Can You Feel the Hope, Part 3

The point is important enough to bear repeating, and repeating. Especially when the issue is so salient to all of us. So, for the third time this week I want to emphasize that the bear market is being fed by an excess, not a deficiency, of hope. It will not end until we succumb to despair. See previous posts of February 22 and 28.

Some people are more sophisticated about these matters than others. Sophisticated or not, we are all dealing with them and we all need to have some understanding of this new reality. Ignoring them or failing to understand them is no longer an option.

Today's New York times offers James Grant's thoughts on this topic. I have occasionally quoted Grant who is an authoritative voice on money and markets, and especially on interest rates. And not just because his view correlates with what I and others have been suggesting. Link here.

Grant begins by quoting a wise old broker who told his client that the bear market will end:"when investors give up hope."

Grant reasons that people got into trouble by borrowing too much to buy assets that they could not afford. When the bills came due, they decided not to do the responsible thing and sell their assets to pay off the debt. Hoping that things would return to normal, they held on.

Grant writes: "Wishing this weren't happening to them, hopeful business people and homeowners resist making necessary adjustments. Some refuse to sell the house they can't afford. Others won't think of selling the stocks for which they paid what seemed to be a reasonable price only last year but which are one-half that reasonable price today."

Grant sees the current recession as the normal hangover from an orgy of indiscriminate and self-indulgent spending. Didn't we all have the right to live as high as our credit limits would allow? Wasn't self-indulgence a positive virtue?

We borrowed too much to buy things we could not afford against too little equity. As many have insisted, we are suffering a global margin call.

Today the markets are dealing with the problem. At best, it is going to be a messy and painful process. People are going to be hurt, and lives are going to be disrupted. But as long as people's spirits are buoyed by hope, as long as they continue to refuse to face reality, as long as they hold on to devalued assets and refuse to meet their margin calls, the pain will continue.

Can You Feel the Hope? Part 2

Last night on Fox Business Network's "Happy Hour" host Sandra Smith was interviewing a financial adviser from Pittsburgh.

The man was visiting New York and hanging out at the "Bull and Bear," the bar/restaurant from which the show is broadcast.

Since this adviser specialized in retirement planning, Smith asked him what he was telling his clients these days. His response: maintain a diversified portfolio and ride it out.

So here we have a small piece of evidence supporting the point I made in my post of February 22. The marked is being driven down by excessive hope.

The Dow has lost half its value. That means that if you could get a return of 8% on your investments it would take 9 years to get it back. And that is a very rosy scenario.

In response this adviser was optimistic and upbeat. To add insult to injury he was mouthing a formula that was conventional wisdom before the bear market began in earnest.

I hope his attitude was not influenced by pharmaceutical agents, but it was certainly disconnected from reality. If his clients are not enraged, they certainly should be. Financial advisers who talk as though nothing has happened do not deserve to stay in the business.

In the current environment, discussions between clients and advisers should dispense with the talk about restructuring portfolios and redefining goals. The first question should be: What happened? And that should be accompanied by an admission that the adviser did not see it coming, and that he too has been hurt by the market.

A financial adviser is not in the business of trying to calm frazzled nerves and tell his clients to ride it out. He should listen to what his clients are telling him and to take it seriously. If people are frightened and angry, they are not upset about nothing.

It would be nice if Happy Hour could do a follow up with the adviser from Pittsburgh. Then it would be able to plot the market decline by the look on his face. A true low will be achieved when the smile has been wiped off his face and he is quivering with dread.

Of course, there is more to market analysis than sentiment indicators. Ultimately, you need to be able to determine the value of what you are buying.

Anyone who is tempted to ride it out, or who is ready to believe that the next rally will mark the end of the bear market, should read John Mauldin's excellent analysis in his eletter, "Frontline Thoughts." Today's is entitled "Buy and Hope." Link here.

I would add that Mauldin sends these out weekly to anyone who is willing to give him their email address. Dare I say that this is an excellent value.

The Sexual Marketplace

Call it the sexual marketplace or the dating scene or just plain courtship... no matter what you call it, it is undergoing a massive transformation. Or better, a reversion to the mean.

