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June 21, 2011, 12:01 a.m. EDT
By Paul B. Farrell, MarketWatch
SAN LUIS OBISPO, Calif. (MarketWatch) "” Big names like Nouriel Roubini, Jeremy Grantham and Bob Rodriguez are slinging around words like "disaster" in forecasting the stock market, advising extreme caution and defense strategies. Contrast that with hot headlines about the Dow "storming back soon," soaring to the "Next Stop, Dow 20,000."
Warning, folks, you're in a new cycle of irrational exuberance.
Skittish investors have been dumping their holdings at the slightest sign of trouble, but Matt Phillips tells us why they shouldn't throw the baby "” or Treasurys "” out with the bath water.
After losing an inflation-adjusted 20% the last decade, a prediction that the Dow will roar back 80% anytime soon is misleading, pure speculative hype. Reminds me of book titles like "Dow 36,000" and "Dow 100,000" back in 1999. And memories of those mutual funds selling with absurd multiples over 40, with annual returns in excess of 100%. Worse than the tulip-bulb mania of the 1590s.
What's really roaring back is hype, happy talk and irrational exuberance.
OK, admit it, we all want the good news. Investors are natural optimists, blind optimists. We selectively ignore facts, deny history, block risks and fail to learn lessons like in 2008. Not just Wall Street's trained killers "” the bankers, traders and executives "” but also Main Street's 95 million investors.
Yes, you. Research in behavioral economics tells us investors actually want to be deceived. Why? We want to trust in a brighter future, good news, hope, happy talk and bull markets.
Investors believe "this time really is different." Another meltdown won't happen, even though the pattern is imbedded deep in an inevitable 800-year historical cycle that's guaranteed to repeat. So even though we desperately want to forget the crash of 2000, the meltdown of 2008, the bears and recessions that followed, Wall Street remembers, takes advantage of us and won't stop playing us for suckers.
The closer we get to another crash, the more Wall Street pundits ratchet up the propaganda fed to the press about how the market will come roaring back soon.
Unfortunately, the next crash will be bigger. Wall Street and its puppets in Washington never learned the lessons of the 2008 crash. Today their lobbyists are spending hundreds of millions to kill reforms, keeping in place the same toxic, unregulated Reaganomics that triggered the 2008 crash, setting America up for another, bigger crash, kicking America's problems down the road, one more time.
Except this time it won't work. The public's appetite for another $23.7 trillion in total bailout debt is dead. Of course Wall Street won't stop. Their greed is so addicting they can't see their death wish playing out. And won't see it till too late, till the Great Depression 2 sweeps across America. Till then, Wall Street's self-destructive addiction is unstoppable.
Proof? Here are some reminders from three earlier historical cycles and the irrational exuberance that consumes us:
BusinessWeek, Kiplinger's and USA Today all reported on false predictions made before the subprime credit meltdown spread rapidly across America and the world:
Treasury Secretary Hank Paulson: Tells Fortune magazine, "this is far and away the strongest global economy I've seen in my business lifetime."
Fed Chairman Ben Bernanke: "I don't anticipate any serious failures among large internationally active banks."
Congressman Barney Frank: "Freddie Mac and Fannie Mae are fundamentally sound."
Ken Fisher: "This year will end in the plus column ... so keep buying."
Barron's: "Home prices are about to bottom."
"Mad Money's" Jim Cramer: "Bye-bye bear market, say hello to the bull."
Goldman Sachs' Abby Joseph Cohen: "The fear priced into stocks is likely to abate as recession fears fade."
Kiplinger's: "Stock investors should beat the rush to the banks."
Alan Greenspan: After 18 years, he finally admitted "I really didn't get it until very late."
"Dow 20,000 next? It's pure speculative hype http://on.mktw.net/jtqXLt" 11:33 p.m. EDT, June 20, 2011 from MKTWFarrell
"Ayn Rand's "?Death of the Soul of Capitalism' http://on.mktw.net/lx16x4" 11:59 p.m. EDT, June 13, 2011 from MKTWFarrell
"We need an "?Evil Plan' to foil our own leaders http://on.mktw.net/iO2rmK" 11:39 p.m. EDT, June 6, 2011 from MKTWFarrell
Paul Farrell writes the column on behavioral economics. He's the author of nine books on personal finance, economics and psychology, including "The Millionaire Code," "The Winning Portfolio," "The Lazy Person's Guide to Investing." Farrell was an investment banker with Morgan Stanley; executive vice president of the Financial News Network; executive vice president of Mercury Entertainment Corp; and associate editor of the Los Angeles Herald Examiner. He has a Juris Doctor and a Doctorate in Psychology.
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