Of all the names I have been called over the years — and there have been plenty — “Contrarian” is the one I am most proud of.

Yet while many people seem to aspire to that label, few manage to truly achieve it. There is a comfort in crowds, and degree of stress relief that comes when you are not out too far on that limb. The Herding instinct is powerful, especially amongst traders, analysts, strategists and economists.

I was discussing this last month with Paul Kedrosky. He noted that many people seem to aspire to that title, and for all the wrong reasons. We talked about how EVERYONE seemed to be expecting a classic September sell off all summer. That expectation seemed to even be the basis of the mild sell off last week.

The contrarian view isn’t betting on the collapse, its looking at what will frustrate the most amount of people. I suspect that a continued rally higher would have that effect, despite the historical post crash patterns.

One thing you should consider when betting against the crowd: They tend to be right most of the time. There are a several things I disagree with in Surowiecki’s The Wisdom of Crowds, but the basic idea that crowds can determine outcomes is undeniable.

Indeed, markets are essentially the net result of the behavior of crowds. When asked why stocks were going down, the old trading desk joke is “More sellers than buyers.” That is as good a definition of a crowd as I’ve seen.

To better explain contrary thinking, I like to describe Wall Street and Markets as a sports stadium filled with fans. The better the team does, the louder the crowd cheers. The louder they cheer, the better the team does. Hence, markets have a large degree of self-fulfilling prophecy in the way they respond to crowd behavior.

Call it what you like — sentiment, reflexivity, feedback loop — for most of the time, the crowd not only determines market direction, IT IS market direction.

The secret to being a true contrarian is identifying when this excited (but orderly) crowd of cheering fans becomes a an unruly mob; Determining the point at which the fanatics become hooligans. Not throwing paper cups on the court, but overturning cars; When the Wisdom of Crowds becomes the Madness of Crowds.

That is when you short a raging bull market, buy into a crash. You hold your nose and make the purchase.

And, it is typically an uncomfortable, outlier position.


Contrary Indicators 2000 – 2003 Bear Market (September 9th, 2003)


Understanding Contrary Indicators (May 31st, 2008)


Four Stages of Secular Bear Markets (August 27th, 2009)


Category: Contrary Indicators, Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

68 Responses to “Beware of Naive Contrarianism”

  1. Note that the market disconnected from the fundamentals a long time ago . . .

  2. VennData says:

    The statistically derived “three factor model” of value and small cap tilt (plus equity risk) in equity performance…


    …adds momentum in recent studies (with more computing power)


    So if momentum “works,” then that proves crowds usually have it right.

    BR’s quote “That is when you short a raging bull market, buy into a crash. ” is truly, the only timing model that can possible work. Since the “momentum” cannot work forever by definition, and fails at its “end points.” Ergo the “buy when there’s blood on the streets” call last Spring was a lonely, profitable, call.

  3. CNBC Sucks says:

    Ritholtz, you worry about naive contrarianism when I worry more about that other guy, contrarian naivete.

    Seriously, though, I appreciate your continued tenacity pointing out all of the fallacies in Dr. Fama’s efficient-market hypotheses. Usually, you focus on aspects of behavioral economics to pick on the market, but for me it is a Treasury that can print money and borrow with impunity and a supposedly independent Fed that can buy its own government’s bonds up the ying-yang to keep interest rates low while using up its balance sheet to micromanage the fates of private banks. As long as foreign governments print their own currencies to match our own and continue to buy our debt to maintain the world’s current economic system of trade imbalances, this trillion-dollar shell game will continue, and I don’t know how the heck anybody can even talk about market fundamentals. I haven’t seen my poor buddy Steve Barry in these parts much, ever since I ridiculed him for talking about excessive P/E ratios at a time when the US government can throw trillions of dollars in funny paper money at asset prices and get away with it, for now.

    That’s a long way of saying: franklin420d – Steven Jackson and T.O. for Forte and Hester…will you make up your mind?

  4. HarryWanger says:

    Yes, until every regular Joe jumps into this rally in a frenzied panic, it will continue to go higher. Stronger economic news once again this morning. Not only do you need the crowd, you need the numbers to back it up. And as long as the numbers continue to come in stronger each week, the market will continue upwards.

