal offence.
The event of significance is as follows: the NCIS has admitted that it has been swamped with accountants reporting their clients for suspicious activities. You too are affected in more ways than you think. To be continued next week...
