Pessimism is frowned on at one of the chat groups that I frequent. The members are a quite diverse bunch, including big-time traders, money managers and financial speculators, but most of them evidently see eye to eye when it comes to the economy: sunny and warm on most days, with a chance of scattered showers. The group’s leader posted an open letter to “doomsdayists” the other day in which he noted that, historically speaking, betting on Armageddon has been a loser.

No argument on that one. But as readers of this newsletter will already know, one can be quite bearish on the economy, not without good reason, and still play the trends profitably. With respect to the big picture, we may not see bread lines stretching around the block any time soon, but nothing could convince me that business is sound. Far from it, as I have argued here before and taken pains to document. If you need to be persuaded, you should read “When Statistics Lie,” a pellucid  monograph from Dr. Kurt Richebacher that I’ve left posted at Rick’s Picks for the last month or so. The global financial system is a house of cards, as his analysis makes clear, and one needn’t be a disciple of doom to believe the day approaches when we will all wake up wishing we did not own stocks.

Still, I agree that we cannot live our lives as though tomorrow is certain, or even likely, to shroud us in darkness. History is instructive on this point, and the letter I’ve mentioned above cites some inspirational lessons from the past that we can imbibe to shore up our optimism about the future. The letter, written by the celebrated trader/speculator/author Victor Niederhoffer, can be accessed by clicking here.  Lest you fear becoming enraptured by his message, here’s my response to use for a tether:

Blind Optimism

Just as atheists and sinners must sense what a hell-hole this planet would become if not for the righteous and the faithful, we ‘doomsdayers’ understand that the world desperately needs optimists, even the blind, patronizing kind who hold sway in this forum. I say "blind" because the introduction of facts that might contradict the group's assertively blithe view of the world are discouraged, if not to say censored. Mises himself would only be politely tolerated here, his dour disciples made to wear yellow armbands.

This ideological, factually strained kind of optimism seems to me insecure.

At any rate, it pales in comparison to the robust optimism of *my* favorite optimist, Steve Wynn, who stakes billions on bullish positions from which no exit is possible save bankruptcy. Even more impressive is that Wynn is no cold-blooded quant wagering on an obscure statistical quirk, but a seat-of-the-pants risk-taker betting that middle class America's prosperity can only burgeon. In short, a guy with the cajones to put a five-acre fountain in the middle of the desert. 

Y2K ‘No Sweat’

Admittedly, Las Vegas would be a mighty small town if I had been the first capitalist on the scene, and Americans would probably have to drive three times as far to get to the nearest shopping mall. But this doesn't mean pessimism is in my blood. Working for Dresdner in the late 1990s, my reports on Y2K to institutional investors grew increasingly bullish and dismissive of the end-of-worlders as the crucial date approached. Ultimately, my optimism bordered on certitude, buttressed as it was by interviews with hundreds upon hundreds of sources in health care, banking, manufacturing and energy.

Now, with respect to the economy, and having done my homework, I would not venture that "doom" is imminent, nor would I conflate forecasts of economic catastrophe with speculative fears of radical Islam, water and fuel shortages, smallpox, bird flu, asteroids, global warming, and the like. To ratchet down the rhetoric a bit, we deflationist are not warning of "doomsday" -- i.e., some catastrophe that will extinguish civilization.

Rather, we see deflation, simply, as the path the financial economy is most likely to take when debtors and creditors are forced by higher real interest rates to come to terms. The process is certain to be wrenching, since settlement will involve hundreds of trillions of dollars of very thinly collateralized obligations.

Stick your head in the sand and tune out the blunt facts, if you prefer. But please don't assert that those of us who are predicting trouble must necessarily be wrong because the world still turns.