Young men who are jobless or bonusless are less likely to date and less likely to mate. And they can hardly be expected to shower the objects of their affections with limitless gifts.

So, what is the new dating scene going to look like?

After markets go to extremes, they tend to revert to the mean. At least, that is the theory. But when it comes to dating, what is the mean?

Different ideas have been put forth. Writers in the Washington Post and the Atlantic Monthly have written cogently on the issues involved. Link here and here.

Some have suggested that the mean is a feminist version of gender equity. Most of the jobs lost have been held by men, and this might lead more men to stay home and become nurturers while more women become sole breadwinners. This would obviously affect the sexual marketplace, perhaps leading women to look for more nurturing men and men to look for more dynamic, career-oriented women.

But Emily Bazelon, writing in Slate.com, has thrown doubt on this outcome. Link here.

Bazelon suggests that since men react much worse to unemployment than women do, many women might decide to leave the workforce to open up jobs for their husbands, roughly as happened after World War II.

If the mean is not the advent of a gynocracy, then perhaps it will be a more Darwinian world where gender roles are more strictly defined and where sexuality reverts to its traditional role in a calculus of fertility and reproduction.

This would not, however, be as radical a change as it first appears. The excesses that characterized certain segments of the dating scene seem to have been produced by Darwin on steroids.

For several years now the New York sexual marketplace has been defined by the mega bonuses that young investment bankers, hedge fund traders, and financial advisers were using to impress young women.

Think what you will about this ostentatious display of wealth, it signified an ability to provide for a wife and children in the great cosmopolitan metropolis.

All things considered, you needed something like a Wall Street bonus to afford a co-op in a good neighborhood. Add to that the cost of private school, and you had to be in either finance or real estate to bring up a family in New York City.

Spending thousands of dollars on a date showed that the man in question could provide a New York lifestyle for himself, his wife, and his children.

Unfortunately, the women who were receiving all of that largess were often at pains to reciprocate. And they often felt like they were being bought and sold. If they yielded to temptation and married the men with the massive bonuses, their simmering resentment often led to marital misery and divorce.

But that world is over. And it is not coming back any time soon. Thus, the male status hierarchy that had been skewed by the overemphasis on money is adjusting to a new reality. Men who have prestige, but perhaps not fortunes, are becoming more desirable than unemployed financiers.

The previous dating culture was something like a free-for-all where everyone was laboring under the assumption that they could have it all.

As we know, serious money forgave some seriously bad behavior.

Now women will perhaps become less tolerant of bad behavior and men will work on developing other qualities that will make them desirable in the sexual marketplace. A good place to start would be: making money the old fashioned way, by earning it.

The Best and the Brightest

First, it was David Brooks. Then, it was Sen. Robert Byrd, of all people. Their worry: that the Obama administration is concentrating power in a few bright aides and czars who are operating out of the White House. Link here.

Clearly, the administration was elected to take charge of the financial crisis. It is trying to do so. But concentrating power in the hands of a few-- which the ancients called oligarchy-- rarely benefits anyone but the few.

What can we look forward to?

The best and the brightest:

1. Know better than you and I.

2. Want to impose their superior vision on an inferior world.

3. Refuse to allow their work to be judged by reality.

4. Blame others when their policies appear to fail.

5. Work tirelessly to maintain themselves in power.

To do this, the best and the brightest:

1. Demean the intelligence of anyone who does not accept their claim to superior wisdom.

2. Refuse to negotiate with people who disagree with them or to compromise with reality. They make grandiose promises that cannot possibly be kept. Examples: the administration is going to give more people more and better health care for less than it costs now. And: the administration is going to solve the energy crisis by building more windmills. (Apparently, the best and the brightest never read "Don Quixote.")

3. Proclaim that their approach is working even if it is not. For this it helps to have a well-oiled propaganda machine.

4. Select a group of possible scapegoats that can be blamed when anything appears to go wrong. Among them will be George Bush, George Bush, and George Bush. Also, Herbert Hoover, Margaret Hoover, Ronald Reagan, Nancy Reagan, Republicans, the vast right wing conspiracy, and the Mossad.

5. Stay in power, no matter what. If that requires fiddling with the census, so be it. If their vision has not lead to Heaven on earth, we will be told that our faith in the great leader is being tested. To pass the test we must give him more power.

