Wednesday, December 30, 2015
Economy: The Negativity Cult
I worked then for an online service in Germany and wrote frequently stock market and financial news. Shortly after the bankruptcy of Lehman Brothers, which brought huge gains for short sellers, groups of hedge fund managers and other short sellers tried to repeat their success. They borrowed stocks from a brokers, sold the papers immediately in the hope to buy back for a much lower price. Others bought CDS, financial constructions which were bets on the bankruptcy of a company. In the months after Lehman´s fall herds of hedge funds and their followers attacked everyone who seemed vulnerable - almost any bank had to be saved. Federal Reserve member Richard Fisher (Dallas Fed President) described these attackers as " big money" that "does organize itself somewhat like feral hogs. If they detect a weakness or a bad scent, they go after it."(marketwatch).
These massive bets against banks and many other companies destroyed not just the trust into the attacked firms, these bets destroyed the trust into the whole economy. Bankruptcies and tumbling stock prices seem to confirm those attacks. The destruction of trust lead to spiral of pessimism that almost sucked the whole economy into the vortex of a depression. In spring 2009 massive stimulus programs (QE) and a zero interest policy stopped finally the downward spriral.
But years after the crisis the distrust is still around. The pessimist zeitgeist still rules. People who allegedly "saw it coming" own a huge following and crash prophets are still en vogue. There is a cult around doom & gloom gurus like John Hussman. In 2011 the fund manager announced an US recession (businessinsider) and repeated his recession call in 2012 (businessinsider). In August 2013 Hussman predicted that the US stock market will crash soon (businessinsider) and he repeated his crash call in August 2014 (businessinsider). Hussman has still a lot of devote followers - in spite his awful performance. Henry Blodget is one of Hussman´s chearleaders. In July 2014 the founder & CEO of influential website business insider also announced a stock market crash following Hussman´s arguments. Marc Faber is another member of the doom & gloom club. The perma- pessimist, who is still worshipped, predicted for 2014 a stock market crash that should be worse than the crash of 1987 ( cnbc).
There also is a cult around short sellers like William Ackman. The hedge fund manager is betting massively against Herbalife, a producer and seller of nutritional supplements, which he wants to destroy (driveby). The media eagerly multiply and advertise the strategies of short sellers like Ackman, Chanos & Co., giving them the power to influence the stock market (talking stock price down). Even when the short sellers do nothing illegal they can inflict a lot harm by spreading rumors and allegations which can ruin the reputation of a company and thus irritate customers, creditors, investors and employes and so inflict damage on the company.
The naysayers, downers & prophets of gloom are courted by "New York Times", "The Guardian", "Bloomberg", "Business Insider" and Co and the majority of the popular bloggers, they all link to each other. The negativity cult is irrational in the face of the progress the world has been making (bloombergview spectator). In the US the number of new jobs and wage are rising and the weekly jobless claims dropped on the lowest level since 40 year. The cult of pessimism is at least irritating investors and potential employees and creating a headwind for the economy.