Swine Flu: Don't Panic! (Seriously. Don't.)

A few years ago they terrified us with chicken.

In 2009 it's pork, bacon and ham. Once again, the world's tastiest creatures appear bent on revenge.

Yes, we have another potential pandemic on our hands, this one goes by the name of Swine Flu. And like most every medical scare, the response is all out of proportion to the facts as we know them.

Since Swine Flu touched down here in New York City, it's all people seem to want to talk about. And the media reports rather than dowsing fears, have predictably poured gasoline on the fire.

"New virus"... "no known cure"... "quarantines"... "stockpiling Tamiflu"... and now this "money quote"; "I fully expect we will see deaths from this infection." (Richard Besser, acting director of the CDC.)

Scary, right?

A little perspective is called for here.

Yes, there may be deaths resulting from the Swine Flu in the United States. There have been 150 deaths (at last count) in Mexico.

But there are ALWAYS deaths from an outbreak of influenza. (Sad but true) How many? The CDC estimates that complications from influenza kill approximately 36,000 people each year.

Thirty-six. Thousand.

Today I read "Fears of Swine Flu" were the reason the DJIA gave its gains back. If this episode seems like a repeat (perhaps of repeat of Quincy), it is. A few years ago it was Avian (Bird) Flu that captured the imagination of the media. It weighed on the necks of the world markets, like an infected albatross.

Let's check the stats on that "Superbug". In the last 10 years (according to the World Health Organization) it has killed 248 people (as of January of '09).

Look, I am not making light of Swine Flu. It has already inflicted horrible suffering on people. It is truly a killer and all out effort to combat it should be taken with the utmost alacrity.

But if people feared the mundane killers out there a fraction as much as they fear these inflated medical scares, they'd never leave the house.

My wife, (bless her heart) worries when I take a plane. "Let me know when you get you there, honey", "Call me when you get in", she says to me.

What I (wisely) no longer bother to point out is that the most dangerous part of my journey arrives after I get into JFK.

Flying is amazingly safe. So safe, that when something bad happens amidst the millions of flights that take off every year, it makes news. More than that, it IS news. Cars on the other hand...

You know what kind of flying isn't safe? Flying down the Long Island Expressway at night and weaving in and out of traffic on the Triboro bridge at 75 miles an hour, while your Russian taxi driver is screaming epithets at his girlfriend over the phone.

That's legimitately terrifying.

Turbulence? Piece of cake.

So let's not lose sight of the baseline here.

We have enough real economic indicators out there scaring us already.

Do we really need the Pig Flu torpedoing our rallies?

MarketPsych on TV

Been a little remiss in my blogging the past month, but I wanted to update folks.

I will be on CNBC Monday morning (supposedly between 10:30 and 11:00 AM) with Erin Burnett and Mark Haines talking about Fear and Market Bottoms.

So tune if you wish.

And congrats to Richard and the MarketPsy Asset Management crew who have been riding high through these turbulent markets. When it comes to secret formulas for deliciousness, there's Coca Cola, Kentucky Fried Chicken... and MarketPsy.

The Monster in the Closet

It is again rumored that there IS a monster in the closet, and this one is bigger and badder than any previously imagined. The monster is in the form of bad debts on bank balance sheets -- creating an insolvent US banking system with "$2.5 trillion" worth of bad debt. I'd say that's a scary situation to be in.

There are a number of potential remedies to dealing with the monster -- the UK may choose to go the route of nationalization, which is apparently favored by Shelia Bair (currently head of the FDIC). The danger of nationalization is the destruction of shareholder value that would ensue and the further loss of investor confidence.

In anticipation of this worst-case scenario, today we saw the stock market acting as if nationalization were likely to occur - creating a self-fulfilling prophecy of plunging share and asset prices, which itself increases the risk of banking collapse. Such psychological positive feedback loops don't stop unless some signal is given by the government (or a credibly strong authority) that nationalization is not likely to occur. Because we're in the midst of a momentous political transition, such information probably won't come this week. Which sets us up for a very volatile week.