  5. Transor Z says:

    Barry, call it what you will, but I think you’re an intellectually curious, easily bored person who wouldn’t be happy running a shop that just goes with the flow and takes the path of least resistance to collecting a paycheck. You want to be the “Moneyball” guy who actually questions received opinions and hopefully cashes in by finding significance in the details nobody else pays attention to.

  6. “Note that the market disconnected from the fundamentals a long time ago . . .”–BR

    is an Important observation. with that, “how to keep score?/what’s the unit of account?” becomes a key consideration. much in the same way shock-absorbers are fundamental to an automobile’s handling attitude, People should wonder if their ‘portfolios’ have sufficient ‘shock-absorbers’..

    CNBC S,

    good to see those new band-pass filters are working for you..

  7. SINGER says:

    Excellent post. One the most interesting things about the current environment is something you brought up re: how we missed the boat on new regulations…

    The market pops, which, at some point was inevitable given the decline, and everyone forgets about getting new regulatory frameworks in place and the dangers of wild speculation…

    The market feels like it used to before the crisis except now the S&P 500 is 1050, not 1500, and we have alot more government debt…

    I had a thought this morning when I saw Citigroup was up to 4.64 from .90 in FEB, “Holy S, Citi is up to 4.64….” Then I realized, Oh my god, Citi is 4.64…

  8. jc says:

    Not everyone can be a contrarian, hehe.

  9. Ruffkin123 says:

    I’d have the following rebuttal.
    (1) As characterized by mutual fund cash on hand, short interest, hedge fund net long, and other metrics the market is positioned more *long* than it has been in quite a while. The data is the data.
    (2) As characterized by Bloomberg economist forecasts, fundamental future expectations are more bullish than they have been in quite a while.
    (3) Valuations do not make any sense whatsoever.
    (4) The number of people now taking the view of “the Fed won’t let it happen” and “government will just spend us back”, valuations no longer matter, and thus stock market downturns can’t happen has reached something of a fever pitch.
    (5) I don’t care if this happens in September, October or November … but, we are historically overstretched by magnitude of rally and duration of rally relative to prior major bear market rallies.
    (6) A slew of people who called the top in 2007 and called the bottom in March 2009 are coming out of the woodwork on the short side here (Prechter, Janszen, …).
    (7) Major market downturns (Nikkei 1990, Dow 1929, Nasdaq 2000) took almost exactly 2.6 years, which would be around July 2010. These things take time. If we already had our bottom, that was the shorted major bear market in history by a long shot.

    Time will tell!

  10. CNBC Sucks says:

    Likewise, Hoffer. My exile was actually self-imposed, and will be resumed once franklin420d MAKES UP HIS FREAKING MIND. I mean, what does a guy have to do to get a trade in this league???

    These days, Hoffer, like the vast minions of mainstream America, I no longer concern myself with the machinations of bankers, regulators, and politicians, so long as those bankers, regulators, and politicians are…FASHION-FORWARD. I no longer worry about a national debt we will never pay, a trade deficit we will never bridge, or a currency that will inevitably collapse, so long as we are…FASHION-FORWARD. Heck, I don’t even say bad things about Libertarians like you anymore, as long as Libertarians like you are…

    I think you peeps can figure out the new mtheme.

  11. leftback says:

    Fascinating post and another great thread last night – LB appreciated everyone’s points of view.

    Would like to emphasize the following: it is only 1930 (sorry I mean, 2009) and we are in the position of the UK in the Depression (dominant financial capital), while China plays the role of the US (factory to the world). As Barry points out, we are NOT in a Depression (look around!), and where we go from here depends in large part on government intervention. We’ll have to see where we are in 1932 (I mean, 2011).

    A better analog for us to look at is probably the Japanese property bust and Lost Decade. There are any number of reasons why RRE/CRE will continue to decline from here, and so far those who have played the markets using pages from the Japanese playbook have done very well. This includes Mish, BTW, who explained in March that once a rally took hold it would be painful to be short until at least the 200DMA. All of that was correct.

    From here, it’s hard to say where we go, but LB is trying to capitalize on market imbalances and manias, like the recent run-up in gold. We still think the short dollar trade is very very crowded and that commodities will crash.

