Irrational Pessimism??
In my previous post, there was mention of rationality of customers being a prime reason for the recession. Although this idea may seem to be fundamental to many of the readers, I was a bit reluctant in accepting the entire notion - "How can 'Rationality', an ideal concept, result in something so disastrous like 'Recession', miles away from ideality!!" It's the fact that we assume customers to be irrational, while they make their choices, that makes 'Rational' - 'Irrational'.
While googling to find the basis for the theory, I came across an entirely new term - "Irrational Pessimism". This state of mind is a result of the ongoing recession. Most of the stuff that follows is part of other blogs. It is quite amazing to see the unanimosity in everyone's outlook: “It will get worse by the end of 2009”, “it will take 3-5 or even 10 years or more to recover”, and “it is the worst since the Great Depression”.
Pessimism is ‘everywhere’! The argument that this pessimism is justified is ‘everywhere’. I would like to cite the reasons why it may be “irrational pessimism”.
“Misery Index”, simply adding unemployment rate and inflation, shows that we are just at 7.6 %, which is far below the recessions of the 70s and 80s when it was 22% and 19.9%.
This recession is, of course, not over yet, but none of the above statistics are expected to get as bad as the prior recessions. There are stories of massive lay-offs, but unemployment is only expected to rise to 8.9%.
So, how do we explain the stock market hitting the rock bottom?
Reasons for the Crash being Larger:
- Popping of 4 bubbles at once – real estate, oil/commodities, China (BRIC countries) and a debt/financial bubble.
- Fear among consumers due to the Banking Crisis, made it harder to get credit.
- Recession is global.
Are these enough to justify the current pessimism??
- All the 4 bubbles have probably deflated fully, except may be for real estate.
- The US financial index is down 80%, not much room to fall further.
Everyone is wondering how bad the economy could get, but the economy is not the problem. Everyone is wondering how low the stock market will get, while trillions of dollars sit in cash on the sidelines waiting for the right time to jump back in.
Is “Irrational Pessimism” the latest bubble? We need to wait and watch as to what will be the impact, when this one pops.
Labels: bubble, Financial Market, irrational, irrational pessimism, pessimism, recession
posted by Oval at
5:08 PM
8 Comments:
Very interesting!
Incidentally there is an interesting website that is specifically dedicated to recession victims.It offers help and discusses all issues related to recession-www.angstcorner.com. It’s worth a visit!
I think it is very optimistic of you to assume that Irrational Pessimism could be the next bubble.
Nonetheless, the popping of this bubble should be the start of healing process. People will come to realize the basic root being the mindset and nothing more.
Nice one. A different outlook must say!
As I said, this was new to me as well. I read this on blogs, and tried to present the same.
I feel that even if it may not be a perfect analysis, the point put up is worth pondering over.
Hi, nice post. I have been wondering about this topic,so thanks for sharing. I will likely be coming back to your site. Keep up the good work
@ Joan: Thanks for the appreciation. It's nice to have unknown people comment on one's blog. It really encourages one to write better posts.
@Jayshree: Sorry for the late reply. Visited the site you suggested. It surely seems to be interesting. By the way I am about to get my degree in one year's time, may be you see me next writing an "angst blog". ;)
I think its wrong if you judge this crisis (customer sentiment)based on Indian stats. Apart from US all major export oriented economies were severely hit like germany, china,Japan,European union...so these nations and their fundamentals are governing the sentiments of everyone.
For these nations %age drop in GDP, employement is worse in decades almost equalling that during Great Depression. As for the financial sector after recent stress tests US banks still need close to 560 billion USD.... so their miseries are far from getting over.
Employment in US falls by 600k every month...so you cant call fear of an average customer irrational. US citizens used to spend more than 99% of their earnings in consumption (no saving)..and this was responsible for booming asian & european economies etc. (more imports in US) Now they have started saving more...you cant call this irrational, it was bound to happen at some point or other.
The stats that I have quoted are not for India. I may not have mentioned, but these are related to the US economy.
In that case (assuming my source of information is trustworthy enough ;) ), this pessimism seems to me irrational.
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