Psychologically speaking, there are a few things we can do when we think there's a $2.5 trillion monster in the closet, which roughly parallel the "freeze, fight, or flight" response:

1. FREEZE: We can hide under the covers and hope it goes away (hasn't worked so far).
2. FIGHT: We can grab a baseball bat and run into the closet swinging. (This seems to be the TARP method, but too many blows have missed the monster and hit us on the other arm -- ouch - which makes parents (i.e. taxpayers) angry and reduces our monster-fighting motivation).
3. FLIGHT: We can jump out of the bed, sprint to the light switch with a pounding heart, fumble to find the switch in a panic, turn on the light, and slowly turn to face the monster. (Just shedding light on the monster reduces the uncertainty and fear we feel.) If instead of turning on the light we fled from the house, then we'd be homeless and the monster would get our Serta, which isn't tolerable for most of us.

Right now we're hiding under the covers, and the monster has been growing bigger and more bold.

I'm concerned that in the next rescue - Part 4 - the government may destroy shareholder value via nationalization. To do so would further undermine confidence in the stock market, at a delicate time, and in my opinion it could delay the economic recovery. The lower asset prices go due to nationalization, the more forced liquidations and underfunded pensions we'll see. That may be inevitable in the course of this unwinding, but it's not economically desirable.

If we turned the light on the monster, had a long honest talk with it, gave it it's own bedroom (the "good bank, bad bank" method), and let it find a job on its own time, then we might make it through without being eaten. Seems like the best option so far.

We may have to live with a stinky expensive monster for a while, but that's better than ignoring it and having crippling anxiety attacks and insomnia which ultimately undermine our ability to get on with life.

And don't forget that the banking system was insolvent in the early 1980s as well, and it made it through that storm intact.

Richard

Yeah, But Are You "Sure-Sure"?

Ivory soap is famously 99.44% pure. I like that extra 44/100s. It gives me peace of mind.

If only financial forecasters would follow the Ivory model in their predictions. I've been hearing/reading/seeing a lot of expert predictions these days. New calendar years and volatile markets seem to attract them.

Now, let's be clear, I don't have a crystal ball. (I do have a Magic 8-Ball. But when I asked it if the Jets would make the playoffs it told me "Signs Point to Yes." So I'm thinking it's busted.)

The only predictions I will make with any confidence are these:

1) All consensus predictions will be too narrow in scope.

2) People will overuse artificial parameters in the form of round numbers and calendar years when formulating those overly narrow predictions.

Okay, I cheated.

Those aren't predictions. They're observations of human behavior that are among the most reliable you will ever find.

How reliable? Research into the area that behavioral finance folks call "overconfidence" indicate that when people are asked to predict a range in which they are 99% confident results will fall (i.e., a 99% confidence interval) they are correct 80% of the time.

Now at first blush, that may not seem so awful. 80% vs 90-something%...what's the big deal?

But it is awful.

Truly, horribly, make-you-want-to-toss-your-cookies awful.

Why?

Think of the corresponding behavior in light of such predictions. When we're 99% of something, it's basically as close to saying we're absolutely certain as we're going to get.

You could go Ivory Soap and say 99.44% certain but when we blurt out, "I'm 99% sure that won't happen", we're essentially saying, "No shot in hell."

That's dangerous even when it's TRUE.

Once in a hundred years was the standards to which they built the New Orleans levees. That works fine... right up until your neighborhood has to be airlifted off the rooftops.

But with market predictions, it's 20x worse. Events that people - and this includes experts, mind you -- say would happen every 100 years (1%) - happen EVERY FIVE YEARS (20%).

Let's say you listen to a more conservative expert predictor. He/she is twice as good and are accurate 90% of the time.

That STILL means every 10 years we're going to experience something that "nobody" saw coming.

Nassim Nicholas Taleb wrote a book called The Black Swan. (It's not as good a book as Richard Peterson's Inside the Investor's Brain, but it's certainly worth reading).

Where are we seeing such predictions these days?

Oh... everywhere.

"Where do you believe the S & P will be a year from now?"

"How high do you think unemployment can go?"

"What are the chances you will have to cut your dividend, Mr. CEO?"

Remember, fellow investors, fight the danger of narrow framing and don't be drawn into sharing the outlook of those who look at the horizon through a key hole and tell you wide it is.

We have no reliable way of knowing how bad (or how good) it's going to get.

The key is to expand the scope of expectations and to have plans in place for even the most unlikely-seeming scenarios.

Think "Ivory Soap".

And good luck.

-Frank

(If you are interested in a MarketPsych seminar, please feel free to contact us at info@marketpsych.com. I'm 99.44% sure you will find our seminars valuable.)