  12. Ruffkin123 says:

    Leftback, let’s not forget that the UK had their depression earlier in the decade. WW1 left them in tatters, at the end of their “imperial overreach” tether. It’s easier to fall out the window from a 2 story building, than from a 10 story building.

    We came into our downturn from a vastly different set of circumstances. Namely a 30 year leveraging and asset inflation cycle, transforming into a FIRE economy along the way, culminating in the laughable valuations we see presently. We are in the 10 story building.

  13. franklin420d says:

    If you are contrary to contrary thought wouldn’t make you a contrary contrarian?

    Trading in the league, hmmm taking care of that right now.

  14. laughingAllTheWay says:

    “One thing you should consider when betting against the crowd: They tend to be right most of the time. ”

    Excellent point.

    This is why “I was early” generally means “I was wrong.”

  15. danm says:

    I’ll repost it here because it falls in the trading category, plus it deals with the issue of the tipping point…


    danm Says:

    September 10th, 2009 at 9:58 am
    let’ s say you’re 40 that means you missed the 90’s boom for capital appreciation, and you’ve been around for two major economic messes in the 2000’s, statistically you are also reaching maximum output of money for your kids high school and college with probably a negative bias for future capital appreciation, all fairly realistic views based on your experience

    I’m one of the few who got some equity because I bought my house early… I put minimum down in mid 90s. I became a portfolio manager and got to participate in EVERY single bubble since the beginning of the 90s. Built up a good nest egg but not as much as those 5 years older than me. Built up cynism too.

    1. Oil and Gas analyst at beginning of 90s. That burst.
    2. Gold analyst 91-96. That burst.
    3. Tech analyst in late 90s. We know how that went.
    4. Portfolio manager for financial services fund 2001 to 2005. Amen.

    But I am convinced the chances are high that my savings will be taken away from me one way or another unless I reinvest in some business where I roll up my sleeves. If I am in the market, it will tank when the boomers start taking out more than they put in (in a few years). If I am out, chances of huge inflation.

    I find there are a lot of traders on this site. I don’t know what their story is but I just can’t get into trading mode. Why? Although I believe we’re in a trader’s market, I also believe the risk reward premium is not there in my case. In a trading mode, you have to be on top. I think it is more important to invest my resources somewhere else right now. Most investors are looking for 8% annually, that’s 80K on a million dollar portfolio. You already need that for retirement so you need another 10-40K to add to your fund, plus your living expenses which are high when you have two kids.

    And the smaller your portfolio, the less sense the trading equation makes if you are around 40. It is much easier still to go out and make that amount than to sit at a Bloomberg and try to get that extra 4% outperformance. Even the pros have a hard time beating the market… 4% is asking for the moon. Statisitics clearly show that most traders don’t do well over the long term. Maybe I would not be most traders but I don’t have the inclination. Why would I want to invest my time, resources and energy in trying to beat the house? It’s all speculation today. There will always be addicts who gamble their savings, I am not one to do this.

    Even finding a business to create is hard. I think there is currently oversupply in nearly every segment. A large amount of boomers will be looking to sell their companies over the next few years. Maybe that will consolidate the market and fix the overcapacity issue.

    But I also think our whoe economy will be going through an overhaul. For example the big box services companies. Many boomers will be looking to generate extra income (5K, 10K, 15K…) and will not be looking at their incoem in a ROI fashion. This will affect the big boxes which are probably still fixated on their 15% ROI. This will also impact all the little businesses. The boomers needed 100K+ and created the big box economy.

    Now the boomers will be satying in the work force needing extra income (5K, 10K, 15K…) which could lower household incomes. This woud be hardest on Gen-X.

  16. Mannwich says:

    @laughing: Good point. Depends on how “early” though.

  17. leftback says:

    Calling tops is always harder than calling bottoms. It’s easier to spot despair than hope and vanity.

  18. danm says:

    Population is growing and our system is made for growth. So it’s hard to bet against it.

  19. sharkbait says:

    HarryWanger Says:
    “Stronger economic news once again this morning.”

    I heard this surprisingly (for mainstream media) rational analysis/commentary on NPR this AM:

    Jobless claims no: Actually artificially low due to one less day in the calculations for Labor Day. Yes, one day does make a difference. I attended a jobs fair myself yesterday. To say it was “well attended” would be an understatement.

