5 Stages of Market Grief
Barry Ritholtz
About this author: Author's websites:
One of the most intriguing things I find about the market is how the collective psyche sometimes resembles a singular entity. In particular, I have been fascinated by the commentary we have heard from some quarters regarding deep and obvious flaws in the present macro environment. I spent a lot of time over the holidays (skeptically) reading commentary from various pundits. There was something strangely familiar in the absurdly erroneous observations, but I couldn't place my finger on what it was.
Until Friday. I don't know who or what actually triggered my memory, but it finally dawned on me what the parallel was: The Kübler-Ross model of 5 stages of grief.
For those of you who never took any psych in college, that is the process by which humans deal with grief and tragedy. It was introduced by Elisabeth Kübler-Ross in her 1969 book "On Death and Dying". This has become well-known as the "Five Stages of Grief". They are:
1. Denial
2. Anger
3. Bargaining
4. Depression
5. Acceptance
Reviewing recent market commentary, it appears that the investors, traders and pundits alike have been working their way through each of these 5 stages. Consider:
1. Denial:
For the longest time, the consensus was that Housing issues wouldn't
impact anything else. Classic denial was demonstrated by the insistence
that first Housing, then the credit crunch, was "contained."
There has been a multi-step process for the deniers (denialists?). Initially, they insisted there was no housing slowdown. Then, any slowdown would not impact consumer spending or the broader economy. The 3rd denial step was that while it was no longer contained, any damage would be mild. The most recent denial was that while the Housing issue has been worse than previously believed, it is now fully reflected in stock prices.
Me think they doth protest too much.
We saw the same denial steps in inflation, consumer spending, and job creation. The denial transition went from a) No slowdown to b) Slowdown, but no impact to c) Impact, but contained to d) Broad impact already reflected in stock prices.
2. Anger: The details of this were personified by Jim Cramer's now infamous Fed rant. After spending the prior year discussing that Housing was fine (February 2007), and pointing out each bounce in the home builders
(November 2006) was proof the Housing bottom was in, Cramer's
incredible meltdown was stark evidence that the denial stage was over,
and the classic anger stage was beginning.
3. Bargaining:
I believe we are now at the bargaining stage. This is reflected in the
increased expectations of a 50 bps rate cut (If the Fed cuts
aggressively, stocks will be fine). Buying falling knives is a form of
bargaining (If I avoid momentum plays, and only buy cheap stocks, I'm
okay).
Yet another example I've been seeing: "Invest Now in Anticipation of Recession Recovery."
~~~
What's next? Well, steps 4 and 5 -- Depression and Acceptance -- have yet to occur this cycle.
If you were an active investor -- or better yet, in the business, recall what your psyche was like in mid-2002. That was Step 4 - depression. The screens were red all day, investors refused to even open up their monthly statements, no one wanted to take your calls. It was ugly. That's what depression is like.
Step 5 (Acceptance) was when people finally admitted it was over -- that stocks had their day. Hope was extinguished, and perhaps real estate or commodities might be a better play. Incidentally, stage 5 is a great time to buy equities.
If this parallel to Kübler-Ross continues to hold, and if my approximation that we are only at stage 3 is correct -- then we have some downside work to do before this is all over .
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This article has 15 comments:
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Malkiel
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590 Comments
Jan 07 10:31 AM-
BxCap
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49 Comments
Jan 07 10:37 AM-
Reinko
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342 Comments
Jan 07 05:21 PMSome real good analysis of the emotional component of irrational market behavior. And Barry understands his stuff: Those (five?) stages can be observed at the individual level, the family level, the company level to way up the country/global level.
Global level?
Yes, why not because we will miss the USA when we need her the most in the future...
Barry has brains, so Barry understands the next:
Go the the Federal Reserve 'flow of funds' sheet in the so called Z1 release, link:
www.federalreserve.gov...
Add up the relevant totals (column one the the one before last):
Total non financial debt sector = 30640.9
Total financial sector debt = 15435.3 billions of US$.
That's about 46 trillion and with a bit of debt kept outside the books (for example those trillions of US government bonds inside the social security funds that are not in the official total government debt) we see:
Total debt that the US economy has on itself is over 50 trillion.
With a reasonable to understand interest level of say 5%, we need 2.5 trillion a year to stabilize this debt.
2.5 trillion is just 2500 billion and that is above the entire profit the US economy takes in on a yearly basis.
Thus this Ponzi schem will vaporize and Barry can go to line one:
Denial.
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calvino
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79 Comments
Jan 07 09:28 PM-
David Lentz
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356 Comments
Jan 08 09:53 AMHowever, it sure seems just a bit different this time (and my perceptions can change at any time, so quite likely this all means nothing), and I'm thinking that we may be in for a few years of trading ranges with a slow decline. That would allow any bullish enthusiasm to burn itself out over time and eventually arrive at stages 4 and 5.
I expect this "trading range" process will have downside plunges marked by loud "pops" that will be pockets of the debt that Reinko has noted imploding, forming a process of lowering the trust in any US-related debt and raising the effective national interest rates, regardless of how much money the Fed pumps in to keep the banks afloat. At the end of it all, we won't have quite so much debt remaining, and very few will be willing to lend to us. A lot of businesses in the financial, housing and manufacturing sectors will have expired, and the American economy, with the shiny new, uber-cheap Bush dollar, will be poised to move forward again.
