May 2000, The Elliott Wave Theorist
Socionomic Perspective on the Microsoft Case
The Timing of Attacks on Successful Corporations
In 1890, a year after a new all-time peak in stock prices that would last a full decade, Congress passed the Sherman Act, which in vague language outlawed “trusts,” which in fact means companies that service a large market without significant competition. Take a look at the comments above the graph of stock prices in Figure 1. Observe that the government’s antitrust suits against U.S. corporations, particularly the landmark suits that make the history books, consistently come near stock market peaks, usually slightly afterward. Often the correlation is so close as to be within weeks of a major top that leads to declines in the averages of 50% or more.
Railroads were arguably the most successful U.S. industry in the late 19th century. On the run-up to the stock market peak of June 1901, the stock of Great Northern Pacific railroad, which later became part of Northern Securities Co., increased more than ten fold in less than a month. Shortly thereafter, the government sued Northern Securities Co. in the first major application of the Sherman Act. In 1906, the year of a peak that was not exceeded for ten years, President Theodore Roosevelt filed his famous suit against one of the country’s largest company, Standard Oil. During the Panic of 1907, the President offered no objection to a merger involving U.S. Steel when asked to do so and explicitly directed his attorney general not to bring an antitrust action against International Harvester. In 1911 and 1912, after stock prices had recovered, President Taft’s antitrust division filed suit against both companies. A month after the all-time high of 1929 and before the crash, the U.S. attorney general announced that the Justice Department would deal “vigorously with every violation of the antitrust law.” In 1930, the Justice Department filed suit against one of the biggest success stories of the 1920s bull market, RCA. In 1937, the year of a major top in stock prices, the government sued aluminum maker Alcoa. The antitrust movement saw little action throughout the nearly two-decade long bull market of 1949-1966/68 until the very end, when the stock market reached a top of the same Elliott wave degree as that of 1937. In 1967, the government ordered Proctor & Gamble to divest itself of Clorox, and in January 1969, a single month after the most speculative bull market peak since 1929, the Justice Department sued the country’s most successful company, IBM. From 1982, antitrust activity again virtually disappeared during nearly two decades of bull market. On May 18, 1998, just one month after the final high in the advance-decline line, which had risen for 24 years, the Justice Department sued the world’s most successful company, Microsoft. On April 3, 2000, a single week after the closing high in the NASDAQ 100 index, the court sided with the U.S. Justice Department in ruling that Microsoft had unlawfully violated the Sherman Act. Like his predecessors at prior historic turns, U.S. District Court Judge Thomas Penfield Jackson, representing “the people,” has pursued and denigrated Microsoft with a fervor that borders on the evangelical. His desire to break up the most successful company of all time as measured by percentage gain in value per year by a major corporation is a passion born of the passing of a social mood peak of even higher degree than that of 1929. As you can see from this century-long history, major antitrust suits coincide remarkably consistently with the passing of major stock market tops.
A fundamental analyst might guess from this evidence that antitrust suits cause stock market declines. This response does not answer the question of why the entire economy would be affected by a single suit, an idea bordering on the preposterous. Presumably, competitors would benefit as the target suffered, neutralizing any broad effect. The erroneous conclusion, moreover, is utterly negated by the fact that the target of the latest suit, Microsoft, tripled in price after the suit was brought, with the last doubling taking place after the November 1999 “finding of fact” in which Penfield ruled, “Microsoft Corp. is a monopoly with practices that wounded competition and consumers and hurt innovation.” More important, and typical of fundamentalist explanations, the suggestion of a causative link between antitrust actions and falling stock prices goes against the assumptions of many other fundamental analysts. The majority of economists believe (mistakenly) that “trust-busting” is good for the economy. If they were correct, and if their assumption that the economic performance dictates stock market trends were correct, then stock prices should rise after an attack on a presumed monopoly, not fall. Finally, this conclusion about causality does not answer the question of why antitrust suits are typically brought after the stock market has climbed for years or even decades to a state of overvaluation in a climate of rampant speculation rather than at any other time. For the most part, the Justice Department leaves successful corporations alone near the end of bear markets and through 90% - 100% of bull markets. What is really going on?