    Trade deficit: Two factors for increase: 1) Cash-for-Clunkers (gov’t stimulus idiocy): stimulated Japanese car sales 2) Oil prices are up (USD down – also due to aforementioned idiocy of B52 Ben’s $ printing).

    I agree w/ contrarian investment strategy. I recommend FusionIQ. Keep up the good work Barry & Co.

    BTW, my thought is that between consumer (aka: US citizen) deleveraging (recent data confirms), more housing woes, and Commercial Real Estate (CRE) problems (lags residential), we’ll likely see a new downturn in the not too distant future. Not to mention employment is not going to come back quickly. A lot of good jobs are gone. This is structural in the economy. I think it will be difficult to approve more $ for stimulus II, but I’m sure they’ll try. Until all this enormous debt is written off/paid down, we’ll not see a true recovery. Suspending mark-to-mkt. is just allowing the zombie banks to postpone the inevitable. Let’s see how they deal w/ CRE losses (mark-to-myth?), and continued declines in residential RE values (regression to the mean). Are we turning Japanese (i.e.: The Lost Decade)? Gov’ts will not deal with diffuculties if there is a mechanism to “kick-the-can” down the road. Unfortunately, the Fed has a printing press, without audit, or oversight checks, or balances. Support HR 1207. First step. Next stop: Congress will vote to raise the debt limit this year. China is not stupid. They’re already diversifying away from USD, and even if they just reduce the rate of Treas. purch. (which I believe they are, as they now focus on internal markets), we’re still going to see much higher rates. We all know what that will do to a highly leveraged economy.

  20. ronald says:

    As more you know as more you know why something will not work, that’s why most scientific breakthroughs are done early in a given career. One can actually show that in artificial brain models.
    In other words as bigger the crowed as better they are to spot an error if something is wrong. Which leads to a tendency of keeping the status quo. Or crowds don’t go out on a limp to try something new, they are evolutionary at best. Never revolutionary. Which makes them right most of the time, since the limp will break sooner or later as father out you go.
    But sometimes one progresses besides the known fact that people would fall of earth if it would not be flat.
    I wouldn’t call it an unruly mob, it’s the point of total confusion when the crowd has to may contradictory arguments why something will/can not happen. Or the point when the crowd turns on it self, since they do not have a common point to show how right they are.

  21. flipspiceland says:

    WELL! Why didn’t you write this on March 1 this year, when it would have done all of us a world of great?

  22. danm says:

    Like I said before, my entire career has been all about one bubble or another. I can spot them a mile away. And I know that it take 3-5 years for them to burst. My problem is that I just can’t get myself to buy crap even if I know it will go up just because investors are stupid and greedy. My better half thinks I am the stupid one but I just can’t do it. I only invest in quality companies, and it’s hard to find when you also have a life!

    I guess I have a question for the traders. If you know that the companies that you are trading are crap but you buy them anyway because you know that everyone else will not see they are crap for another year or two and you can make a lot of money on other people’s cluelessness, how can you live with yourself or feel good about your contribution to the world? Doesn’t this impact the quality of the person your are?

    Isn’t investing all about efficiently distributing capital to where it is needed? Because when you buy crap becaue it will go up before it goes bankrupt, you are sending wrong signals to the economic players and further destroying the economy and your children’s future.

  23. laughingAllTheWay says:

    Manny – it does depend, that’s why I said generally.

    Sharkbait – I will take the opposing viewpoint for a purely acedemic exercise.

    1) Consumer deleveraging – affects company top line growth, not bottom line profits. Companies can adjust and be very profitable.
    2) Housing woes. Don’t see this as impacting companies other than banks, government has their backs.
    3) CRE – secondary offerings, and defaults will help “manage” the CRE issues. Banks will be hurt, but the government has their backs.
    4) Unemployment reduces growth, not long term profits of companies quick to adjust.
    5) Stimulus and bailouts will continue as needed (not proactively, but reactively).
    6) Debt is not the problem people are making it out to be. Don’t get me wrong, when you do the calculations, it looks like a disaster. But government debt in a fiat currency system is kind of manageable.
    7) Japan is US? Probably, but they are surviving.
    8) Kicking the can down the road gives time for healing and stabilization.