David Brooks may be right to say that if the Obama program fails it will discredit liberalism and lead to a revival of conservatism.

But that was not what happened during the New Deal. And if it worked for FDR why wouldn't work for Obama.

Let's hope Holman Jenkins was prophetic when he wrote in the Wall Street Journal a couple of days ago: Obama "kids himself if he believes that he will be allowed to preside over a depression without being politically blamed for it. The public is different now-- the world is different-- and he will own the 'Obama depression' sooner than he thinks."

How Do You Self-Motivate?

The other day Addakula Balakrishna wrote to Jack and Suzy Welch via Business Week. Remarking that the Welches often talk about how a leader can motivate others, Balakrishna asked: "But how do leaders motivate themselves, especially in challenging times." Link here.

The Welches' response is excellent, and I want to review it in detail.

First, they show that fear of failure motivates better than a desire for success. You can come to terms with different degrees of success, but you cannot negotiate with failure.

The Welches recommend that a leader look in the mirror and say: "I am not going to be the one who lets this place fail."

This may not look like a confidence-building measure, but it is. It moves you to do your best and to do everything in your power to succeed, or, at least, to survive. It prevents you from slacking off or giving up. Better yet, you can try it at home.

Knowing that if you fail you will be letting down a large number of people will shift your focus from yourself to others.

Second, the Welches say, a leader can sustain personal pride and confidence by identifying with the corporate mission, what I have been calling the company's high concept.

A leader knows where the company has been and what it has accomplished. He must also know what it is about. Has it prospered by providing good service or quality products or exception value or the lowest prices?

A company's larger concept should also involve its role in the nation's economic life.

Dov Seidman once wrote that there is a great difference between the bricklayer who thinks of his job as laying bricks and the one who sees himself building a cathedral.

If you extend the thought, a leader must communicate to his staff the place that the cathedral has in a community and how it will serve the spiritual needs of individuals.

Third, the Welches point out that in time of trouble and trauma a leader's first impulse is to withdraw from close contact with his staff. He will naturally not want to get too close to people whom he might fire and whom he might let down. Their succinct advice: "Don't do it."

They remark that a leader gains intellectual and moral sustenance by interacting with people, by listening to their observations and concerns, and using the information to set better policy. You cannot manage a company if you are detached and fearful.

Fourth, they suggest that a leader should see his challenge "not as an intractable problem, but as an exciting puzzle to solve." As I understand it, this means that a leader does not see himself directing a play or a movie, but as playing a game.

People who see the world as a narrative drama tend to act as though outcomes are inevitable. There is little the director or the audience can do to change the outcome of Macbeth.

If you see yourself playing a baseball game that has gotten to the third inning, then you will see yourself having the power to influence the outcome, both for you and your employees.

Finally, the Welches debunk the notion that the leader is lonely at the top. As they put it: "The old saw 'It's lonely at the top' is pablum. It's only as lonely as you let it be"

Well said. A leader should never get so absorbed in his job that he forgets that he has friends, neighbors, family members, who are supportive, who believe in him, and whose good opinion can motivate and sustain him.

A leader who makes good use of the human resources that are part of his life outside the office will be better prepared to set the right example for his staff.

The Perils of Mental Health

Most people agree that we were not prepared for 9/11 because no one had imagined that it could happen. You cannot prepare for something you cannot imagine.

Perhaps we do not prepare for these "black swans" because it is not the most efficient use of our mental resources. If we spent all our time trying to imagine the worst, we would never get anything done.

But no one ever suggested that we spend our working time thinking up future "black swans."

The task can be accomplished by a few, sufficiently paranoid individuals. Note the accent on "paranoid." How many of us, given the choice, would rather be wrong and mentally healthy than right and paranoid?

We are all proud of our mental health. We have worked long and hard to achieve it. We are not going to give up this new status symbol for the dubious achievement of predicting a catastrophe.

Mental health involves a positive attitude, a glass-half-full state of mind. Along that road true happiness lies. When people are mentally healthy, they do not spend their time forecasting calamity. They dismiss end-of-the-world scenarios as paranoid, the stuff of psychiatric wards.

