Irrational Exuberance Is Like Deficit Spending, Only Worse

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I have been a journalist for my entire working life. But I changed the subject that I cover about halfway through my career. The first half was spent covering budget and tax legislation. The second half was spent writing about stock investing.

On the surface, these seem to be two very different subjects. The reality is that in important respects they are similar.

The reason why I tired of writing about budget bills is that it came to seem a futile endeavor. The purpose of explaining to people what is going on in budget negotiations is to help them understand the issues better so that the policymakers who are doing good things are rewarded and the ones who are not doing good things are exposed.

Guess what? As a people, we like it when policymakers fool us as to the spending decisions they make. In a theoretical sense, we want to see the budget balanced. But we desire programs that we cannot afford. So what we really want is to be tricked into thinking that we are doing what is responsible while enjoying the short-term benefits of irresponsibility.

It’s just like that in the stock investing realm!

Do you want to know the true value of your stock portfolio? Of course you do! You need to know the true value to be able to develop an effective plan for your financial future and to assess how well your investment strategies have been working out. But you don’t really want to know the true value.

If you did, all of the web sites that report on stock developments would be sure to tell you how much you need to subtract from the official numbers to account for the effect of irrational exuberance.

They don’t do that because they know very well how you would react if they did. You would leave their site and travel to sites that offer more comforting reports, that it is not timing the market that works but time in the market, that stocks are always a good buy regardless of the price paid for them, that the market always eventually recovers from price drops.

The Long-Term Negatives Of Deficit Spending

Our budget deficit is worse today than it has ever been. Not because of the person who is president. All of the people who have been president in my lifetime have made it worse to some extent. When I was a journalist, I could sometimes develop enough of a relationship with a policymaker that he or she would confide in me how he or she truly felt about their work product.

The people who were passing the bills that made the budget worse felt bad about it. They knew better than anyone else how important it was to get the deficit under control. They never were able to take the steps needed to make it happen because they also knew better than anyone else about the pressures that keep things moving in the wrong direction.

The saying is that Social Security is the third rail of American politics: touch it and you die. I get the point. But I have learned in recent years that the true third rail is irrational exuberance. Irrational exuberance is much like deficit spending. It’s something that we all bemoan because we know how damaging it is to each and every one of us.

But it is also something that we all count on to keep us feeling okay about how our lives are proceeding. We are sensitive to any effort to reduce deficit spending or irrational exuberance in a significant way. So the people charged with the task keep hands off.

The irrational exuberance problem is worse. There have been so many articles written about the long-term negatives of deficit spending that the message has penetrated the brains of just about all of us. We don’t demand action in a committed way. But we know. Everybody knows.

Denial is more of a factor when it comes to irrational exuberance. We all know that that’s a problem too. If we didn’t know that on some level of consciousness, the fear that brings on a bear market would not be lurking within us and the historical record teaches that that fear is always present (but unacknowledged) at times when prices reside where they reside today.

But the irrational exuberance phenomenon is a more personal thing than the deficient spending thing. We don’t personally pass the bills that make the deficit worse. We do make the stock purchases that send prices even higher. So the denial of the trouble we are causing for ourselves down the line a bit has to be even stronger.

Will we solve these problems? I am an eternal optimist. I believe we will. Not in the easy and obvious and expected ways, it would appear. I think it would be fair to say that we have elected to find the most convoluted solutions to these problems possible.

And I don’t believe that we are going to end up in a good place re either problem without going through some dark and painful awakenings that force us to deny our denials. But I think we are going to get there in the end. When we have exhausted every other possibility, we will throw our hands up in the air and elect to do the right thing as a last resort.

Rob’s bio is here.