Not a pretty picture, one of starvation and amputation, certainly not the image of a vibrant and growing domestic economy, but there you have it. Navigating the next few years will separate the competent investors from the rest.
Mind you, I'm not at all encouraged by this prospect, as it's a lot harder to make money in such an environment. I'd much rather see a cataclysmic end to the bull market and a brief recession than a long, drawn-out smothering of the bull.
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WAKEUP
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503 Comments
Jan 08 02:06 PM-
gordon
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312 Comments
Jan 08 03:29 PM-
Tman
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3 Comments
Jan 08 04:34 PM-
Reinko
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342 Comments
Jan 08 05:47 PMOf course you folks are a long way from capitulation, it is well known that Americans are always far too optimistic because otherwise they would not have picked up 48 trillion US$ debt levels on their own economy...
Well if you cannot deal with the yearly cost of this debt (just about 2.5 unpaid trillion US$ or just 2500 unpaid billion a year), why not throw in another 2500 pounder?
Here we go:
As usual go to the Federal Reserve flow of funds because we have good action over there lately, here is the link:
www.federalreserve.gov...
Go to the one last column of debt; the financial sector kind of debt:
It says:
2007 Q2 total financial sector debt = 14855.0
2007 Q3 total financial sector debt = 15435.3
Thus QoQ we have:
15435.3/14855.0 = 3.9% of debt growth in just one quarter for the entire US financial sector...
Hence on YoY we have: 1.039^4 = 16.6%
Well 16.6% of the outstanding debt equals to something like 2.5 trillion more debt needed in 2008.
David, can you tell me where this debt is supposed to come from?
Will it come from some 3, 5 or 8 billion M1 money throwers from the Middle East that suddenly think 'Wow, let's invest another 2500 billion'?
Please get real David, it is well known that the DOW traders do not know what will happen in the future. This is their problem and not mine...
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Reinko
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342 Comments
Jan 08 06:06 PMBut with the rest I can live: he has a good insight of what will happen if we do not have a sudden burst.
Yet my expectations, based on only Federal Reserve reporting, are that we will have a severe bust in this year numbered as 2008.
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irondoor91
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128 Comments
Jan 09 12:57 AM1. Start with "Normal Functioning" back at the end of 2006.
2. Proceed to Shock and Denial (Avoidance, Confusion, Fear, Numbness, Blame), then
3. Anger (Frustration, Anxiety, Irritation, Embarrasment, Shame)
4. Depression and Detachment (Overwhelmed, Blahs, No Energy, Helplessness)
5. Dialogue and Bargaining (Reaching out to others, Desire to tell one's story, Struggle to find meaning for what happened).
6. Acceptance (Exploring options, A new plan in place).
7. Return to a Meaningful Life (Empowerment, Security, Self-Esteem, Meaning).
On the above scale, I would put us currently at just about somewhere in numbers 2 and 3. The fear set in today with release of the AT&T data showing "disconnection of phone and high speed internet service lines". There goes the telecommuter. Who gets the blame? The Fed, of course for being "behind the curve".
The reality is that nothing can stop this train on its way to the bottom, and nobody is yet forecasting just where that point is going to be. How about Dow 10,000? Does anyone remember Bill Gross' forecast of Dow 5,000 a few years back? I do, as I used it to caution clients about over-eager equity positions. Of course, he was wrong then, and so was I, but how about this time now?
The "dialogue and bargaining" phase should be going on about now at Bear and Merrill. Ditto at GS Global Macro. Soon these mis-managers will be "seeking new options", and "putting a new plan in place" in their never-ending "search for self-esteem and meaning" in all matters of life.
Enjoy the ride as we continue short the financials and REIT's.
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Reinko
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342 Comments
Jan 09 05:13 PMAlso a very funny list, the 'return to a meaningful life' did bring a soft smile on my face...;)
By the way: In Oct 2001 (the 21th to be precise) I suddenly understood the DOW would go to 7000.
At that point in time it had not crossed the 10,000 level and was standing at something like 9,500 if I remember it correctly.
It even climed to 10,500 but I knew all I had to do was waiting.
The decline did set in and intraday low was something like 7194 so that was not bad. That was not a bad estimation.
Yet this time I am expecting similar numbers because this one is much more severe, if the entire financial sector indeed needs 2.5 trillion US$ debt as is expected, we are in deep problems...
As the return towards a meaningful live is done by me:
I am reading a very nice article about big market moves, it is a bit mathematical but not very deep or so (just a bit of the beloved log and easy to understand power laws). Here is the link, have a nice time reading it:
www.sciencedirect.com/...
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Reinko
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342 Comments
Jan 09 05:15 PMwww.sciencedirect.com/...;
or go to article number 12 on this link:
www.sciencedirect.com/...
Have fun reading it!
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Al Capital
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70 Comments
My Website
Jan 10 08:46 PMmnrtrading.blogspot.co...
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Gob
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39 Comments
My Website
Jan 10 08:56 PMAnd it's "The lady doth protest too much, methinks."
Just sayin'.
Aeeeiiiiiiiiiiii!!!!! TEH SKY IS FALLING!!!!!11ELEVEN!O...