Saturday, August 29, 2009

Economic pessimists: too many?

When in doubt, my instinct is to bet against the herd.

In 2007 there were only a small number of people predicting the looming disaster to come. Popular investing gurus like Ben Stein, Jim Cramer, and Bob Brinker only saw happy days ahead. When it came to the housing market, public television and late night advertisements featured people like Robert Kiyosaki and John and Greg Rice singing the praises of real estate investments.

We all know how that turned out, but now I'm starting to see the opposite phenomenon. Ben Stein, who usually advises us not to worry about the occasional bear market, is now expressing fear that the SEC is not doing its job to prevent corruption, and contemplating the possibility that "this time it's different." Robert Kiyosaki, who only a few years ago was saying that it's foolish not to go into debt, is now vaguely advising people to prepare for the worst. I happen to be in agreement with the pessimists right now, but I'm weary of seeing too many people join the doom-and-gloom camp. I don't think the pessimists are an overwhelming majority yet, but they seem to be growing in number.

Even if most people become bearish on the economy in the next several months, I'm still not sure what that would mean. Despite my contrarian philosophy, I can't help thinking that if we really do tax, borrow or print our way into financial oblivion, then sentiment may become irrelevant at some point. Is it ever possible for the herd to be right?


John said...

I know you are currently not market timing but what do your "sentiment" indicators say? Is "optimism" high and dropping or high and rising or low etc.
I have read that insider trading is at Oct 2007 levels (insiders are selling) and that options traders are increasingly covering their long bets. I read so many articles from "gurus" saying the sky is blue and the storm has passed, the worst of the recession is over and jobs are coming back. Yet initial claims continue to exceed 550,000 week after week, incomes are dropping and delinquencies are rising. I am hearing some (but less and less) caution from the "gurus". I continue to believe the market will get to 1200 but that it will see 500 by 2014. Thoughts?
John from Colorado

Jody Wilson said...


By some measures, sentiment has been at or near the optimistic extreme since late March, leaving me unable to explain the current bull market rally in terms of sentiment.

Mainly I see the current rally as an historically unusual case of the market moving against sentiment, against the economy, and against yield valuations simultaneously. Are the $trillions of bailouts/ buyouts/ stimulus showing up in stock market? Will a crash ensue when government spigot inevitably turns off? Who knows?

Jody Wilson said...

P.S. Stock market sentiment (that you asked about) and economic sentiment (that I was talking about in the original post) are two separate things!