Ten years ago Alan Greenspan coined the phrase, ‘irrational exuberance’ as investor sentiment got too far ahead of economic fundamentals. Today we find our markets at the opposite end of the spectrum in an atmosphere of ‘irrational pessimism’. The investment community now supposes that pessimism is a mark of superior intellect. Back in 1999 everyone was looking for the next big breakout company. In 2010 everyone is looking for the next failure. This obsession with failure has led us from the bear raids on US banks to the panic of European debt contagion. One of the consequences from the multiple speculative bubbles over the last ten years is that investors have come to expect the worst, even when it’s unwarranted.
Robertson Davies provides insight into the current state of affairs, “Pessimism is a short view of life. If you take a long view, I do not see how you can be pessimistic about the future of man or the future of the world.” Norman Cousins adds, “Pessimism operates in a narrow field of vision that fails to take into account the possibilities at the outer edges of experience.”
Both Davies and Cousins articulate the short sightedness of a pessimistic environment. Look at history and you will find very few scenarios that ended in worst case. Even recent history shows that US banks were able to recover from the financial crisis, employment was able to turn positive, GDP grew larger and quicker than any expected, manufacturing went into full blown expansion mode, and the dollar didn’t lose its reserve currency status after all. The pessimists were wrong, wrong, and wrong again because they failed to take into account the possibility of solution. Our global financial system is able to provide liquidity and is able to expand time horizons for governments in short term trouble. The pessimists will be wrong again because they discount the ability of smart people being able to solve problems.
The #1, most interesting element about today’s stock market has nothing to do with government debt. It’s the stalwart balance sheets of corporate America. The imaginative hope of dot-com investors during the stage of ‘irrational exuberance’ is unfolding before our very eyes and we are too negative to notice. The elephant in the room is missed by those looking beyond the mark. We are living in an age where computers now run on mobile devices that everyone can afford. Software companies can now distribute through thin air. The advertising industry has an innovative new channel to reach consumers. Social networks are changing communication. Video chat looks like the next frontier. The prospects for these types of growth triggers should drive the stocks of involved companies through the roof. Now is the time for p/e ratios to go sky high. What does it say about the investment community that we were exuberant when we should have been pessimistic and now we are pessimistic when we should be exuberant?
This cycle of sentiment is prone to the same ebb and flow that characterizes economic cycles and the two don’t necessarily happen in tandem. When sentiment and fundamentals are at odds with one another there is opportunity. In our www.economictiming.com portfolio we are beginning to buy some longer term positions at this point in the sentiment cycle as compared to the economic cycle. Companies like Cisco (CSCO), Akamai (AKAM), Apple (AAPL), Google (GOOG), Baidu (BIDU), Amazon (AMZN)... all the QQQQ’s are going to be big winners as sentiment rises off the bottom of irrational pessimism. A cycle is called a cycle for a reason. Nothing lasts forever. This tech revolution will receive its reward as the aftershock of the financial crisis (euro contagion) joins the long list of worries that never came to be.
Disclosure: Long aapl, qqqq