The Whiplash Shift in Investor Sentiment

Wow, the negative shift in investor sentiment has come faster and harder than I ever imagined. When I started writing “Boomergeddon” about a year ago, the U.S. economy was growing briskly and the stock market was rising. I certainly wasn’t alone as a pessimist, but I didn’t have much company. Indeed, I sometimes wondered if I was testing peoples’ credulity by suggesting that the U.S. might default on its debt within 15 to 20 years.

Now I’m getting trampled by the stampede for the exits. Fear of inflation has turned into fear of deflation. Hopes for a strong recovery have morphed into worry about a double-dip recession. Sentiment gets worse by the day. Now there’s this: Gluskin Sheff economist David Rosenberg says the U.S. economy has entered a 1930s-style depression. Reports CNBC:

The 1929-33 recession saw six quarterly bounces in GDP with an average gain of 8 percent, sending the stock market to a 50 percent rally in early 1930 as investors thought the worst had passed.

“False premise,” Rosenberg said. “And guess what? We may well be reliving history here. If you’re keeping score, we have recorded four quarterly advances in real GDP, and the average is only 3%.”

According to CNBC, major analysts from Goldman Sachs, JPMorgan and others have slashed 2010 GDP projections to the 1.5- to 2-percent range. Meanwhile, Morgan Stanley now says that global investors face defaults on government bonds, given the burden of aging populations and difficulty of generating more tax revenues. Reports Bloomberg:

“Governments will impose a loss on some of their stakeholders,” Arnaud Mares, an executive director at Morgan Stanley in London, wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over.” …

“Outright sovereign default in large advanced economies remains an extremely unlikely outcome, in our view,” the report said. “But current yields and break-even inflation rates provide very little protection against the credible threat of financial oppression in any form it might take.” …

“The conflict that opposes bondholders to other government stakeholders is more intense than ever, and their interests are no longer sufficiently well-aligned with those of influential political constituencies,” such as elderly voters and their claims on pensions and health insurance, Mares wrote.

The sentiment is getting so negative, I’m tempted to become a contrarian. Sure, fellas, the situation is bad, but it isn’t that bad. We’ve still got 15 years before Uncle Sam goes broke. Give it a rest, already! (Original post on the Boomergeddon blog.)

In all seriousness, Virginians need to pay heed. Time is running out to get our fiscal house in order and wean ourselves from the federal teat. The job of governance will not get any easier in the years ahead. It will only get harder.


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11 responses to “The Whiplash Shift in Investor Sentiment”

  1. Larry G Avatar

    Here's a short commentary on this:

    " Fiscal Austerity and America’s Future"

    http://economix.blogs.nytimes.com/2010/08/26/fiscal-austerity-and-americas-future/

  2. I think one of the biggest "fears" is that Uncle Sam is virtually out of ways to stimulate the economy…..we are in uncharted waters if the current medicine doesn't do the trick, i.e., 0% Federal Funds Rate, The Recovery Act, etc,.

    Larry G's link is a good read….

    Fiscal Conservative's just want to cut spending without addressing the underlying problems in the economy that have been brewing for decades and now have come home to roost.

    I agree, a smaller government is part of the answer, but it's not the only answer.

  3. Isn't 3% about the long term average for gdp growth?

  4. "There's a point at which pessimism becomes a self-fulfilling prophesy, scaring businesses away from investing or hiring. The dark tone of today's discourse is at risk of doing just that.

    The Milken Institute's new study, "From Recession to Recovery: Analyzing America's Return to Growth" is based on extensive and dispassionate econometric analysis. It concludes that the U.S. economy remains more flexible and resilient—and has more underlying momentum—than is generally acknowledged. In fact, our projections show cause for measured optimism: A return to modest but sustainable growth is close at hand.

    ———————–

    From Carpe Diem

  5. Larry G Avatar

    "
    Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

    The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.

    More than likely, that era is gone for good."

    “There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”

    Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment."

    http://www.nytimes.com/2010/08/23/business/economy/23decline.html?adxnnl=1&ref=business&src=me&adxnnlx=1282928436-cIjS35fRsXqvMLSsqdS9CA

    or http://goo.gl/gK5w

    Now that we have the preliminaries better understood, my question is – or we headed towards a European mentality towards wealth and well being?

    Remember just a few years ago in Bacon's Rebellion how people were saying that home building powered our economy.

    Now what?

    wanna blame this on Obama?

  6. Anonymous Avatar
    Anonymous

    What about the old real estate saw "Location, Location, Location"?

    Some residential real estate will do better than others. But it is crazy to assume that real estate prices can regularly increase faster than the increase in personal income. This also means local government will need to decide what is important and what is not important. Even Fairfax County will need to rethink how bountiful it can afford.

    TMT

  7. Anonymous Avatar
    Anonymous

    “I agree, a smaller government is part of the answer, but it's not the only answer.”

    The issue is not bigger or smaller government, it is better governance.

    Smaller federal Agencies makes a lot of sense because the federal level has become a dumping ground for all the issues municipalities and states cannot handle under the existing system.

    There needs to be governance at the MegaRegional and Regional scales where almost none exists now.

    According to Dr. Risse the most important scale for effective an effective governance structure is the one closest to the citizens – the Cluster scale. Of course there needs to be governance at the Neighborhood scale, at the Village scale and at the Community scale.

    In a recent lecture Risse pointed out that no comprehensive rearrangement at the ‘state’ level leaves any ‘state’ with the same boundaries. The role of states may be taken over by Regions and MegaRegions in a rational structure that reflects economic and social reality.

    For sure there should be far more citizens involved in governance (“government”) than now. Most as volunteers at the smaller scales.

    But under any system ‘Big’ government is not the problem, it is a symptom or a larger problem – trying to manage a 21st century society with an 19th century governance structure.

    Ralph G.

  8. Anonymous Avatar
    Anonymous

    “Carpe Diem” is a blog written by a Mark Perry, a ‘visiting scholar’ at ‘The American Enterprise Institute.’

    What would anyone expect him to say? He gets paid for this sort of spin.

    He got his PhD from George Mason. Enough said about his perspective.

    RLJ

  9. I'm no fan of phd's or else I would have one. A PhD in economics is a cost benefit oxymoron. That said what is it about GMU phd's that invalidates them, as a whole?

    Nothing guarantees real estate value increases except they are not making any more and existing homeowners do all they can to ensure that they make less.

    Nothing ties value increases to personal income as long as population increases faster than housing. The vast bulk of recent Florida sales have been bulk sales to commercial buyers. If you are correct, they rent the homes and capitalize on low interest rates. If you are wrong, they flip the homes for capital gains.

    They lose if the economy tanks so badly people choose to do without shelter.

    That is why reiterate should be part of your investment (speculative) strategy.

  10. Lets assume Mark Perry gets paid for his blog. Does he get paid
    Ore or less than BR authors?

  11. Whiplash works both ways. The market was up how much today?

    Too bad CJ missed it.

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