  24. Mannwich says:

    I’m pretty much with you danm. Incidentally, to your other point, I’m 39 years old. The cynical generation.

  25. Mannwich says:

    @danm: And that was kind of my point last night during my battles with Wanger. Hence, the frustration in my posts had little to do with any recent losses (although I did get smacked in the spring a bit, after some healthy gains in the winter), but the bigger picture. Isn’t that what this site is about or is “The Big Picture” merely alluding to making money anyway you can, even if it’s crap? That, to me, is a depressing thought if it has indeed come to that.

  26. danm says:

    “The Big Picture” merely alluding to making money anyway you can, even if it’s crap? That, to me, is a depressing thought if it has indeed come to that.
    Something in me believes that if you fall into the pattern of accepting crap, you will eventually get crap. It’s all about lowering your standards and that does not usually work out well.

    But I’m 40, and maybe still too idealistic for my own good!

  27. sharkbait says:

    Are you taking the contrarian position then?

    laughingAllTheWay Says:

    1) Consumer deleveraging – Co’s cannot cut costs forever (cannot (should not) cut off your arm). Must eventually have top line growth…
    2) Housing woes. – This is the heart of the econ. problems here. Pervasive.
    3) CRE – I don’t know how this will play out, but it’s coming, and it’s big.
    4) Unemployment – If consumers not buying: see (1) above.
    5) Stimulus and bailouts – It will be difficult to get approval for even more $, IMHO.
    6) Debt is not the problem – At some point in the near future, for every $ of debt incurred, there will be no net growth. I’ve seen Dr. Marc Faber call this “Zero Hour”. Basically, the cost of financing becomes such a tremendous drain, that there is no growth (i.e.: GDP). Remember, there must be some positive GDP just to handle population growth employment requirements…
    7) Japan is US? – Well, from a fiscal, and monetary perspective it seems to apply.
    Kicking the can – Yes, true. But not organic health, only artificial, and at lower level of GDP. Not to mention the huge piles of $ growing for our children (and theirs). Trying to teach my son to be responsible, and accountable. Not using US economy as a case study for ethical behavior here…

  28. danm says:

    . Isn’t that what this site is about or is “The Big Picture”
    I think the Big Picture is what it is but the interpretation of how it will affect you life is different depending in which wealth/age group you and your loved ones reside.

    In any kind of economy there are winners and losers. For the last 20 years we’ve had growth, yet there is a huge percentage of the population that is already disenfranchised. It’s not as if growth was good for everyone.

    I think there will be a lot of losers in North America over the next couple of decades but I don’t think many see themselves in that group.

  29. laughingAllTheWay says:

    sharkbait – what is the current contrarian position? And based on what data is it contrary?

    Also, it’s not hard to see the possible negative scenarios which could unfold going forward. It is too easy to get mired in the thinking of “this will not end well.” And, ultimately, it may not end well (at some point), but human history shows resilience long term. Look, the Roman empire didn’t end well either
    (fun while it lasted), but the Renaissance kicked butt. That cycle took SO many generations.

    A human life has circumstances in which it is born into. Living an uplifting life is not always easy, but right now in the US, the oportunities are still huge. Anyone living today may or may not deal with grave misfortune in their lives, there is always suffering. But in general, we have it very good even now, I suspect we will for quite a few more generations. And the United State will probably not be the epicenter of future opportunities. They will be world wide.

  30. danm says:

    I also think we can cut on a LOT of material goods before our quality of life decreases.

    The biggest asset is health. That’s why I am really concerned about the older folks. I really truly think the elderly will suffer the most and not the younger generation­.

  31. danm says:

    Look, the Roman empire didn’t end well either
    (fun while it lasted), but the Renaissance kicked butt. That cycle took SO many generations
    Yet, lots of people suffered in both.

    And guess what. the USA has been a success story, yet millions of mothers have been devastated by the loss of their sons in war.

    A strong GDP is moot.

