For investors, the market is fading from black to pink. Not to red -- that would be too obvious, since red is the color of danger and stop signs. Pink, on the other hand, is mythically the color of delusion and denial, the color of rose-colored glasses, the color of juvenile wistfulness.
That is the view, at least, of Jim Williams, a veteran psychocultural analyst retained by major financial institutions for his keen scrutiny of incipient trends and news anomalies. Speaking from his redoubt in southern Massachusetts last week, he said the dark season of excess fear and anger generated by the bear market's two-year reign of terror has, in the past six months, given way to a precarious season of excess hope and denial.
His observation stems largely from his discovery that pink has made a comeback among the fashion forward, spearheaded by influential designer Isaac Mizrahi's new line, while angels have replaced gargoyles in sales at boutiques and on Hallmark card racks. Also, children's playthings have made a comeback as collectibles among twenty-somethings, and the musical "Peter Pan" has regained popularity. And margin and credit card debt are near record highs. These are the scattered clues, or "down cards," from which he draws broad judgments -- just as a pollster forecasts a presidential election by surveying just 1,700 people.
We Seek What We Lack
Drawing on the lessons of psychoanalyst Carl Jung that people grasp consciously for symbols that are the reverse of their subconscious, Williams proposes that the public's attraction to pink and nostalgia reflects their deep inner fears. "The public has turned to speculation in stocks precisely because they
have hope," he says. "They are piling up debt in total denial of their eroding liquidity. Outside they are partying because inside they are glum; they are grasping at straws," he says.
The dangerous implication for the market, he says, is that any new data or event that would throw irrefutably cold water on the positive consensus view could have an unexpectedly harsh effect. "When you take off your rose-colored glasses, the world looks even gloomier than it really is," he says.
Quick anecdote: A couple of months ago, Williams says, he was paying his quarterly visit to a client, mutual fund giant
in Boston, and the 16 money managers in the room all preened as bulls as the market hit new highs. "There was too much bravado," Williams said. "If they had told me it's
that the economy is improving, or that they weren't 100% sure, I would have felt more comfortable. But they were so strong, it was a throwback to the late '90s."
When Williams first explained his theory of anomalies and down cards back in mid-March, he was urging clients to buy stocks because he anticipated a reversal of the extreme risk aversion pervasive at the time, just prior to the start of the Iraq conflict. Now he is urging clients to sell stocks as he anticipates fretfully overleveraged individual investors reversing back toward a revulsion for risk.
He was particularly exasperated by the nature of the stocks that rallied hardest in the past six months. Among stocks focused on the emerging trend toward the widespread use of Wi-Fi -- a trend, by the way, he first highlighted for clients years before it hit the mainstream -- he noted that tiny, profitless component maker
( PROX) advanced 120% since March 15, while profitable competitors
have advanced just 33%, 54% and 42%, respectively. "What's going on here? The worst stocks had the best moves. It shows the public binged on speculation at the expense of prudence. They denied reality. It's something that can persist for a while, but it's something that can never last."
Investors Will Open Their Eyes, but When?
In Williams' judgment, the days of pink are numbered -- he just doesn't know how many. "When people get more in touch with their inner selves, the market will go down," he forecasts. "I don't know when, probably within a month to six months, but I know that it will."
Why is the timing part hard? Consider another anecdote. I mentioned to Williams that my 8 1/2-year-old daughter had recently seemed to engage in her own pink period. At bedtime lately she wants to be read kindergarten-level books like the "Berenstain Bears" rather than more challenging chapter books. I initially found this puzzling, but soon realized she seemed to want to return to an earlier time in her childhood, to be a carefree preschooler rather than a third-grader responsible for homework, soccer and piano. Williams said the timing for investors' decision to grow up was similar to my daughter's: "You don't know when and she doesn't know when. The catalyst is a mystery. But at some point, she will want to read more at her level, and at some point, investors will stop denying the present."
Williams' theory goes a long way toward reconciling conflicts among current economic data.
The Weekly Leading Index of the Economic Cycle Research Institute has hit 55-year highs in recent weeks. According to ECRI Chief Lakshman Achuthan, that indicates U.S. gross domestic product is expanding at an above-trend growth rate of around 4% to 5%, and that there is no downturn on the six-month horizon.
Bulls believe that jobs -- which should be expanding at a pace of 250,000 per month at this point, yet instead are contracting -- will rebound sharply as economic growth accelerates in the next two quarters. But bears argue that due to the stunning lack of jobs in the recovery -- three million have disappeared -- there aren't enough well-paid new workers to buy stuff; thus the growth cannot be sustained and another recession within a year is inevitable.
Achuthan thinks both sides are wrong, conjecturing that the U.S. will see stronger industrial production through next year, but increases in productivity and an acceleration of overseas outsourcing has structurally put a cap on U.S. manufacturing jobs forever. Making up the difference, he says, is higher income for the remaining workers that will tide the economy over until factory workers are retrained into service, distribution, consulting or entrepreneurial roles. "Those who would say jobs are a lagging indicator and will snap back are in Fantasyland," he says. "But the people who do have jobs are not afraid to continue consuming, and they have more money. Personal income is hanging in there. As GDP strengthens, income will rise with it."
The economist, who has done a very good job of calling the twists and turns over the past few years, concludes by suggesting that bears are "prone to the error of pessimism" if they underestimate the durability of the recovery.
Can the Pink Divide Be Bridged?
The rub, however, is that the people most responsible for grinding out that growth don't see it coming.
magazine reported this month in its monthly survey of CEOs that nearly half of respondents, or 46%, said the economy would grow at 2% or less in the fourth quarter of this year, and another 39% predicted less than 3% growth. Moreover, sales of stock by corporate insiders is at an all-time high, peaking last month at levels higher than those that predated major market swoons of the past several years.
The gap between what Achuthan sees and what the CEOs see could be called the Pink Divide. As people have seen their neighbors' jobs fall by the wayside -- apparel icon Levi Strauss last week announced it would close all its remaining North American plants -- they have gone on a feel-good shopping spree financed by mortgage refinancing, credit cards and brokerage margin.
Their over-the-top spending on cars and trucks and houses and stocks can go on only for so long. And then the bills must be paid. In green, and not in pink. And if Williams is right, the ending won't be a happy-go-lucky children's story, but a fairy tale very grim indeed.
Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at email@example.com. At the time of publication, he owned or controlled shares in Cisco Systems.