CEO's do it.

Psychology of the Auto Bailout (or lack thereof)

A few thoughts about the auto industry bailout failure:

As Congress is considering this decision, there is so much baggage from past consdierations (prior bailouts, anger about SUVs and "sabotaged" electric cars, union pay and benefits, etc...). The emotional baggage is getting in the way of rationality.

Psychological research shows that facts and numbers are needed to make the best decision in such a situation. Grandstanding over ideology is what happens when no one has come up with clear numerical projections. Numbers such as: 1) how many people will become unemployed and their families will draw federal and state benefits? 2) what are the consequences of bankrupcy reorganization to employees, suppliers, and others? 3) What are the realistic future strategies of the companies? 4) Who are the creditors who will be hurt by bankruptcy?

These are useful questions, but under stress and uncertainty the human mind will latch onto emotional images without such numbers, often making worse overall decisions as a result.

Richard

Oh, Ye of Little Faith

Faith.

What is it? What does it mean to investors?

If something is provable, certain... there is no need for it.

You don't need faith when you already know.

Faith is for the times when you really don't know.

It's the belief in something despite a lack of evidence.

The essence of faith is doubt.

We investors are getting our faith tested these days.

Faith in policies that we were assured will fix the problems. Faith in the people who make them. Faith in companies who say their balance sheets really are okay. Faith that investing in stocks is a good and safe choice for the long term.

Algonquin Round Table raconteur, Alexander Woollcott once said, "Everything I love is either illegal, immoral or fattening."

Exactly.

Cheating vs. Owning Up?

Looking the Other Way vs. Taking a Stand?

Broccoli vs. Red Velvet Cupcakes?

You want a short and reliable guide to making the "right" choice?

It's the one that's most difficult to choose.

So here we have a market that is tantalizingly cheap (historically speaking) and absolutely terrifying.

What choice do you make if you have a long term horizon?

I say unto thee, brothers and sisters: Those who have faith in this market will be rewarded somewhere down the road.

I believe that. In fact, I'm acting on it.

But to tell you the truth, I'm just going on faith.

Investors Are in the 4th Stage of Grief - Depression

It's been a depressing time to be an investor these past few weeks. In my opinion we're at the worst point in this crisis so far, yet surprisingly to me, the MarketPsych Fear Index has only begun to rise in the past 3 days.

I think investors have been in a state of despair, not fear. They have essentially become resigned to further losses. That's obviously not healthy for the markets. And on a technical level, it doesn't bode well for a price recovery. On a psychological level, I think the entire financial community is in the 4th stage of the Five Stages of Grief called "Depression." See midway through this blog post for a prior discussion of the five stages.

The image above was borrowed from Irvine Housing Blog, and even though it incorrectly orders the progression of the Five Stages, it gets the point across.

I've been to New York to train portfolio managers and financial advisors every month since the crisis began, and I'm finding a tragic progression in the psychology of the people I've spoken to, just like the stages of grief (above).

In late September, I still heard hope - "this is a bad year, but it might still recover." A few people were frazzled and had abandoned their long term strategies for cash, but the vast majority had stayed invested and were taking big losses. (In general, the hope for a recovery, and the attempts to time the bottom, are characteristic of a continuing price slide, not a bottom.)

By late October I encountered paralysis and shock. There was furious scribbling when I described stress management techniques, but otherwise the portfolio managers I spoke with were somewhat listless and exhausted.

Last week, I encountered profound sadness, hopelessness, and despair. Some people approached me with deep concerns about their abilities to keep their jobs and their clients.

Nothing will ever be the same on Wall Street, and I'm afraid the shakeout of the financial industry is just beginning.

By being real about where you are, and staying positive and proactive, you'll make it through this crisis OK. Remember to work on the things you can control, and let go of those you can't. And dust off your Plans B and C - hopefully you won't need it, but knowing it is there is psychologically settling.

Once you've come to terms with the sad realities we're in, then it's time to start positioning for the future. There are great opportunities that come out of every crisis, and there is usually plenty of time to spot them and take advantage, since so many others are paralyzed. For example, boat trailer sales are up, since many people can't afford marina slip fees for their boats anymore. And of course, Safe sales are up... There is always opportunity, but sometimes it requires a little more creativity to see it.

Best wishes,
Richard