Investor Sentiment, US Economy

The Willie Loman Effect

By, 12/13/2007

Story Highlights:

  • While bearish forecasters say the economy's health is worse than it seems, in truth it's probably their bearish stance that rests on a shaky foundation.
  • The newest theory to support a bearish forecast is based on self-fulfilling prophesies and vicious cycles. But logic and history say it's all hokum.


Willie Loman could never get it right. He was delusional from the outset about how good things should be, and then doubly dour and delusional when reality hit. At both extremes, poor Willie never saw the situation for what it was. We almost wonder if Arthur Miller wasn't only allegorizing the American Dream in Death of a Salesman, but also penning a metaphor for the investor psyche.

As positive economic data piles up and stocks stubbornly remain in positive territory this year, those forecasting a bear market and accompanying economic recession are increasingly grasping at straws. Luckily for the bulls, good old Biff is doing better than his old man realizes.

We constantly hear "it's much worse than it seems out there," as if the investing world stubbornly refuses to take off its Loman-esque rose-tinted glasses. We think the opposite is true: The bears are clinging to worst case scenarios, what ifs, and shoddy data. Here's some hard evidence:

A 'Subprime' Gauge, in Many Ways?
Serena Ng, Carrick Mollenkamp and Scott Patterson, The Wall Street Journal (*site requires subscription)

It turns out that much of the perceived subprime woe stems from a shoddy index called the ABX. This esoteric index, representing only about 3% of subprime mortgages, is being used to judge the entirety of the subprime problem—including asset write-downs on mortgage-related securities! The ABX is probably not only flawed, but could be biased in favor of making the situation seem worse than it is. Now that's an index Willie would love.

One of the strangest bearish theories we've seen lately holds that psychology alone can tip the US into recession. Even if economic reality is rosy, heightened dour expectations for bad times ahead will prove a self-fulfilling prophesy. If folks believe the credit market is bad, they won't lend or borrow; if everyone believes US consumers are in trouble, then everyone will hunker down and stop spending. And so on until the economy comes to a grinding halt.

Loose Lips Sink Economies
William R. Broz, Los Angeles Times,0,4923261.story?coll=la-opinion-center

This is Willie Loman logic if ever we've seen it. It's a misapplication of the concept of a vicious cycle—where each iteration of a negative input reinforces itself, spawning an ever more negative result. Milton Friedman, free markets apologist that he was, spoke about this phenomenon. He even once cited negative reinforcing behavior as a reason for the depth of the Great Depression.

First of all, let's remember the Great Depression was preceded by euphoric investor sentiment—not exactly what we've seen over the last several years. And, the Depression era wasn't just about negative sentiment—things really were bad. Compare that to US third quarter GDP growth of 5%.

Also, today's global economy is far different from +75 years ago. Capital markets are globally integrated, robust, versatile, and highly developed. The multiple ways in which firms are tapping liquidity today—from the Fed to foreign investment—is ample evidence of that.

But let's say the vicious cycle theory were true. In that case, there's no way stocks should be up for the year, right? By now, dour sentiment should be sending stocks for a big-time plunge, shouldn't they? Yet, here we are with most indexes still up for the year.

The Dogged Bull
By Alexandra Twin,

The caption for this one reads, "Despite the day-to-day turmoil, the stock market damage has been limited, with the Dow and S&P 500 clinging to levels not far from record highs."

Looked at another way, if it's possible for bearish psychology alone to send us into a recession, shouldn't the opposite be true? Shouldn't euphoric psychology be capable of creating higher GDP? No way! The Tech bubble of 2000 and recession of 2001 taught us that one pretty resoundingly.

Psychology can move markets in the short and sometimes medium term, but you'd be hard pressed to find a single instance in market history where we had a psychosis-induced recession. Ultimately, the fundamentals dictate the longer term trends. What matters for stocks is investors' appraisal of reality. If too dour, then it's a great time to buy stocks; if it's too optimistic, then you can bet trouble is just ahead.

That's why, back in 2000, despite everyone saying "it's different this time," it wasn't. The economy sagged and so did stocks. And that's also why, despite five years of dour sentiment, stocks are set to complete a fifth consecutive year of the bull—it's also been five years of global economic prosperity.

There's no escaping fundamentals—psychology only sinks the short-term focused. Today, stocks are extremely cheap relative to bonds and cash, and global economic growth is robust. That folks aren't appreciating it is all the more bullish.

The Willie Lomans of the world are waiting for a reality that won't come. We aren't seeing the death of salesmen at all. In fact, they're doing pretty well on their own lately:

November Retail Sales Jump 1.2%
Alister Bull, International Business Times

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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