The social mood shift that occurs at the transition from bull market to bear includes a change in general attitudes toward the financial success of others. Society moves from a feeling of support toward one of resentment. During a bull market, the social mood is directed toward rewarding achievement; during a bear market, it is directed toward punishing it. The bear market mood begins to creep into collective thinking late in a bull market. Democratic governments are instruments of egalitarianism. At some point, their representatives cannot stand watching some companies succeed wildly more than most others. When the bull market reaches exhaustion, the old supportive mood begins to crumble, and the new punitive mood bursts forth. One result of this metamorphosis in social character is governmental attacks against highly successful enterprises. In fact, they typically start with a major attack against the most successful enterprise of the time. This socionomic perspective is quite comfortable with the fact that Microsoft tripled after the suit was announced. The environment of stock market tops is one of rampant speculation fueled by a manic psychology. Reason and outside event causality are no part of this landscape. Bullish fever among speculators and righteous anger among egalitarians can coexist for brief periods as major social mood tops are being formed, thus producing the anomaly of a soaring stock price for a company that is being attacked in court by its own government.
The Timing of Permissiveness with Respect to Successful Corporations
Antitrust action typically continues throughout most of a bear market, following through on the momentum of the initial thrust from the top. As bear markets come to an end, the old mood of resentment evaporates. The timing of this correlation is just as remarkable as that for tops, as demonstrated by the comments below the graph of stock prices in Figure 1. At the 1914 low, the Clayton Anti-Trust Act reined in the broadness of the Sherman Act. In 1920, as the market was approaching the low from which the bull market of the 1920s would erupt, the Supreme Court “rejected the challenge to Andrew Carnegie and J.P. Morgan’s formation of U.S. Steel, saying “mere size” is no offense. Near the 1932-1933 lows, the government settled its case against RCA, and the National Recovery Act suspended antitrust law for two years. Near the 1942 low, the War Production Board offered grants of immunity from antitrust action, and the government suspended many of its antitrust cases. A year after the 1949 low, the government settled its suit against Alcoa without achieving its objective of breaking up the company. In 1982, after a sixteen-year decline in real stock prices, the Justice Department abandoned its suit against IBM. Like its attacks, the government’s major acts of reconciliation and permissiveness typically occur within weeks or months of a major turn in the stock market, this time to the upside. In both cases, its acts are in response to, and part of, the changing social mood.
One could try to argue that once a stock market decline goes far enough, corporate fortunes in general are so poor that there is no longer any need to punish trusts. However, if the government’s theory of monopoly power were correct, a contracting business environment would have no effect on its relative position. Further, this view does not explain why in some cases the government pulls back after stock prices fall 50% and the economy is in recession and in other cases after stock prices fall 90% and the economy is in depression. There is no “magic level” at which governments stop their attacks. They stop when the social mood reaches bottom, wherever that may be. The exact timing and level of that event are determined by the wave pattern.
A Socionomist’s Response
With regard to the question posed at the outset, then, the answer from a socionomic perspective is this: The Justice Department’s antitrust action against Microsoft has had, and will have, no effect whatsoever on the overall trend of the stock market (just as it had no effect on the stock price itself). The causality is the other way around: The exhaustion of an extremely positive social mood trend, as reflected by stock market statistics, affected the Justice Department’s emotional mindset and caused it to capitulate to a desire to attack the most successful corporation it could identify, which was Microsoft.
In contrast to the uselessness of conventional assumptions about the direction of causality between social events and mood (see opening paragraph), the socionomic perspective allows a basis for at least some limited probabilistic forecasting. With a knowledge of the Wave Principle, we can roughly anticipate the timing of major antitrust actions and later, their resolutions. For example, we can predict that no major government attacks on corporate success are likely from the time of a stock market bottom of Cycle degree or larger through most of the ensuing bull market. We can also predict continual government attacks on corporate success from the time of a stock market top of Cycle degree or larger through most of the ensuing bear market (the later ones typically being of lesser import than the first). We can further state that when a major antitrust action takes place after a long period of non-action, it is a sign that the social mood trend of at least Cycle degree is likely changing from bull to bear. We can also state that when a major antitrust action is resolved after a long period of conflict, it is a sign that the social mood trend of at least Cycle degree is likely changing from bear to bull. We can say these things because antitrust actions and resolutions do not occur randomly; they occur at specific times in response to a psychological environment involving a major extreme in social mood and its reversal.
The Timing of Attacks on Monopolies
First, we must define our terms. A monopoly is an entity that holds an economically preferential position due primarily to the use of force. Monopolies are maintained by the force of the state in favor of selected individuals, guilds, companies or state enterprises. European monarchs routinely granted monopolies on specific markets to individuals. Guilds successfully barred competition when the power of the state was behind them. Corporations and state enterprises such as the U.S. Postal Service and the U.S. Mint enjoy monopoly privileges. Persons attempting to provide services in competition with entities such as these are aggressively punished by fines and imprisonment.
