Where are we right now on the Fear/Greed meter?

If there was a scale that calibrated Maximum greed as a +10 (internet stocks in late 1999, real estate in late 2006, commodities in spring 2008) and Maximum fear as a -10 (depths of the Great Depression in 1933), where would we be today in the midst of the Global financial crisis and economic meltdown? In my opinion, we are roughly at a +2. Yes, a +2. There seems to be an inordinate amount of attention focused on not missing the next Bull market (some actually called a bottom in JUNE of this year), and near-zero apprehension of a possible Decade-long malaise in the majority of Industrialized western nations. While we are currently enjoying a respite from the relentless downward stock action of Sept/Oct/Nov, the chances of seeing any signs of economic recovery in the next several months is near-zero. In fact, my readers were the first to see the case for a huge retrenchment in National consumption and production that will make all recessions of the past three decades look like a walk in Central Park on a balmy Spring day.

I am herewith reprising excerpts from a recent email exchange with a friend of mine, which I believe is typical of the mindset of the average investor with 6 or low-7 figures in assets. My responses to his queries are in bold italics.

Q. When do we realize this economic deflation, and how long do you expect that to last?

Economy's been deflating radically for months -- stocks are down 40%, real estate 20-40% depending on where you live, and have you shopped for clothes lately? Unprecedented sales. Circuit City, Linens 'N' Things, and many more stores (or dozens of locations of larger chains such as Ann Taylor/Talbots) will be closing over the next 12 months. Commodities also down huge....this is Deflation. Everything drops in value due to lack of demand from consumers. Expect this to continue for at least another year, at which time the equity markets will be seriously lower than where we are now. Be aware that we are in the middle of a mini-rally in stocks which may last another month or two. The consensus is that we are close to the end of this recession and by the fall of 2009 the economy will be back on the upswing. In my opinion, this is the single most dangerous presumption that an investor can make. No one under the age of 85 has lived through a collapse of the world financial system such as we are seeing today, and the damage will last for several years.

Q. When do you think we will bottom? What will be the cause of the halt? At some point, (the hoarding/saving will cease) and we can't purchase any less as a society? Using your knowledge and experience, build a two likely scenario for the next 5 to 8 years.

We will see the deleveraging of the individual - much in the same way that the institutions in the financial sector have shrunk/become insolvent. The mistake everyone seems to be making is that there will be tons of bargains in stocks and real estate to be had. That will only be true for a relative minority of people who didn't get wiped out/lose their jobs along the way to the bottom. Believe me, when your neighbor's house sells for 60% off its peak value and your retirement savings has dwindled by 70-80% from its peak, and your job can only pay you the yearly income you were making in the late 90s - you won't exactly be hunting for investment bargains at that point in time. Millions of people will be in the same boat. We are going to unwind all the gains that were built on excessive credit (home equity, credit cards, stock investments, etc) that have been falsely presumed as a birthright for living in the U.S. of A. in modern times. Given the dissonance between people's naive presumption that we can't get much worse than the current economic environment - and the reality of the ongoing unwinding of leverage and credit, it would not surprise me to see the Dow trading at 4000 within two years (not withstanding the mini-rally up to around dow 10000 in the next few months). I suggest readers look at FDR's spending programs as an example of how ineffectual government can be. The depression rolled right along for 8 Years after FDR's first progams started, and despite all of govt's best efforts we did not get out of the economic morass until we got involved in World War II.

Q. Do you see the unwinding going to realistic values or will they descend beyond because of loss of faith in the economy after peoples expectations for a rapid recovery to pre-existing values are dashed? I have heard some people speak of P/E ratios they see as favorable in many stocks at this point in time. Are they wildly mistaken? As for history, I think it gives structure and meaning to the present. Does current communication technology alter the parallels to history? Does it sufficiently alter population awareness and reaction time to a point where we can no longer anticipate timelines for events such as these (as if we really ever could before)? Is the relatively blunted population response (ie, overall panic) reflect naïveté or a better collective understanding of the situation?

With near-certainty, I would say that a total loss of faith in our economic system is coming. Such a radical shift in mass psychology doesn't occur overnight. people have been conditioned to think the natural state of economic matters is always better in the 'long run'. Guess it depends how you define 'the long run'...life in the early 1950's was better than in 1928, but we had a disastrous 16 years in between. "I have heard some people speak of pe ratios they see as favorable in many stocks at this point. Are they wildly mistaken?" 'Wildly' is a severe understatement, and ties in with the general naivete about the severity of our current worldwide situation. Do you understand what the E in P/E stands for? It's already sinking rapidly. I started this Blog specifically to provide some insight other than twaddle from so-called 'professionals' who have zero standing to discuss the future, since they were completely clueless in warning anyone a year or two ago about the financial tsunami currently upon us. "And as for history,..." The history of economic man is encumbered by two fundamental forces: Fear and Greed. You've seen the heights that Greed can take us to...and now you are going to witness the other side of the coin firsthand. The fact that investors as a whole are still concerned about 'missing out' about bargains in the next up-cycle which is surely to be right around the corner is an indicator of where we are in December 2008 on the fear/greed meter....which is to say "nowhere near Fear". Human beings are no different in their Base emotions than they were 50, 500, or 5000 years ago - only the technology changes. When we get to real Fear, when unemployment is at 10% and everyone finally realizes that government intervention can't solve a crisis of world proportions, we'll be much closer to a buying opportunity in the stock market - call it late 2010 for an estimate.

This conversation is crucially important for people to understand just where we are in the down-cycle, which is to say "very early". Remember, no one who works in the industry is coming on TV or writing anything negative in a major media publication because they CAN'T. You think you are going to hear "investment professionals" publicly tell you to run for the Hills? Their livelihoods depend on YOUR assets being fully invested in stocks, mutual funds, real estate, emerging markets, etc. so they can take management fees and commissions off you. Don't be so foolish as to equate "professionalism" on Wall Street with expertise in other professions. They are all SALESPEOPLE, nothing more. This should have been obvious to all my readers a long time ago.