What the world has been thinking...and how the markets aggregate it.

PORT ELIZABETH - The financial markets are massive global aggregators of both opinion and fact, and operate on a monetary voting system. If the majority of the money feels pessimistically then perceived risk goes up and yields go up to compensate for it via prices going down.

While this is an over simplification, the point is that (at least in the short-term) markets are driven by mass opinion.

With over 100m searches on Google a day, Google indirectly provides a unique tool for analysing what "the world" is thinking about in Google Trends.

In the search engine giant's own words with Google Trends "...you can compare the world's interest in your favourite topics. Enter up to five topics and see how often they've been searched on Google over time. Google Trends also shows how frequently your topics have appeared in Google News stories..."

I find the best way to understand the average internet user is that they are innately lazy.  With everything just a click away, when it comes to search terms (or domains for websites etc,) the magic rule is the shorter the better. For example, have a look at the relative popularity of users searching for "car" versus "cars" versus "motor vehicles":

It is no surprise that the shortest phrase "car" is googled far more often than the other two, despite the fact that they essentially mean the same thing.

So, now that you understand how to pick the correct phrase to find Google Trends with, you can apply this to questions that do effect financial markets and economies.

For example, as the sale of new motor vehicles is seen as an excellent economic indicator, why not look at how many people have been googling to buy a new car? 

The beauty is that this is in fact a leading indicator to even the actual purchase of a new car, as a person will shop around before they buy. Hence, analysing the "buy car"/"sell car" search popularity gives you insight into how many people are probably about to buy/sell a car...before money has even changed hands.

Is there a slight upwards trend from late 2008...? Does it appear to taper off towards the last part of 2009...?

What I find more interesting is the bottom graph, which shows the frequency of the phrase in what Google terms "news" (eg, CNN, Sky, BBC etc. that are all aggregated on Google News).

A visual scan of this bottom graph reveals how the volatility increases from late 2008 onwards. This is probably a consequence of the recent and ongoing motor industry bail out.

Far more interesting than a discussion around cars, have a look at the following graph tracking the googling of the words "recession", "invest", "subprime".

Firstly, "invest" has been relatively stable since as far back as Google Trends shows you.  This is to be expected, as the term is not uncommon, yet would be used for a range of reasons.

Secondly, notice how the popularity of the uncommon search phrases "recession" and (especially!) "subprime" is basically nil...until suddenly they start effecting the world. From the beginning of 2007 these little phrases have been insistently pushed by the financial media, cited in annual reports to shareholders, muttered by brokers and generally hyped up.

It is also interesting to see how "subprime" spiked the earliest and rose the most in 2007, but its popularity has from the latter part of 2008 been replaced by "recession".  In fact, the latter became so popular at the start of this year that it even rose above that of "invest"...all backed by the lower graph revealing how popular media was pushing it as a news item then too.

So what can be gleamed from this graph...?

Notice how "subprime" has had its volatility drop with no spikes during 2009 and is slowly fading away...?  On a superficial level this seems to indicate worries about subprime's part in the global financial crisis are over (or at least, everyone knows everything about it by now and feels no need to consult Google anymore).

Also, notice how "recession" seems to quietening down with the latest spikes in its popularity in the global village's mind only at the beginning of this year...yet the financial news (bottom graph) has kept on pushing the word. 

The reality about journalism is that you need to write something in order to sell it and the more emotive, the better...so the saturation of articles of ‘doom and gloom' citing the global recession is a natural consequence. It is heartening to see, though, the decline in its popularity from the search volume index angle; people are tired of hearing this and obviously just want to go on with their lives.

In closing, this article's point is not aimed at being a highly enlightened discussion on the demand for new cars, the recession or subprime, but rather to provide you with a new tool to track world opinion: Google Trends.

*Keith McLachlan, founder of SmallCaps.co.za, regularly uses Google when he misplaces his thoughts and is contemplating outsourcing other mental functions to the search engine.

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responses to this article

Thanks Keith This is at the very least an interesting tool and I think you introduced it in an interesting and informative way. I certainly added the link to my favourites research toolbox folder before even finishing the article. Could be interesting to expose . .more trends, and the spread between media interest and actual search interest. . .less by Jack on November 25 2009, 15:56 Find this comment inappropriate? Report it

Big4 hunting I just tried the following keywords and guess what? standard bank, fnb, nedbank, absa by Jack on November 25 2009, 15:59 Find this comment inappropriate? Report it

Search trends Great piece Keith!!! by Sisa Mayekiso on November 25 2009, 16:11 Find this comment inappropriate? Report it

Useful tool Good original thinking. by Reader on November 25 2009, 16:30 Find this comment inappropriate? Report it

Well done Keith Great piece. by Just Wondering on November 25 2009, 18:25 Find this comment inappropriate? Report it

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