  32. laughingAllTheWay says:

    danm – I can’t solve all the world’s problems. People do suffer. Actually, no one can solve all the world’s problems. Stuff happens, it really does. That doesn’t mean you can’t contribute and uplift humanity. You can in almost any circumstance. It doesn’t mean suffering is eliminated. It never will be. We are always in a struggle to survive on some level. Utopia is only theoretical for humans. Utopia can’t exist in nature. Suffering and difficulty are not a good enough reason to be so negative. It is what it is. Who you are in all this is what matters. What’s your part in it all? (Rhetorical)

  33. Thor says:

    Danm – you’re on a roll today

    “If you know that the companies that you are trading are crap but you buy them anyway because you know that everyone else will not see they are crap for another year or two and you can make a lot of money on other people’s cluelessness, how can you live with yourself or feel good about your contribution to the world?”

    I find it ironic that many people belittle the greed of the average Joe in this country but fail to see how the above kind of behavior is any different. My guess is that it’s more about greed and profit at any cost than anything else. There is a huge segment of our population who will simply never be happy with what they have. They will always want more – a bigger car, a larger house, a better paying job, more money. In my humble opinion there is little difference morally between the people in the real estate industry who pumped that bubble and the folks buying and selling stock they consider worthless.

  34. leftback says:

    As an investor, I am presently persuaded to be long only those investments from institutions which are really TBTF if people start selling tomorrow and there is a FTQ. So that means Treasuries and cash for me, right now.

    As a trader, I tend to be contrarian, and simply try to fade the most excessive moves I see occurring in the market, so I am currently short gold. In March I was long materials and mining stocks, and short the 10-year.

  35. laughingAllTheWay says:

    @LB – So not inflation protection for the investor? Except maybe TIPS?

  36. call me ahab says:

    thor says-

    “In my humble opinion there is little difference morally between the people in the real estate industry who pumped that bubble and the folks buying and selling stock they consider worthless.”

    agreed- many of these folks will be riding it back down thor-

    of that i am certain

  37. Onlooker from Troy says:

    re: http://www.ritholtz.com/blog/2009/09/naive-contrarian-ism/#comment-213988

    Yes, yes, yes. That’s my perspective (and problem as an “investor”, really speculator these days). I really need to feel as if I’m buying some real durable value that doesn’t have to be watched daily for the bottom dropping out. (much of my money is with Hussman) Many will scoff at that and deride it. So be it. I’ve overcome that by saving; being a frugal, efficient person who’s happy and contented with a simpler life. That makes me some kind of naive’ rube in this day and age. But I’m OK, although it does irritate occasionally; I can’t deny that.

    Mannwich said:
    “Isn’t that what this site is about or is “The Big Picture” merely alluding to making money anyway you can, even if it’s crap? That, to me, is a depressing thought if it has indeed come to that.”

    Very much agree with your perspectives; no surprise, I’m sure. And also why I won’t engage in that debate with those like HW. It doesn’t change anything and only frustrates further.

  38. [...] Beware naive contrarianism.  (Big Picture) [...]

  39. Thor says:

    Troy – “That makes me some kind of naive’ rube in this day and age. ”

    I disagree, I think there are far far more people out there just like you (and me, and Manny, and Ahab). People happy with what they have – not always trying to make more money, to acquire more things that they have the mistaken belief will fill up that feeling of emptiness inside. It’s these people who tend to get all of the attention – it’s not called conspicuous consumption for nothin’ ;-)

    As if said it before and will probably say it again – I have a feeling everyone is going to have to learn how to be more frugal in the future – not because I’m of the doom and gloom variety, but because I don’t think we’re going to have a choice. We’ve been over-consuming for decades and that’s not what I feel this country should be about.

  40. manhattanguy says:

    For the markets, is this what we are looking at before the next crash?

    UUP at 22, S&P at 1100, Dow 10,000, Oil at 80?

  41. call me ahab says:

    “Health-Insurer Shares Climb; Public Plan Is Viewed Unlikely”

    way to go Obama- you’re the man- way to tough it out and stand up for what you believe-thanks for that change you bullshitted us about-

    at least I can take comfort in that you have re-inforced my negative opinion of politicians-

    change? yeah- right

  42. Thor says:

    Ahab – you’re being overly pessimistic and un-patriotic!!!

    Sorry, couldn’t resist ;-)

  43. danm says:

    Danm – you’re on a roll today
    I thought we were Thursday yesterday… so just gained an extra 24 hours. LOL!

  44. Mannwich says:

    I’m pretty much with the Father of our Nation on this one…….have been for a while.


