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Battling the Pundits of Pessimism

Back on May 11, I wrote about

stock market bubbles. While conceding that valuations were stretched (perhaps an understatement), I argued that the stock market was not bubble-bound. Since that time, I've received some emails asking me to revisit the scene of the bubble debate.

First off, I still believe that the bubble theorists were blowing a lot of headline-grabbing air in the spring. Recall that the biggest champion of the bubble theory,

The Economist

, argued that the


must move quickly to


rates and prick the stock-market bubble before it got out of hand. Bubbles, one must recall, lead to catastrophic finales. Look at Japan. The


hovers at 12-year lows, and Tokyo stock prices have limped badly since blowing up eight years ago. For a similar thing to be happening in the U.S., one must make the argument that the


is headed to 3000.

But the bubble talk is less prevalent these days. The stretched valuations have gotten smacked around pretty good, and Wall Street is chastened by recent events, especially the

Long Term Capital

debacle. Still, stock prices have not collapsed as they might in a bubble scenario. Certainly, segments of the market bear some resemblance to bubbles --

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at however many billions raises an eyebrow.

What is perversely ironic is that the bubble champions, arguing for tighter money early in the year, now argue just the opposite today. If a bubble theorist had his handle on the monetary stick, we would have a mind-boggling interest-rate policy that certainly would not contribute a lot to markets badly in need of some semblance of order.

So, if there's no bubble, where are we? Is the worst over? I believe that we hang on the precipice of radical possibilities. The doomsayers, many of whom have dropped the bubble talk in favor of a far darker scenario involving the return of socialism and global capital regulation, are garnering the most attention these days. It's no longer just a bubble, it's the potential collapse of Western-style free-market capitalism. And this group has some points. Emerging countries are more nervous about the financial markets. Japan is not making a good show of things. Even Europe is ailing, and commentators love to point out how many socialist-leaning governments are now in control in the



But this rising doomsday vision has many flaws, enough for me to side with the anti-doomsdayers, once known as bulls. For one, the U.S. economy is still humming pretty nicely and the Fed still has time to ratchet back on rates. Moreover, with the U.S. fiscal situation stronger than it's been in 20 years (a surplus, for crying out loud!), the government has a little Keynesian flexibility at its disposal. It is not difficult to fathom that the U.S. is in a position to act as the stalwart in the storm, helping the struggling emerging nations get back on their feet. Indeed, the Fed's recent rate cut, while small, shows that the U.S. is willing to take the lead in making sure that the global financial problems get solved.

In addition, some of the staunchest bears that I know, investors who benefited greatly from recent slumps and cheered as stocks dropped from Jakarta to Moscow to New York, have now started to change their tune. I heard from two bears in particular today, each outlining different reasons why they are starting to feel that the run on the short side may be drawing to a close. Now these gents were a mite early on getting short, and they may be a mite early in getting long -- and they freely concede that point. But this kind of shift is something important to ponder when the now-popular pundits of pessimism are barking loudest.

Coincidentally these shifts -- from bear to almost-bull -- occur just as the public seems to be losing its stomach for the battle. Fund flows have gone starkly negative. I don't entirely agree with

Jim Cramer's

view that this is like 1990, primarily because I think the philosophical attack on capitalism is far greater than at the start of the decade, but in 1990 the public bailed at the bottom. It didn't take long for them to jump back in, and that might be one more lesson from 1990 that we should heed.

From bubbles to doom, the bears have had plenty to say of late, and they may still yet find themselves inglorious in triumph. But I believe the bulls may have more reason to say that a light at the end of the tunnel is beginning to show itself.

Media Notes:

Hats off to my former mates at

The Wall Street Journal

for snaring that great letter from






. That was a beautiful piece of detail in the Long Term Capital story...

Don't forget Saturday's

story by

Aaron Task

on the Fed's role and a nifty

read by

Gregg Wirth

on the new Wall Street smokejumpers being asked to save the ailing hedge fund ...

Mavis Scanlon

with a nice

story on oil service stocks and charges ... An online trading

notebook from

Amy Olmstead


Eric Moskowitz

with another ax

story, this one on lessons from the biotech world ...

Jesse Eisinger

with an important

preview of pharmaceutical earnings ...

Herb Greenberg


insight into possible accounting questions at




Helene Meisler

on the technical

health of the market ... More

Paul Noglows

on the

Net ... And plenty of market action.