Monday, May 3, 2010

The Depths of Pessimism

Here is a chart that appeared in Saturday's edition of The New York Times. It covers more than 40 years and shows the difference between the percentage of Americans who expect their income to rise during the next six months and the percentage who expect their income to fall during that time.

I think this chart is interesting because it confirms the deductions I had made from the material in my media diaries during the past few years.

First of all, this survey data shows the level of economic pessimism reached during 2009 was more extreme (by a wide margin) than any during the past 40 years. This is consistent with the story told by magazine covers and newspaper headlines during 2008 and early 2009. During that time I often remarked that the torrent of pessimism was more extreme than any I had observed in my forty years of market experience.

Second, the five year bull market of 2002-2007 was associated with a lower level of of optimism than any similar bull market/economic expansion during the previous 40 years. This too was apparent in the stream of media commentary that accompanied the bull market. At the time I was astonished at how many investors refused to participate in the long bull swing.

This chart also is another piece of evidence suggesting that the 2009 low point in stock prices was a once-in-a-generation low. I doubt we shall see levels of pessimism like those of early 2009 anytime during the next 30 years.


  1. I hope you are right, unfortunately everything I see says we have yet to reach the bottom in pessimism.

  2. what I see, is the Bulls being bullish, and the "Bears" finding reason for the markets to keep on going up for the foreseeable future — which means they are "bears disguised in bulls". Not very contrarian...
    Here's a very meaningful example:

  3. agree...last march, buy and hold was delivered a fatal blow in the psyche of investors and it iprobably the best contrarian play out there over the coming years

  4. Carl,

    Yes, but now all the news media is we have made the turn and everything is rosie, greenshoots, housing is turning, jobs are better, people hiring, etc...BS... I don't see or hear much pessimism in the news media.

    Life is good!

  5. Another great pick by Carl. I stand in awe. I have not seen such a concise understanding and explanation of what kind of turn we are taking in the market and society. It will take years if not a whole decade before the general public wises up to it.
    I like to compare it to the early 50s. Then everybody expected the next Great Depression around every corner and there was a big public paranoia about communism (Sen. McCarthy) etc. Only at the end of the 50s / beginning of the 60s people started to relax and accept that a new boom era had started and that the paranoia about Great Depression II and communism were way overblown. Today again everybody fears the "double-dip", terrorism, illegal immigrants taking over, corporate bank fascism, total environmental deterioration, etc. ... you name it. It's the age of paranoia again. The McCarthys are out there in many areas as well.

  6. The big difference (or the key issues that tell us that this level of "depression" are real):

    1. Millions of people lost BOTH their 401K's in the old buy and hold thinking that was touted by Schwab, and others; and,

    2. Hundreds of thousands have lost the other equity that they had: their home equities.

    This would lead anyone, esp. baby boomers in their 50's (millions of them) into depressive behavior patterns.

    My wife and I have been traveling for 7 months in our Diesel RV visiting places like Nevada, Cal, Illinois, Mich and Fla: we have not met ONE couple in their 50's to their 80's who did not lose a significant portions of their life savings.

    Sure, the rich and powerful are fine. They started with $10 million on the bank and they still have $6 Million problemo.

    But, for those 65 year old recent retirees, things have changed..and the trust in Wall Street is lost forever.

    This is indeed a different time from 2001-2002 when many of us 40-year olds lost a mere 25% of our portfolio's...we had time and took the time to make that back up. Now, we have older folks who are nearly broke.

    Times are a-changin'.

  7. Carl,
    I think it would be instructive to think about time frame here. To me the NYT chart shows that we started a 40 year bull market in March 2009. (And perhaps an 80-year bull market.) For people under 30, buy and hold IS the way to go.

    Over the next six months, I don't know. Look at the Brazil, Bombay and Shanghai charts. What's going on? Our market is increasingly global, and I'd love it if you could address those charts at some point.

  8. The Mar 09 lows could have been the lowest lows we will see on an absolute basis for some time to come. However, valuations never really hit extremes for a bear market low. We could see lower valuations at some point in the future, which would be quite a fall from here if it happens, say, in the next 2 years.

  9. Also, I am very skeptical about using this chart for investing purposes, contrarian or otherwise. For instance, the highest point on the chart is the late 70s. And, by all accounts, the market top of 2007 coincided with low readings, at least by the history we are shown.

  10. Actually, I believe this graph represents inflation expectations more than anything. In the 70s wages were growing at a faster pace due to inflation whereas now they are not; hence seemingly high correlation with the graph and cpi. So, for a contrarian view of this graph, I believe this is saying we could be looking at inflation going forward. Sorry for all the posts.