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Investor Psychology: The Mary Poppins Market


What is perhaps the most amazing bull market in stocks just keeps on going. Not stage 5 hurricanes nor nuclear threats from North Korea have made a difference. In fact, investor sentiment cannot be described and anything other than ebullient.

We have to acknowledge the occasional Wall Street market strategist or hedge fund manager predicting the immanent demise of the bull market that started almost nine years ago. However, tell that to the VIX Index, generally consider a key gage of investor discomfort. At the peak of the 2008 financial crisis, the index topped out at 60. When last we check, the VIX was near an all time low of 10.

Hurricane Helper

Investors have even found hope in the lethargic 2% growth of the economy. That perverse notion comes at the expense of all the misfortune and misery caused by hurricanes Harvey and Irma. Taking just the financial damage into account, the addition of $50 billion or so of rebuilding in Texas and Florida will bump up the GDP to maybe 3%. Human loss and suffering is not exactly idea for higher stock prices but that has been the reality.

Reality Check

The beautiful thing about the current high level of investor psychology is the ability to turn ones back on reality. We are talking about something beyond the mess at the White House. We are talking about bankruptcy both at a personal and national level. Perhaps this is a bit dramatic, but consider the following recent headlines.

• Student loan balances jump nearly 150 percent in a decade to an all time high of $1.4 trillion.
• Student debt plagues older Americans. There are 5% of the over 60 population on the hook for $66 billion in outstanding student debt.

The current level of US debt is over $20 trillion and this is before the costs of hurricane relief are tacked on. If this seems large, the consumer numbers are worse. Including student debt, the average consumer has $416,532 in debt or almost $25 trillion in total.

Comparing these figures to US GDP and Personal Income provides a measure of our individual and collective ability to pay off debt. US borrowings amount to well over 100% of GDP and personal debt is over 20 times individual annual earnings.

We are in uncharted territory. In the last half century, government debt has gone from less than 5% to GDP to over 100% and continues to grow faster than GDP. Similar conclusions are obvious on consumer debt as well.

No Relief In Sight

Any way you look at it, control over debt isn’t going to take place. The $50 billion in likely hurricane damage will push up unplanned Federal spending and if any form of tax reform passed by Congress is guaranteed to have a short term reduction in receipts.

As for consumers the outlook isn’t a whole lot better. Static wages in the face of rising spending doesn’t leave lots of space for lowering credit card debt. According to CareerBuilder, 78% of full time workers are living paycheck to paycheck.

Mortgage interest rates may be low and stable but housing prices are going up more than 5% annually. Oh yes, there are those education costs that fuel ever-higher student debt.

The Age of Denial: A Powerful Weapon

After comparing the record stock market to its bankrupt constituents it seems that a new rule of survival is needed. Here is one suggestion: if a wall is too high to climb and it can neither be broken through nor maneuvered around, then just deny it.

A recent report on American attitudes pointed out how 70% are either seriously overweight or obese. Consumer surveys showed that only 48% felt they had a weight problem. The apparel industry feeds this denial using models and presenting supersized apparel for fashionably fat consumer. Hey if denial can work for Madison Avenue why should Wall Street be excluded?