"What drives value, stock prices, inflation, employment and everything else that comprises our economy is PERCEPTION"
Steve Sturm has some insight into why the economy looks so bad at the moment (via Instapundit):
I agree that the financial crisis is in part psychologically induced by the media to assist getting Obama in office. Hopefully, after that it will be resolved with the media switch to world peace, economic prosperity and happiness for all (except Republicans) after Obama gets in. But there is also a chance that once started, people's economic fears may take a while to die down and the problems that were exacerbated by the media will take some time to resolve, or there is always the chance that the doom and gloom stories will backfire and those who would have invested and spent will still be wary to do so.
The stock market and the economy will be in the toilet until November 5, 2008, at which time both will slowly start to recover from what ails them, with the recovery accelerating on January 20, 2009...
Those dates are, for those few of you who need to be told, the date after Obama wins the Presidency and the date he takes office.
And why will the sun again start to shine on those dates?
Because once Obama wins, the MSM will no longer have an interest in shoving negative stories down our throats. And on the day he takes office, they'll have an interest in playing up how well things are now going.
I agree that the financial crisis is in part psychologically induced by the media to assist getting Obama in office. Hopefully, after that it will be resolved with the media switch to world peace, economic prosperity and happiness for all (except Republicans) after Obama gets in. But there is also a chance that once started, people's economic fears may take a while to die down and the problems that were exacerbated by the media will take some time to resolve, or there is always the chance that the doom and gloom stories will backfire and those who would have invested and spent will still be wary to do so.
Labels: politics
posted by Helen at 5:42 AM
29 Comments:
From the NY Times on September 30, 2008:
"In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
"The action will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.
"Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits."
http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&partner=permalink&exprod=permalink
Of course, this is being painted as Bush policies ruining the utopia that Clinton set up. Ironically, the democratic party is positioned to benefit from Clinton's disaster.
The date of the article was September 30, 1999.
I don't think we'd see Fannie Mae writing that now (or even a few days ago). LOL
I think that there is an underlying value to financial instruments (a la Graham / Dodd), but the price of a share in a company may move above or below the value due to perception and emotional factors. The price eventually comes back in line with the true value (or overshoots it on the other side).
It's not ALL perception.
... may TEMPORARILY move above or below the value ...
I've read that 2/3rds of the US economy is driven by consumer spending. Consumer confidence is an expression of people's perception of the economy. If you can convince people that things are worse than they really are, then you can have a significant impact on the economy for a time. Retailers are already reporting steep declines in consumer spending for last month. That has to leave a mark.
Back in 1992, Clinton and Gore ran around the country saying we were in "the worst economy in 50 years." The Press dutifully reported and supported the line. Then, within days of Clinton winning the election, the Press finally reported that the economy was actually doing pretty good and had been for most of the year. They did their job - they got Clinton elected. The truth was secondary.
Back in 2000 when the economy was slowing, Bush 43 talked about it. Clinton complained that Bush was "talking down the economy." What hypocrisy!
Well, I certainly agree that the media is driving much of the perception that the economy is worse than it really is, and that once Obama is elected it will start reporting that the economy is better than everyone thought. This is their habit.
It's simply an extension of what Rush used to talk about. When Republicans are in office, the media reports on how many homeless people there are. When the Democrats are in office, they don't. But the salient point is that the actual number of homeless people does not change, regardless of who is in office, merely the perception of how many homless there are.
It's the same with reporting on the economy. When Clinton was in office, the economy was great, but really that was an illusion as evidenced by the tech-bubble that burst shortly after he left office. When Bush came into office, the economy was terrible, but really that was an illusion as evidenced by years of steady growth. So I fully expect the media to report the economy is in good shape if Obama is elected and in bad shape if McCain is elected.
However, that does not mean the financial crisis is not real, because it is. This is an enormously complex issue that few understand and will take years to resolve, no matter who wins the election.
The problem is that the fundamental causes of this mess--CRA, Sarbanes-Oxley (mark-to-market accounting), questionable financing (no documentation, interest-only, adjustable-rate mortgages), securitization and structured investment vehicles--are not being addressed. There is nothing in the bailout plan that will fix any of these problems, so the crisis will only worsen.
