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Is Stock Market Perma-Bearishness a Form of Mental Illness?

Stock-Markets / Trader Psychology Oct 27, 2013 - 11:36 AM GMT

By: Investment_U


Alexander Green writes: There was a revealing story in this week’s Wall Street Journal…

David Rosenberg, the chief economist and market strategist at Gluskin Sheff & Associates, spent a decade warning about the health of the U.S. economy and the future of the stock market. That meant he missed the bull market a decade ago but helped the firm’s clients avoid the 2007 to 2008 financial crisis. Unfortunately, he missed the rebound that followed. (Such is the fate of market timers and other psychics and clairvoyants.)

However, this past spring the longtime perma-bear changed his tune and became more enthusiastic about the economic recovery and more bullish on stocks. (Better late than never.) The interesting part was the reaction of his firm’s clients.

There was an uprising. One subscriber called him “a turncoat.” Another wrote, “It is too much for me to have another cheerleader.” Still another canceled his account and said, “I don’t recognize his work.”

This dovetails perfectly with my own experience with longtime stock market bears. They never fail to see the cloud in every silver lining – and continually seek validation of their view that the country is broke and going to hell in a handbasket.

There is a problem with this analysis: It is wildly out of touch with reality.

Let’s start with the assertion that the country is broke. Corporate profits are at an all-time record – as they have been for each of the past 13 quarters – and so are profit margins. Corporate balance sheets – currently holding more than $2 trillion in cash – have never been healthier.

How about American households? We’ve been told that families are drowning in debt and saving nothing. This is true of some families, but not most. Last month the Federal Reserve announced that household wealth in the U.S. hit an all-time record in the second quarter: $74.8 trillion. Understand this is assets minus liabilities. Americans as a whole have never been richer.

Bear in mind, it is not my opinion that American businesses and households have never been richer. It is a well-documented fact.

And Uncle Sam…

How about federal government deficit? Here, indeed, we face a serious problem. But not as serious as many over-the-top forecasters make it appear. The annual deficit peaked at $1.4 trillion in 2009 and has been sliding ever since. The Congressional Budget Office projects it will be $642 billion this year – and will keep falling through 2015.

How about beyond that? That, of course, depends on the level of economic growth, tax revenue and appropriations. Former Treasury Secretary Larry Summers, the former Federal Reserve chairman candidate who was apparently too conservative for Democratic lawmakers to confirm, wrote in an October 14 op-ed piece in The Washington Post that the increase in the federal deficit over the next 25 years could be entirely offset by either a 0.8% decline in spending or growth in GDP by the same amount.

Personally, I wouldn’t bet a nickel that Congress will cut spending, regardless of who is in power. But, fortunately, we have a good reason to believe the 0.8% increase in GDP will materialize.

Horizontal drilling and hydraulic fracturing (fracking) are creating an energy revolution in this country. This year the U.S. overtook Russia as the world’s largest producer of oil and natural gas, a development that was unimaginable only a decade ago. America now produces 22 million barrels a day of oil, natural gas and related fuels. Funny, it seems like only yesterday that we collectively boohooed about our growing dependence on – indeed, our addiction to – foreign oil.

As my 16-year-old daughter Hannah would say, “That is so yesterday.”

You’ll notice that gloom-and-doomers on the budget all begin their arguments with the same words, “If nothing is done, the federal budget deficit… blah, blah, blah.”

Yet something will be done. Simpson-Bowles and other bipartisan commissions have already outlined the steps necessary to reach fiscal sanity. Yes, there is political polarization in Washington and plenty of heated rhetoric, but entitlement reform is coming.

Why isn’t it already here? Because voters let the yahoos in Washington get away with it. I need only point out the 91% reelection rate for Congressional incumbents in last November’s election. Only when forced to make difficult choices will these blunderers finally act.

This is nothing new, incidentally. As Winston Churchill famously observed, Americans can always be counted on to do the right thing… after they have exhausted all the other possibilities.

So – to recap – corporate profits have never been greater, corporate balance sheets have never been healthier, household net worth has never been higher, and the annual budget deficit is going down, not up.

This doesn’t mean the economy can’t stumble or the stock market can’t fall. They can. But they won’t go down because we are going broke, for one simple reason:

We aren’t.

Good investing,



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