The bubble at the end of the age

Before commenting on the stock market, which everyone cares about, I must indulge a small obsession with the way that mainstream economists are able to ignore relevant research in psychology even when they are doing inherently psychological work themselves, and even when the relevant work in psychology was actually published by an economist—but in a journal with “psychology” in the title. 

I refer of course to the article by Robert Shiller in Sunday’s New York Times, “An Echo Chamber of Boom and Bust,” which apparently resulted from Shiller talking to himself in his office.  In their book on “animal spirits” Shiller and Akerlof ignore a seminal article in the Journal of Economic Psychology relating “animal spirits” to the first law of psychology, the Wundt Curve describing sensitivity to adaptation level. (see this and this).  The obscure economist who wrote these papers might reasonably be really pissed off at the arrogance of Shiller and Akerlof.  I have it on good authority that Shiller declined to respond to correspondence on the subject.

Paul Samuelson once said words to the effect that, "As economists, we don’t care what other people think of our work—we write for ourselves.”

I’m just a blogger, as Calculated Risk likes to say (and CR is someone who does respond to emails, BTW). 

As August has come to a close and a lot of folks are looking for a stock market pullback (and yours truly is slightly bloody from a small –2 beta position on the NDX), I thought it would be appropriate to update the Coppock Guide and my own “animal spirits” of the stock market oscillator that are both monthly models. 

The picture is pretty astoundingly bullish on a pure emotion basis.  Of course, it would require a veritable tsunami of liquidity to float the market on top of an economy that is in a depression.  But that’s what we have a Federal Reserve and Goldman Sachs for! 

Here’s the picture:

Click on graph to see bigger image in new window.

Now, I am as blown away as anyone to think that the U.S. stock market would have the unmitigated chutzpah to complete a gigantic head-and-shoulders pattern by climbing another ~50 percent from today’s levels, but this is what the emotional nature of the market wants, and it’s what Ben Bernanke would most like to deliver.  It might happen after the current pull back, as more economic indicators stabilize, and the dollar rallies on weakness in foreign economies.

It could be the bubble at the end of the age for America.  The way things are going the next collapse, due by my reckoning in 2013 or 2014, will be worse than this one.  The stock market will see new lows, in real terms if not in nominal terms.  If, as many expect, the government responds to fiscal bankruptcy by starting a big hot war and getting an inflation or hyper-inflation going, the stock market could continue to go up.

Next “animal spirits” update will be after the unemployment rate data is released on Friday.