Is US now stuck with irrational pessimism?
In some ways, today's swoon looks like the flip side of 1996's 'exuberance.'
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"Everyone was on the train to happy land," recalls John Lekas, a portfolio manager at Leader Capital Management in Portland, Ore. "Greenspan was saying you might want to get off at the next stop – he was right about that."Skip to next paragraph
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One sign of the difference in investment psychology: Wall Street in 1996 was busy raising money for fiber-optic links around the world. This would later lead to a rush of initial public offerings and eventually the growth of companies such as Enron and Global Crossing. Both eventually failed in the dot.com collapse five years later.
This past September, by contrast, saw no new public stock offerings. In October, there was only one. "Essentially, investment banking has dried up in the last 90 days," says Dickson.
Part of this pessimism is related to a "negative feedback loop" that the nation has entered, says economist Richard DeKaser of National City, a Cleveland bank. When the loop is present, investors, business people and many ordinary workers are expecting the worst.
For example, today's low interest rates could be viewed as a potential stimulus to the economy. But some investors think the US has entered a liquidity trap, he says, where low interest rates don't do anything to help the economy – much like Japan in the 1990s.
"I don't agree," he adds, "but when you are in that moment, you are susceptible to feedback loops."
It's an old story – trying to stay out of the way of trampling herds. In 1841, Charles Mackay wrote "Extraordinary Popular Delusions and the Madness of Crowds," a book that detailed 200 years' worth of investment bubbles and schemes.
The stories told by Mr. Mackay "sound like only yesterday, or maybe even today," wrote Peter Bernstein, a financial author and guru, in a forward to a 1996 reprinting of the book.
Will pessimism lead to rebound?
Some investors believe today's extreme pessimism may contain the seeds for recovery – at least in the stock market. "Assume there are 20 people on a deserted island and 19 have sold whatever they have to one person," says Mr. Lekas. "I would think most of the sellers are out of the way." He predicts a massive stock market rally at year's end.
Others aren't so sure. They argue that the pessimism might be warranted.
"We really do have a serious systemic risk and the problem is not irrational," maintains Andre Weisbrod, a Pittsburgh-based financial planner and mutual-fund portfolio manager. "I'm not in a hurry to dive back in even though some companies are screaming 'Buy me, buy me.' "