Not Quite a Contrarian Extreme

 

In "Financial Press Getting Very Scary — Good Sign?," the Wall Street Journal's MarketBeat blog notes that at least one "expert" believes bearish sentiment about the economy is at or near a contrarian extreme.

The financial press sometimes is ahead of the curve, but it can also act as a contrarian indicator.

The most famous incidence of this is the BusinessWeek story in August 1979 that proclaimed the Death of Equities. This story ran on the eve of what would become a remarkable two-decade surge in shares, capped by the craziness of the Internet bubble of the late 1990s.

With that in mind, Ed Yardeni, head of Yardeni Research, takes a tour of the recent financial press landscape. He finds plenty of really scary headlines, including:

• The Wall Street Journal’s Monday story about how debt is hampering the recovery. It talks in stark terms about how debt-fueled binges usually result in a very, very long recovery period.
• This week’s Economist features a cover illustration of a man in a suit staring down at a drain. The headline: If Greece goes…The story argues that “the opportunity to avoid disaster is shrinking fast.”
• The Financial Times weighed in this week with another glumster: “The outlook for income growth has rarely looked worse than it does today.” Big debt, no income. Yikes.
• Not to be outdone, Bloomberg this week features Gary Schilling, an economist, arguing that China is headed for a hard landing. In Part One (a multi-part series?!?!?) he says: “Few countries are more important to the global economy than China. But its reputation as an unstoppable giant — as a country with an unending supply of cheap labor and limitless capacity for growth — masks some serious and worsening economic problems.”
• And back we come to the FT, adding to the Greek drama/tragedy. “European officials have begun debating contingency plans in case the Greek parliament fails to approve a EUR28bn austerity plan, which will be voted on after a three-day debate that began on Monday.”

Mr. Yardeni’s view: “It may be time to be a contrarian. If the financial press is losing all hope in the long-term outlook, then maybe the future will be better than expected by the consensus of doubters.”

While I generally agree with the view that it's a bullish sign when "the crowd" is negative, that perspective doesn't just refer to the media or certain segments of the population. It also includes Mr. Yardeni's (highly-paid) Wall Street peers, who appear to be lopsidedly bullish nowadays, as the Associated Press reports in "Why Economists See a Stronger Second Half for 2011":

Farewell and good riddance to the first half of 2011 — six months that are ending as sour for the economy as they began.

Most analysts say economic growth will perk up in the second half of the year. The reason is that the main causes of the slowdown — high oil prices and manufacturing delays because of the disaster in Japan — have started to fade.

"Some of the headwinds that caused us to slow are turning into tail winds," said Mark Zandi, chief economist at Moody's Analytics.

For an economy barely inching ahead two years after the Great Recession ended, the first half of 2011 can't end soon enough. Severe storms and rising gasoline prices held growth in January, February and March to a glacial annual rate of 1.9 percent.
The current quarter isn't shaping up much better. The average growth forecast of 38 top economists surveyed by The Associated Press is 2.3 percent.

The economy has to grow 3 percent a year just to hold the unemployment rate steady and keep up with population growth. And it has to average about 5 percent growth for a year to lower the unemployment rate by a full percentage point. It is 9.1 percent today.

As welcome as the stronger growth envisioned in the second half is, the improvement should be modest. For the final six months of the year, the AP economists forecast a growth rate of 3.2 percent.

It's also worth noting that contrarian calls really only make sense when the data matches the sentiment. With the stock market off five percent from its two-year highs and the year-over-year change in real GDP at 2.3 percent, one could hardly describe those numbers as being overly negative.

Once again, if you want to know what's really going on in the economy and financial world nowadays, pay no attention to those clueless shills who the mainstream media keeps relying on.

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