Posts filed under “Investing”
Small World: On Saturday, I mentioned problems with Citibank’s Panic/Euphoria sentiment measure.
Then, I discussed the work of James Montier of Dresdner Kleinwort Wasserstein (DrKW) yesterday, (Seven Sins of Fund Management). This was the first time I ever mentioned him.
By coincidence, I read about a Fear/Greed indicator last night from the very same James Montier in Thoughts from the Frontline (which coincidentally references my earlier discussion of Northern Trust’s Paul Kasriel). How’s that for convoluted circles?
Anyway, here we are less than 2.4% from recent highs, and Montier’s sentiment readings does not shows panic (like Citi’s Lefkovich’s does) — but rather, reveals irrational exuberance: The index has only reached
this level of greed in September of 1987 and May of 1996.
DrKW Fear and Greed Index
click for larger graph
Source: Thoughts from the Frontline
Montier notes this is a measure of Risk appetite:
“It is really a measure of relative risk
adjusted momentum between global equities and bonds. When the risk adjusted
performance of equities is high relative to the risk adjusted performance of
bonds, then investors start to forget about the concept of risk altogether; they
become totally focused on return. Irrational exuberance reigns (shown as a
reading of above 1 in the chart below).”
“In contrast, when bonds have performed well in risk adjusted terms relative to
equities, investors tend to forget that things will generally get better at some
point, so this creates the ‘end of the world is nigh’ kind of feeling (a reading
of -2 in the chart below). Effectively, the measure captures the tendency
towards extrapolation of the recent past/current situation into the indefinite
future. Thus it serves as a contrary indicator.”
John Mauldin adds that in 1996, the DrKW Fear/Greed indicator went off the charts — but the markets were still going up:
“So why even bring it up? Because we have other flashing lights going off in our list of indicators. As we discussed for the last two weeks, real hourly earnings and real consumer spending are slowing down, which is a very good indicator of a future slowing of the US economy. And the yield curve is starting to invert (more later). We are getting signals that should make investors more cautious, yet they are becoming even less so!
Neither consumer spending nor the yield curve were showing “issues” in 1996. On balance, greed was a good thing back then.”
John does mention that the Fear & Greed Index “seems to nail the bottoms, but we are nowhere near a bottom.”
All ths raises one question: if there were no confirming signals in the 1996 DrKW’s indicator highs, what other confirms were there in 1987? I asked John, and will update this post as soon as I hear back from him.
Greed by Four Lengths
Thoughts from the Frontline, February 10, 2006
This is the article that the Greenspan quote came from that popped the market today; I don’t know how accurate it is (holographic image?) but
Gold price riding high on fear of terrorism, says Greenspan
Leo Lewis, Tokyo
February 09, 2006
"ALAN Greenspan, who stepped
down last week as chairman of the US Federal Reserve after 18 1/2 years, has
blamed the threat of terrorism for the high gold price, in his first private
sector speech since being let off the leash of officialdom.
members of his audience of international investors – watching a holographic
image in Tokyo as he spoke in New York – Greenspan said the high cost of gold
did not reflect inflation or the strength of commodities, but rather a fear
among investors of a major geopolitical conflict. There were people who believed
that a nuclear weapon could be detonated within five years, the former American
central bank supremo said.
The low probability of such an event occurring would not necessarily avert a
spike in the gold price, he added.
Greenspan went on to discuss a range of topics, including the problems
created by a lack of investment in refining capacity by the oil industry. He
said this failure by the oil majors meant that the era of cheap energy was
almost surely over.
The former Fed chairman is also said to have indulged in a moment of
self-criticism over the central bank’s failure to prevent the market bubble in
the late 1990s.
That may explain Gold’s $20 whackage yesterday, but what about all the rest of the metals and commodities?
Also, if you missed this, you MUST read it:
GREENSPAN SENDS MIXED SIGNALS IN FIRST DAY AT HOME
Former Fed Chief’s Inscrutable Statements Baffle Wife
Its a hoot!
and on the chance the article disappears, I’ll archive it after the jump . . .