A monopoly differs from an especially successful company in that the latter is always at the risk of competition. Monopolies have survived for centuries despite bad products and services. On the other hand, every non-monopoly company is subject to collapse if its products or services deteriorate, if it misses the next innovative trend in its field, or if the very field it is in becomes passé. Some people claim that an especially successful company can become a monopoly simply because its success gives it “power” to destroy the competition. It is true that immense success can allow a company to make deals with other businesses to induce them to deal with it exclusively. However, this condition is different from dealings with a monopoly because it is voluntary. The other business can always refuse if it so chooses; there is no gun behind the deal. Further, such “power” is temporary. To the extent that any successful business engages in elaborate restrictive schemes, it will, in the long run, drain its resources and weaken itself, allowing future competitors to gain an edge. Competition, moreover, is not fixed to any number of firms existing at a particular time. A successful company frets as much over potential competition as over actual competition. It knows that the slightest slip in top quality goods and services will endanger it immensely. No matter how hard it may try, no company can keep a premier position forever. The natural order of things eventually reduces the relative success of every exceptional enterprise.
This distinction between actual monopolies and purported monopolies that are not is important for the purposes of our socionomic thesis regarding “trust busting.” It allows us to see the commonality between the suspension of government’s actions against successful non-monopoly corporations near stock market bottoms and its simultaneous initiation of attacks on actual monopolies.
Figure 2 [not shown] shows times when the U.S. government has acted to limit or break apart the monopoly power of the original U.S. phone company, AT&T. Under the Communications Act of 1934, the U.S. government recognized AT&T as a natural monopoly and allowed the communications carrier to operate without competitive forces. In 1949, the year that a 20-year bear market pattern in real stock prices (not shown) ended, the U.S. Justice Department cited AT&T for “maintaining a monopoly” that violated the Sherman Act. On November 20, 1974, the month between the final lows in all the stock market averages following declines of 45%-74%, the Justice Department sued AT&T for monopolizing the telecommunications industry. In 1982, the year that real stock prices bottomed, AT&T was ordered to divest itself of all seven of its local operating companies and cease offering local phone service. As a result of that action, the monopoly no longer existed, and the telecommunications industry exploded with innovation so dramatically that in 15 years, many of the most successful and entrepreneurial companies on earth are those associated with telecommunications.
The more entrenched monopoly power of the U.S. Post Office survived the bear market of the 1970s, but it might not have if the decline had been one degree larger. In 1970, the two-century old U.S. Post Office was transformed from an agency of the executive branch of the U.S. government to a “quasi-independent postal corporation” modeled after a private sector firm. At the same time, notes a “History of the Postal Monopoly in the United States” from the Journal of Law and Economics, the governors of the new U.S. Postal Service established a regulation allowing them “to surrender bits and pieces of their exclusive grant to preserve the substance of the monopoly.” It adopted this policy to head off a rising chorus of public attacks on the Postal Service monopoly. As the law journal history notes, the attacks themselves “are extraordinary because ever since its original colonial times, the postal monopoly has seemed inviolable.” In 1973, the House of Representatives convened hearings on mail delivery restrictions that had been in place for more than 150 years. In October 1974, the very month of the bottom in the S&P, the first official suspension of prohibitions on private carriage were put into effect for certain items. As a result, Federal Express, UPS and even the Postal Service itself brought a burst of innovation to the delivery industry. Congress was still debating a number of bills calling for the privatization of mail delivery as late as June 1982, two months before the final low of a 16-year decline in real stock prices. Things changed when the social mood trend turned up. In October 1982, as the Dow made its first decisive rise above 1000, the Reagan administration “decided for now to de-emphasize its opposition to the U.S. Postal Service’s mail monopoly.”
Monopoly privileges stifle innovation, so when monopoly power is removed, the industry is allowed to develop. In contrast, upon every single antitrust action against successful non-monopoly corporations, innovation did not immediately burst forth. The reason is that each of these successful companies, in a climate of free competition, was precisely the one responsible for the immense innovation that had already occurred. These disparate results confirm the difference in the two types of entities.
We can now see that the principle behind the government’s actions with respect to these disparate entities is the same: At tops, the government initiates force to stifle free competition and success; at bottoms, it removes force that has stifled free competition and success. This latter impetus takes two forms: withdrawing antitrust actions against successful non-monopoly companies and dissolving actual monopolies. With this knowledge, we again have the ability to do some limited probabilistic forecasting both in terms of predicting actions against monopolies and predicting major social mood changes when those actions occur.