"Investor psychology" is a very big beast. It's not about a person, but about people -- millions of them, and their collective state of mind as they participate in the financial markets.
And since it involves so many people, talking about investor psychology is like talking politics: It's far easier to be opinionated than it is to be accurate.
Even so: There are times when a certain news story can accurately reflect today's investor psychology. I recently came across a story which does exactly that.
It's about three words you probably never imagined would be combined (I know I didn't).
1. Subprime
2. Auto
3. Bonds
Yep -- there is indeed an active, growing market for "Securities linked to loans to consumers with credit considered subprime," which are bundled into "asset-backed auto debt issuance." These subprime auto loans amount to 20% of overall auto bonds, double the percentage of the previous two years.
The first time I read about these bonds I was speechless; all I could do was shake my head. The news source is reliable (Bloomberg), but I dug a little deeper anyway just to be sure it's true (it is). If the recklessness of this type of "finance" isn't obvious to you, I doubt any description of mine will help.
Of course, you might think that an instrument like this really isn't "new." After all, junk bonds have been with us for more than three decades.
Then again, not all forms of insanity are the same. In this case it's like the difference between being garden-variety crazy, vs. going stark-raving straitjacket loco.
The larger point is that it's been barely two years since we all saw exactly how a story like this must end. But this time it's even worse. Previously the toxic assets were based on subprime mortgages; now the toxic assets are based on subprime auto loans. Auto loans, dear reader.
Lest you think this is only an anecdote, please allow me to offer a quantitative measure of where investor psychology is today. A recent survey of sentiment among market participants shows that just 24.26% are bearish. How extreme is that? Well, it's a smaller percentage of bears than was the case in October 2007 -- the month of the all-time high in the Dow Industrials.