  45. Seattle Chill says:

    From what I’ve read around the blogosphere lately, the most contrarian assertion imaginable is that the Fed’s ostensible control of the money supply is merely an illusion, a case of the tail appearing to wag the dog. Another contrary notion would be my belief that this rally is 99% the work of wildly optimistic small speculators and deeply cynical momentum traders, and not, in fact, a product of government manipulation.

  46. leftback says:

    “deeply cynical momentum traders, and not, in fact, a product of government manipulation”

    Government gave the “deeply cynical momentum traders” (IB desks et al..) the money to game the market.

  47. Seattle Chill says:

    “Government gave the “deeply cynical momentum traders” (IB desks et al..) the money to game the market.”

    True enough, but lately I’ve seen many people assert that the government can keep pushing up the markets indefinitely, which clearly makes no sense. Sooner or later, all that new money will put upward pressure on interest rates, which would be a disaster for the over-leveraged economy.

  48. Mannwich says:

    @Seattle: True enough but it’s clear that the biggest rational for the markets continuing to move higher is the belief that the Fed will do EVERYTHING in its power to get things going again – - if enough market participants BELIEVE the adage, “don’t fight the Fed”, then this is what you get. This may not be direct manipulation but I believe it is by extension just that, in the very least indirect manipulation to blow another asset bubble.

  49. leftback says:

    “Sooner or later, all that new money will put upward pressure on interest rates..”

    No way – look at the Treasury market today. Sooner or later, there will be a trigger event like a major default, and bond spreads will widen and there will be a flight to quality in the credit markets, then by the time Johnny Retail notices the effect on the equity markets it will be too late. We will see 2.5% on the 10-year long before we see 5%.

    This thing could drop like a STONE. The deeply cynical momentum traders will be long gone, and there will be very few shorts to cover and support the market. Then watch the fear grow. You think we saw fear last year? Hmm…

  50. hue says:


    by definition trading is not investing. to quote Todd Harrison, the route is more important than definition. you know, Fleck is your polar opposite. he’s been bearish for a long, long time back in the 90s. but Fleck can not buy the market for a trade even when he knows it will definitely go up because of sentiment or whateva. trading is about making money in any market direction, not investing in companies. but it ain’t easy, (otherwise we would all be trading and not working) and traders need investors to ride up or down.

    when i first saw your comments months ago, i used to think it was damn (dyslexia), and i thought salient thoughts for such a name. funny, i thought yesterday was Thursday too, rushing on all my football pool picks.

  51. Seattle Chill says:

    leftback, believe me, I am looking very closely at the Treasury market today! Since late July, about 25% of my LNW has been parked in the long end (the rest is in a mix of bills and notes.)

    The government will do whatever it takes to head off the nightmare scenario of rising rates, even if it means violently pulling away the punch bowl. I agree that last year’s bond market action was probably just a teaser of things to come: last I checked, the yield on the 10Y JGB was 1.3%.

    You mentioned being into IGs recently. Do you think they will weather the coming storm, or do you intend to pull out at some point?

  52. hue says:

    god gawd, “route is more important than destination”

  53. hue says:

    and a typo in my correction. back to lurking.

  54. danm says:


    danm if Ido. danm if I don’t. Stuck between a rock and a hard place. Part of my name. I could have changed avatars a long time ago but I haven’t because of my penchant for the dyslexic twist.

    On the trading/misallocation of capital front. Some will say it’s arbitrage and arbitrage is good. But what’s the use of lifting a stock that should go under? Just look at the second offerings coming out. Most are companies that should go the way of the dodo bird but instead are just sucking up that liquidity and making it harder for the competition to survive.

  55. catman says:

    Ruffkin 123 – If your first five points were cogent we would be leaving Irag and Afghanistan.

  56. leftback says:

    “The government will do whatever it takes to head off the nightmare scenario of rising rates”


    “last I checked, the yield on the 10Y JGB was 1.3%”

    Check. Not sure if we can go that low. LB likes the 5-yr but has long bonds as well and TiPS, which I may sell.

    “You mentioned being into IGs recently. Do you think they will weather the coming storm”

    Honestly – would like to think so but don’t know, and would probably pull the plug on signs of credit spreads beginning to widen. Have made more money there than expected and have been reducing risk all around since June. Had some HY as well as IG but long ago turned them into Treasuries. Sleeping extremely well.

