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Generational Dynamics Web Log for 18-Sep-07
More on the Marketpsych "Fear Index"

Web Log - September, 2007

More on the Marketpsych "Fear Index"

By this measure, investor fear has clearly been growing since February.

When I wrote about this subject last week, I hadn't been able to find any historical data on the Marketpsych web site. Now I have.

This graph shows the value of the "fear index" (measured on the left scale) for the last year versus the Nasdaq market index (measured on the right scale). It shows that the market seems to vary inversely with the fear index.

This graph, showing a year's worth of data, clearly indicates that, by this measure, investor "fear" had been falling steadily until February 27, when a 9% collapse in the Shanghai stock market triggered a worldwide "mini-panic." Things settled down after that, but not to the way they were prior to February 27. Investor "fear" was never went back as low as it had been in December and January and, in fact, has been rising steadily since then.

As this graph shows, the "fear index" had fallen to about 4 in January, peaked at 22 in February, but fell back only as far as 10 in May. Since then, it peaked again at 51 in August, and is now hovering around 21, which is near the February peak value.

Before becoming aware of this index, I had previously thought that the August 16 "mini-panic" had been the turning point, and that's why I wrote the essay "The nightmare is finally beginning" at that time.

However, that's clearly not the case. It's now clear that the February 27 event was the triggering event for the rise in investor anxiety, even though the market peak didn't occur until July 19.

The Marketpsych web site does provide a graph that's updated daily, each morning (including Saturday and Sunday), showing the most recent values of the "fear index." The adjoining graph shows the value as of Tuesday morning, along with the preceding three months.

We can guess that the rise in the past few days was triggered by the spreading panic in Britain, as branch offices of Northern Rock continue to be mobbed by depositors wishing to withdraw their money.

And we can guess that the rise on Tuesday morning is related to the anticipation of an expected announcement on Tuesday afternoon of a reduction in the Fed Funds rate.

Incidentally, these two stories have become major international stories in the last few days. In fact, THE major international story on Tuesday appears to be the anticipated Fed announcement, which investors apparently believe will save the world. That alone is a sign of worldwide investor anxiety.

The day to day variations in the fear index really don't mean much, since any bit of news, major or minor, can trigger a small rise or fall. In fact, I suspect that the margin of error on the computation of this index is something like ±3.

What IS important is the long-term trend, and that's become quite clear -- that investor anxiety is continuously increasing.

This contradicts some of the latest remarks by Alan Greenspan, as he seems to have become a rock star in the last few days, and is willing to talk gibberish on almost any economic, political or personal subject.

On the interview on 60 Minutes, broadcast on Sunday, Greenspan said the following, in response to a question by interviewer Leslie Stahl:

Stahl: "Well, what we've already begun to see is not just that housing prices are falling but that it's affecting the job market for anything related to housing, including real estate, including the sales of appliances and furniture."

Greenspan: "But there is an underlying strength in the United States. And, indeed, when you look around the world, even with this extraordinary credit problem, the economies seem to be holding up. But for the moment it does not look sufficiently severe that it will spiral into anything deeper.

"We’re going to get through this particular credit crunch. We always do. This is a human behavior phenomenon, and it will pass. The fever will break and euphoria will start to come back again."

This is a weird point of view. Everybody seems to agree now that there's a housing bubble. Even Greenspan has now admitted that he "didn't get it" about the housing bubble, until it was too late.

So what does it mean when he says, "The fever will break and euphoria will start to come back again"?

Is he abandoning his previous view that "history has not dealt kindly with the aftermath of protracted periods of low risk premiums"?

Who knows?

While I'm on Greenspan, I'd like to comment for a moment on "Fed speak." In his new book (which I haven't seen), Greenspan apparently brags about his use of "Fed speak" to make comments that nobody understands, so that he can get away with saying anything he wants.

What the hell is that all about? I understood everything he was saying, and I've commented on all his major speeches since 2004 on this web site. I showed how he went from self-congratulation to increasing alarm to a total repudiation of his previous reasoning, to dire warnings at the end of 2005. Maybe you have to go to the trouble to read a paragraph two or three times, but if you're willing to go to that trouble, then it's perfectly possible to understand what he's talking about.

This just goes to show how ignorant and sloppy journalists and politicians are. When a journalist or blogger says that he didn't understand Greenspan, what he's really saying is this: "I was too lazy and stupid to bother to figure out what was going on, and I didn't WANT to know what was going on." So you had people like Greg Ip at the Wall Street Journal and Steve Liesman at CNBC who were so stupid and so lazy that now they have to establish a framework of excuses so that they won't be blamed by other people. "Ohhhh, it's not my fault that I'm stupid and lazy; it's Greenspan's fault."

That's like Ben Bernanke's excuse that "It's not the US's fault that we're at astronomic levels of public debt; it's every other country's fault, for having a 'Global Savings Glut.'" Blecch.

Incidentally, I mentioned the February turbulence that caused a 9% drop in the Shanghai stock market bubble in February. There was more turbulence in June.

But nothing seems to stop this bubble (which is what I used to always say sarcastically about the Wall Street bubble, until it finally peaked on July 19.)

The Shanghai index seems to have absolutely no limit, and undoubtedly will keep on getting exponentially higher forever (which is what I used to say about Wall Street). I guess Alan Greenspan would be pleased to see that the "euphoria" hasn't ended in Shanghai.

S&P 500 Price/Earnings Ratio (P/E1) 1871-2007

S&P 500 Price/Earnings Ratio (P/E1) 1871-2007

From the point of view of Generational Dynamics, Wall Street has been in a bubble that began in 1995, as evidenced by the fact that price/earnings ratios have been astronomically since then. The bubble cannot continue forever, and the rapidly rising value of the "fear index" appears to indicate that it won't continue for much longer.

(18-Sep-07) Permanent Link
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Generational Dynamics Web Log for 18-Sep-07 More on the Marketpsych "Fear Index"

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Generational Dynamics Web Log for 18-Sep-07
More on the Marketpsych "Fear Index"