Monday, June 13, 2016

Economy: The Pessimism Bubble

(Drivebycuriosity) - The Interest rates for bonds are falling again - world wide. Interest rates on German & UK bonds sunk to their lowest level. People (the market) are shunning risky assets like stocks. Instead they are flocking into bonds, which are considered as safe havens. This is a sign that the majority (the markets) is getting even more pessimistic.

We are experiencing a pessimism bubble. Since the recession 2008 the markets for stocks & bonds are ruled by pessimism. Positive developments are ignored, like climbing US wages & retail sales, weekly jobless claims close to record lows, zero inflation, commodities & loans are very cheap. Instead people are scared about almost everything: Brit Exit, recession risks, deflation, China hard landing, cheap commodities, you name it.

The media is worshiping alarmists like perma-bear George Soros. BusinessInsider, Marketwatch and other news platforms make a lot of money by spreading negative news and pessimistic predictions ("warnings") and continuous reminders to the 2008 recession. Scarring the masses is a profitable business model. The general pessimism also could be - at least partially - a result of the herding behavior. People are scarred because others (friends, experts, celebs) show pessimism.

The current obsession with risks is irrational & overblown. China is not collapsing (this weekend we learned that in May industrial production rose 6% and retail sales climbed 10%), the US economy is far away from a recession ( driveby ) and even if the Brit really exit the EU people will continue trading with the island and invest there.

Sooner ore later the pessimism bubble will have to pop, as every bubble. Hedge funds and  others,  who are sitting on cash and incomeless bonds, will have to come back to the stock market.

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