  57. Onlooker from Troy says:

    “and making it harder for the competition to survive.”

    And for new ventures to start up with fresh new ideas and innovations that would help pull us out of this ditch. But no, the govt keeps subsidizing failure and the misallocation of capital and resources (human being the most egregious of them).

  58. hue says:

    danm, Uncle Sam love secondaries and dodo birds. you know that don’t fight the fed thing. don’t fight the fed until you do. all of that queasing last fall took a while to hit the markets, and now it looks like the markets will never go down again. i guess once the secondaries are done, then the invisible hand will let the markets go down. maybe the Fed is setting up shadow brokerage accounts with printing money and buying all of the financial secondaries?

    it’s amazing that BofA/Cwide/Merrill/TaylorBean/100s of banks absorbed by NationsBank went down to 3, then is able to sell billions at 10.

    when the crowd are all contrarians, then what is the opposite of that?

  59. hue says:

    “In my humble opinion there is little difference morally between the people in the real estate industry who pumped that bubble”

    as a former mortgage broker who participated in that bubble, believe me, most people didn’t think about morality. it was about putting food on the table. i can only speak of my experience, but most of my cohorts came from the other bubble, tech and tech investments, or other sales jobs. real estate was the next, only train to jump on around 2003 after the nasdaq/9-11 recession. now, no more trains.

    if you made big money in real estate, you likely believed in what you were selling, and have 4 or 5 investment properties in foreclosure. or just one house in foreclosure. just like the insiders at Bear, Lehman, AIG who rode their holdings down to nothing.

  60. from Jeff’s link, above: “Happy Talk: Then and Now

    It is true that consumers and small investors drive a large portion of the economy. And it is true that consumers and small investors, in turn, are largely driven by their perception of what is happening.

    But I would also argue that all of the happy talk in the world won’t turn the economy around when the fundamentals of the economy are lousy, or there has been a giant bubble and vast overleveraging, or there has been massive fraud, or the government has gone so far into debt that it has formed a black hole.

    Happy talk did not work during the first couple of years of the Great Depression, once the speculative bubble and leverage of the Roaring 20’s burst, leading to the inevitable crash.

    As economist Irving Fisher pointed out (as recounted by economist Steve Keen):

    Hobbled by this naive belief in equilibrium, the economics profession was as unprepared for today’s crisis as it had been for the Great Depression. Now that the crisis is well and truly with us, all conventional “neoclassical” economists can offer is the hope that the crisis can be overcome by a good, strong dose of confidence.

    From [Irving] Fisher’s point of view, such a belief is futile. In an economy with an excessive level of debt and low inflation, he argued that confidence was irrelevant–and in fact dangerously misleading, as he knew from painful personal experience…”

    well, worth reading, the post, in full, and, the weblog itself..

  61. Mannwich says:

    @Hoffer: The first thing I thought of when I started reading that, was this is Iraq all over again, but the financial markets and economy. Lying with is now a basic requirement to be in any position of leadership in this country. And it seems to get easier and easier with time. And why shouldn’t it? There is no penalty for it anymore.

  62. Mannwich says:

    ..that’s “lying with ease” (and skill)……..

  63. [...] Ritholtz has a great post on being contrarian: One thing you should consider when betting against the crowd: They tend to be [...]

  64. Jeff,

    yes, it does seem, too much, that way..

    if this: “There is no penalty for it anymore.” realization, really, does take root here, we’ll be in for some, truly, nasty weather, and, certainly, not the kind whose rains sustain future cornucopias..

  65. keithpiccirillo says:

    A lovely piece of writing bringing Gladwell into the fold.

  66. [...] Beware of Naive Contrarianism Indeed, markets are essentially the net result of the behavior of crowds. When asked why stocks were going down, the old trading desk joke is “More sellers than buyers.” That is as good a definition of a crowd as I’ve seen. [...]

  67. DiggidyDan says:


    too late again on this post. blast from the past. read it. take what you may. still applies till fall in october after the pump of better than expectations falls out.

    I made mine many times for fun, how about a Harry Wanger prediction now.

  68. [...] Ritholz says the secret of being a true contrarian is knowing when the ‘wisdom of crowds’ becomes the ‘madness of [...]