Economists see 'negative' bubble
By D.C. Denison
Boston Globe Staff
6/27/2002
During the late 1990s, Robert Shiller, an economics professor at Yale University and an expert on market volatility, studied the dynamics of an economic bubble as the tech-fueled boom took the financial markets to unprecedented heights. Now Shiller is seeing some of those same dynamics at work, but heading in the opposite direction.
''It's important to recognize that a bubble can go both ways,'' Shiller said yesterday. ''And what we're seeing now has the nuance of a negative economic bubble.''
There's no lack of evidence to support Shiller's thesis. Yesterday's announcement by WorldCom Inc. that it had improperly booked nearly $4 billion in expenses is only the latest in a long litany of overstated earnings, accounting irregularities, conflicts of interest, and outright fraud that has buffeted the financial markets.
To Shiller, a student of financial booms and busts, the current situation appears eerily familiar.
''It's starting to look like the bubble of the '90s was a lot like the bubble of the 1920s in terms of some of the shenanigans that companies were pulling,'' he said.
Certainly investor reaction to this string of revelations has been clear and unmistakable. Even before the WorldCom announcement, investor optimism was at its second-lowest level in history, according to the Index of Investor Optimism, a joint effort of the UBS AG financial services company and the Gallup Organization.
What's less apparent, for students of the psychology of financial markets, is what role investor confidence will play in the future of the economy, and what, if anything, will stem the slide.
''We're in the middle of what I would call a `bear market depressive syndrome,''' said Dr. John Schott, a clinical instructor in psychiatry at Harvard Medical School and a portfolio manager at Steinberg Global Asset Management, a money management firm based in Boston and Boca Raton, Fla.
''It's not hard to notice many of the classic symptoms of depression playing out in individual investors and the market in general,'' he said.
Specifically, Schott mentions the denial and anxiety that affected investors early in the bear market. ''People were unbelieving at first,'' he said.
More recently, Schott believes that investors have moved to a second stage, ''a great sense of depression, a feeling that the down trend is going to go on and on.
''People used to ask me, `When is it going to end?''' he said. ''Now I'm hearing investors saying, `I think this is going to go on forever.'''
The ''classic'' final stage of the current malaise, according to Schott, is ''a catastrophic sell-off, when a large number of investors throw in their cards and sell their stock.
''The day you see the Dow go down 700 points with 2 billion shares sold, that's when it will be over,'' Schott said.
''That's the final stage: panic and capitulation.''
Schott said the financial markets went through a similar, though less dramatic, sequence from 1974 to 1981.
''And looking back, we can see that set the stage for the next great bull market,'' he said.
Richard Geist, president of the Newton-based Institute of Psychology and Investing and a clinical instructor in psychology at Harvard Medical School, is also watching carefully for a final precipitating event that will signal the end to the current financial slide.
''Maybe WorldCom is it,'' Geist said. ''It's too early to tell.
''Usually when things are going badly for a long time, there's that one final blow that has the psychological effect of driving the sellers out of the market,'' he said.
''What usually pulls us out of a downturn like this is a major crisis.''
Whatever the mechanism, Geist believes investor confidence could turn around dramatically because many of the financial basics are positive.
''Interest rates are low, inflation is nonexistent,'' he said. ''Investor confidence is one of the only things that's truly bearish, and that's because the focus today is on the very small percentage of companies that are not honest. That's not the whole picture.''
Yale's Shiller has also been thinking about possible turnaround scenarios. He believes the triggers may turn out to be positive earnings numbers and increased regulation.
''If companies start meeting positive earnings estimates, that will make an impression on investors,'' Shiller said. ''Government action could also have an effect.
''Things started turning around in the 1930s, after the creation of regulatory bodies like the Securities and Exchange Commission,'' he added. ''Investors are pretty confident in the government's ability to enact effective regulations.''
D.C. Denison can be reached at denison@globe.com.
This story ran on page C1 of the Boston Globe on 6/27/2002. |
