Fear

Brian Wesbury has an editorial in the WSJ today. It should be required reading for every investor:

You can't move these days without bumping into an economic pessimist. "Recession in America looks increasingly likely," said the Economist magazine on Nov. 17. Two days later, in the International Herald Tribune, Nobel Prize winner Paul A. Samuelson brought up the specter of the Great Depression. And then, on Nov. 26, former U.S. Treasury Secretary Larry Summers wrote in the Financial Times that, "the odds now favor a recession that slows growth significantly on a global basis."

Wesbury is skeptical of government intervention in the economy:

This desire for government intervention to fix problems that grown adults have created for themselves is dangerous. Constantly counting on the government to save the economy undermines confidence in free markets, conditions people to believe they don't have to live with bad decisions, and creates a willingness to take imprudent risk. Actions to stabilize the economy in the short term can destabilize it in the longer term, and set the stage for even more intervention to fix the new problems at a later date.

The self limiting effects of fear will prevent a recession:

Moreover, all this pessimism makes serious economic problems less likely. If it really happens, a recession in the next year could be the most anticipated ever. That fact alone makes it improbable. Recessions usually surprise the consensus. When a recession is expected, the odds of rapidly rising inventories, excessive investment, or a surprise drop in new orders are reduced.

I have been saying for a year now that the housing problems would not cause a recession and the more pessimistic the press and the public get, the more confident I am of that prediction. The fear in markets works in a similar fashion. If investors sell short, they are creating future buying power as they will have to buy to cover the short. If they seek protection in the option market by purchasing puts, the market maker will sell stock short to hedge his position creating further future buying. When you see fear and pessimism like this, long term investors should get excited.

Read all of Wesbury's excellent editorial. It warms a contrarians heart.