Fear vs. Cheer in the Markets

The financial market is currently very nervous. While good news and a strong equity market were reinforcing one another in what I had called the “cheer cheer spiral,” there are lingering worries, and fear-mongers still abound warning that the economy is yet to fall into a deeper recession and even possibly a depression soon.

Objectively, the strong performance of the equity market and the return of investor confidence have taken most observers by surprise. The doomsayers have been disappointed by the strong performance of the market, yet questioning the logic of the many measures which had been taken and which were clearly instrumental in bringing back the confidence.

I recall years ago I read an article in the Wall Street Journal that reminded readers that fear-stirring books often sell like hot cakes while good news books fail to attract the attention of readers. Human psychology is like that.

Yet run-away fear is very destructive. It is well known that the worst fears can be self-fulfilling.

Thus we are facing a contest between two forces: fear versus cheer. In the background of course there are still major problems that the economy has yet to overcome. I for one have always been worried by continuing weakness in the housing market. If the housing market continues to slip, pressures will continue to be exerted on the banks and then on the wider economy. That is why the fear-mongers actually do have a point.

That is also why PPIP is necessary. There are people who think that with confidence returning PPIP is no longer needed. But the best time to introduce PPIP is when there is still confidence. PPIP is then taken entirely as a preventive measure. If problems fall out of hand, it will be too late to undo the damage. Policy makers must not be too complacent.

I have been arguing that a wiser method than PPIP is actually to directly provide price support to the lower half of the housing market. I have explained my proposal in several articles before, and I will not elaborate. I have seen some objections, but so far I have not seen objections grounded on logic. I have only seen objections based on dogmas or rhetoric.

Comments

[lex:]

stocks have been artificially pumped higher by PPT so that feel good factor can come in so ppl will spend. so far the only ppl that have bought the rally are mutual funds sitting on high cash levels. this is just a longer version of that happened in the first few weeks of January when the dow went to 9000 and was +10% ytd. we all know what happened after...

Jun 09 09:00 AM

[Gyoza Mimi:]

The market is going through a massive pump-and-dump scheme. I find very little to cheer about.

Jun 09 09:48 AM

[ain't no fo...:]

Mr. Lok Sang Ho, when you were young did you ever gorge yourself on way too many rice cakes, despite knowing that the consequences of your actions would be unpleasant, to say the least?

As you lay over the bowl voiding the contents of your stomach, did your parents sit nearby handing you fistfulls of additional rice cakes to replace those you were voiding, patting you on the back and telling you what a bright young man you were, or did they leave you alone to figure out, in your misery, the error of your ways?

Mine left me alone, and they didn't clean up the mess I made - and gee, guess what, I figured out after a fashion not to gorge myself on rice cakes ever again.

Yet now you suggest we so-called capitalists (and yes I use that term reluctantly) provide price supports to the lower half of the housing market in order bail out the rice cake gorgers once again.

There is a saying I favor - "Insanity is doing the same thing time after time but expecting different results."

I'm sorry, but to me your bailout solution is pure insanity.

Jun 09 10:15 AM

[Larry House:]

It is NOT "cheer vs. fear." There is truth underlying the opinions. Someone is going to be right, and someone is going to be wrong. Opinions do not change fundamentals. We are in crazy period where data can support a hopeful view and a less hopeful view. It is a disservice to pit view against view in this mess. Opinions are not the problem. "Fear-mongers"--what a terrible label for anyone one who dares talk about some of the dangers that we face.

Jun 09 12:05 PM

[doubleshortetf:]

Mr. Ho,

Have you ever heard of drinking your own "Kool Aid"?

I think you drank too much "beiju" or sorghum liquor. Do drink it watered down with dried fruit and served by KTV hostess as drinking it straight will mar your judgment to see straight and sometimes leads to delusion.

PS - PPIP like TARP is joke.

Jun 09 01:09 PM

[Lok Sang Ho:]

You need to understand the dynamics of social psychology to know what drives markets during times of irrational exuberance or irrational fear.




On Jun 09 12:05 PM Larry House wrote:

> It is NOT "cheer vs. fear." There is truth underlying the opinions.
> Someone is going to be right, and someone is going to be wrong. Opinions
> do not change fundamentals. We are in crazy period where data can
> support a hopeful view and a less hopeful view. It is a disservice
> to pit view against view in this mess. Opinions are not the problem.
> "Fear-mongers"--what a terrible label for anyone one who dares talk
> about some of the dangers that we face.

Jun 17 12:17 PM