Both optimists and pessimists contribute to our society. The optimist invents the airplane and the pessimist the parachute.
~ Gil Stern
Robert Prechter recently made a lot of waves with his off-the-charts prediction of Dow 1000 in a New York Times article. Prechter is famous (or infamous?) for his extreme predictions, as well as for the fact that some of his market calls have been right on the money:
- He forecast a bull market in stocks in 1982, but warned investors to get out of the market before the 1987 crash.
- In July of 2007, he recommended that investors heavily short the S&P 500.
- In late February of 2009, Prechter advised his subscribers to cover their negative bets in anticipation of a very sharp rally.
There’s no doubt that Mr. Prechter has made some great calls. But like anyone who makes a habit of predicting the capricious gyrations of the financial markets, he’s been wrong a lot too. Although he’s made the odd bullish call, he tends to be quite bearish, often extremely so. But does that make him untrustworthy?
There are some in the investment community who are so averse to Mr. Prechter’s opinions, and to Elliot Wave Theory in general, that anyone who even offers a platform for his views is automatically dismissed as a panic-pusher at best and certifiably insane at worst. Is all of this vitriol justified? Are Prechter and those who deign to discuss his views peddling pessimism, or merely searching for the truth?
Don’t Shoot the Messenger
Having followed financial commentary over the past decade, I’ve noticed that the bull position is usually perceived not only as the default stance, but as the right stance. By right, I mean both morally and factually correct. In reality, bulls are often wrong. Bears are often wrong too. Both are incorrect, but it seems like only bears are painted as both factually and morally wrong – even unpatriotic. They seem to always wear the black hats, while bulls usually wear the white.
Not all bears conjure up the same dismissive grumbling as Robert Prechter, however. Not long before Prechter’s pronouncement, Richard Russell, the enduring editor of the Dow Theory Letters, advised his subscribers to Sell Everything Liquid. While many were skeptical of his predictions, he garnered a little less outright hostility than Prechter is accustomed to receiving. Perhaps his longevity has earned him a pass.
Still, most people with bearish views are usually treated like the Tae Kwon Dodos in the movie Ice Age who go around intoning “Doom on you!”. Perhaps this cynicism is deserved in some cases. Some of Mr. Prechter’s predictions are a little far-fetched, but that doesn’t mean he should be discounted completely.
Why the Black Hats?
I guess it sort of makes sense that bears would be viewed more negatively because they are, by definition, well . . . negative. Let’s face it. If given a choice between receiving good news or bad news, most of us would choose good news. It’s easier. It means we don’t have to worry. We don’t have to prepare. We don’t have to do anything. All is well.
But what if all isn’t well? Who is providing the greater service – the advisor who makes you feel good even though tough times are ahead, or the one who tells you to prepare for trouble on the horizon? Back in 2007, Meredith Whitney received death threats as well as abusive emails and phone calls after she downgraded Citigroup. As we all know now, she was 100% correct. Ironically, whether they’re right or not, it’s the analysts who lean bearish who are often villainized. But why?
There are a few possible reasons:
- Most investors, especially retail investors, are long-only: The average investor has neither the time nor the expertise to use the more sophisticated strategies (options, shorting, inverse ETFs) necessary to profit from a market downturn. An upward-trending market is better for the masses.
- The financial services industry sells bull markets: Assets under management refers to the amount of money a financial adviser or firm controls for clients. Most financial services companies earn a percentage of the assets they manage whether those assets appreciate in value or not. It’s the gift that keeps on giving. Your adviser will almost always discourage you from selling because he/she makes money from your money. But if you never sell, you are perpetually long and you can lose a lot of money in a secular bear market.
- Bad new isn’t fun: As mentioned above, rocky markets imply a rocky economy, which often means more worry and work for all of us.
Markets and economies are supposed to be bidirectional. While bears can sometimes lean too far to the negative side of the boat, that doesn’t necessarily mean they are deliberately trying to tip it over. Sometimes the bearish perspective is the right one, even if it’s not the easiest.
Why Negative Isn’t Always Bad
A balanced, realistic life involves ups and downs. So does a balanced market, economy, or portfolio. We can ignore, contort, or delay reality for awhile, but nature and economics will command balance eventually. It’s long been my contention that one of the major problems with our modern culture, markets and economy is the failure to fail. Really, it’s not so bad. In truth, it can be really good.
Forest fires bring both destruction and rebirth. Personal failure brings both discouragement and growth. Bad times render the good times that much sweeter. And sometimes, hard times are reality. Ignoring that reality can bring on a set of negative consequences that make the organic hard times look like a walk in the park. I think that’s where we are right now.
I would love to be more bullish, but I fear that it’s our failure to fail that’s causing us to epically fail, as my sons would say. Negative isn’t always bad. There’s nothing wrong with a disagreement that clears the air. Nor is there anything terribly threatening about a recession that clears the economic deadwood.
But we currently live in a society where the acknowledgment of failure is unacceptable. There are banks that should rightfully be out of business paying millions in bonuses. There are government-supported auto companies announcing amazing percentage gains in sales – mind you, a huge gain is pretty easy to attain when you were in bankruptcy during the previous year’s comparison period. Taxpayers are footing the bill for this fake success. Government deficits and debt are ballooning globally as a result.
If the past couple of years have taught us anything, it’s that fake success is fleeting. Real failure, while unpleasant, eventually leads to real success. We may not always like what the bears have to say, but we owe it to ourselves to hear them out. Handling negative financial developments in a timely manner is better than pretending they don’t exist, allowing them to multiply, and paying an exponentially higher price to clean them up later. Maybe if we gave the bears a break and let them wear the white hats once in a while we wouldn’t be in this mess.
Do you think the bears get a bum rap, or is it really wrong to be negative on the markets and economy?