To remain a member in good standing of the therapy culture you need to express appropriate emotions appropriately. You should not admit to thoughts that involve scenarios of great destruction and calamity. If you do, you will immediately be accused of having unresolved issues. Don't we all agree that emotional extremes are symptomatic?

As for the current financial crisis, we did indeed have soothsayers in our midst who predicted it. You know the names: Nassim Taleb, James Grant, and Nouriel Roubini.

Of course, very few people actually respected their views. They were more often discredited as cranks: bizarre, weird, strange, and melancholic.

When we label a negative forecast as a function of a melancholic disposition, we are ignoring the reality that it reflects.

Don't we all believe that emotional excess is a pathological symptom that must be suppressed by medication or talk therapy? Our culture has told us that extreme anxiety and deep despair cannot possibly reflect real events in the real world. An overwhelming emotion must express unresolved past traumas or defective brain chemistry.

Most psychiatrists work hard to distinguish between emotions based in reality and emotions based in fantasy. Clearly, there are emotional states that have biochemical origins.

Nonetheless, it is much easier to write a prescription than to formulate and execute a plan of action that will overcome a real external threat.

Sometimes it is normal to be very afraid or very depressed. Often these emotions are telling us something about the state of the world and our place in it. The real issues are: first, how we can recognize what the emotions are trying to tell us; and second, what we can do to rectify the situation.

If we choose the right course of action, we will often improve our state of mind too.

And think about this: when you are told that a person with a good attitude should see the glass as half-full, not half-empty, keep in mind that in both cases, you will still have something to drink.

If we change the metaphor just a bit and ask whether you see the swimming pool as half-full or half-empty... either way you would do best not to jump in.

Can You Feel the Hope?

Sometimes hope is the problem, not the solution. So says any analysis that is based on contrary opinion.

Good contrarians who want the market to rally are waiting for more people to lose hope, and thus to give up on stocks and the stock market.

It may look bad out there-- and it is bad out there-- but too few of us have accepted the new reality. Too many of us are holding on, keeping our spirits afloat on an irrational tide of hope.

Bill Clinton notwithstanding, we do not need uplifting rhetoric from President Obama. We need more despair.

But, you will say, Obama has been talking down the economy from the beginning of his presidency. That is not the whole story.

Within Obama's ostensibly downbeat rhetoric is a message of hope. When Obama says that things are bad, he is trying to help people to keep on hoping, despite the evidence. Obama is telling us how bad things are because he is promoting his gospel of hope as the cure for the horrors perpetrated by his predecessor. He is peddling an odd mixture of blame-shifting and false hope.

In the real estate market-- as I have been hearing-- false hope means that people set unreasonably high prices on their homes and refuse to negotiate when a low offer comes in.

False hope tells us that if we wait long enough and if we believe fervently enough, then the good times will come roaring back.

But presidents are not cheerleaders. A president effects policies that will or will not work to solve the financial crisis. If his policies are wrong, he can either change them, or start selling hope.

Reality-- that is, the markets-- have not expressed any confidence in the Obama program or the Obama administration.

As many of our best thinkers proclaim disbelief in the markets, the markets will have the last word.

The question is not whether you believe in the markets, but whether the markets believe in you. Only the most arrogant and insolent among us imagine that the markets care whether or not we believe in them.

So, while investors have been dumping stock, I suspect that the general population is still hanging on. Having bought the dream and the vision of Obama, and having voted for his saviorship, they are not ready to give up.

In the latest Newsweek Jonathan Alter does his best to induce people to keep on hoping. Calling Obama the nation's shrink, Alter declares that this fine and intelligent man will return our confidence and our animal spirits. Link here.

It is strange that Alter conflates the role of president with that of shrink. But not that strange. I have long suspected that the overuse of psychoactive medications has prevented us from feeling despair, and from respecting it sufficiently to learn how to deal with it effectively and constructively.

Despair is not always the wrong emotion. There are times when not feeling despair means that you are out of touch with reality.

When people give up on the economy, when they abandon hope, stocks will become so cheap that they will become irresistible. Then, and only then, will the market mount a significant advance.

As long as people cling to hope, we are not close to the end of the bear market.