This is a credit collapse that is being treated as a liquidity problem, when it really is a solvency problem. The reason why so many banks and financial institutions are failing is because they are insolvent, not because they don't have enough liquidity. They are overleveraged, not underfunded. Now the bills are due, and no one has the money to pay them.
If you have a cracked glass and pour liquid into it, and the liquid leaks out, adding more liquid does nothing to solve the problem. Only when the problem is correctly identified can the proper solution be found.
Simply because the media creates the perception that the glass is not cracked because a Democrat is holding it does not change reality.
Um, my friend laying off two employees because he cannot make the numbers work to keep them on is not a 'perception', it is math.
Blogger just ate my post. Rats.
We, the US, as a whole have a financial problem. We spend more than we make and leverage it by using credit cards to pay for stuff we want "now" but can't afford until "later".
While I don't deny there's bias in reporting in the economy I think I can say with absolutely certainty, as someone on the ground, that the inflation of food prices, fuel prices and utility prices is severely affecting the economy. Inflation of goods is out pacing the rise in wages.
I'm certainly no fan of the MSM, but it seems to me that there's an important difference with economic data in that objective economic data are easily available and are, in many cases, reported by the MSM. The reporting may include infusions of opinion, which are, I think, always unjustifiable, but the raw data from Dow Jones, Standard & Poor, the Bureau of Labor Statistics, etc., are there.
People think of inflation as rising prices. This is incorrect.
Inflation correctly understood is an expansion of the money supply and credit. Deflation is a contraction of the money supply and credit. Rising or falling prices are irrelevant.
We are now in a deflationary mode: the supply of money and credit is contracting. Prices are rising, but so what? If no one has the money or credit to pay for higher prices, then prices will fall. It's elementary. It's also the Austrian School of Economics.
Well, perception is always part of the problem, even when the math is there, we have to be able to perceive, decode, and make meaning out of the data.
Recently Nashville had a gas shortage. The numbers showed that gas purchases went up 40% those two weeks. I had heard, we had apparently ALL heard that there would be a shortage so we all tanked up and topped off. That caused a shortage.
Perception is not the only thing, but it has to be taken into consideration even when the math is there. It is darn important to have that math and respect the facts though!
Trey
@jg:
Yes you are right, my apology to all. The above article was 1999, not 2008 (habit).
I know that my personal attention has been on the recent goings on with Wall Street and Capitol Hill.
The company I work for is a manufacturing and sales organization. I am Sales Manager. The phone has stopped ringing almost over night, and it is officially my responsibility (spelled f-a-u-l-t).
Needless to say, I'm having a blast at work these days.
Anybody got any cheese?
trust, I have no other way to speak with you. I am wondering how your SO's health is. I am hopeful she is well.
@br549
it's very kind of you to remember and ask. (for those of you curious, br549 is asking about the recovery of my 32-year old wife who had her second bout with ovarian cancer this year)
she's doing as well as she can be all things considered. this latest bout has been the toughest since it had more surgery and she has lost many of her natural female chemistry, and she is having a hard time adjusting to things like artificial estrogen. the important thing is they caught it early both times and she survived. They say had it not been found that she would likely not have made it to 35. so we are thankful for that. the recovery and adjustments we'll deal with, i'm just glad she's still here.
It means a lot to me that you asked. :)
Trust, tell her we are praying for you all.
Trey
Thank you, Trey.
Perception is indeed important. Ever since the news broke last week, the result of most calls made by my salesman tends toward the "I'm interested, but I'll wait until next year to see how the economy shakes out."
This is very frustrating since 90% of our clients are in the USA. We've started to expand into Europe as well, and now they're having problems too! Grrr...
you are certainly welcome, trust. As tmink says, she is in our thoughts and prayers.
@marc a.: "I'm interested, but I'll wait until next year to see how the economy shakes out."
Once people start to think the economy is bad, it's a catch-22. They won't invest until the economy improves, yet the economy won't improve until they invest.
If the front page of the local paper tomorrow said the town bank was going bankrupt, everyone would rush in and pull their accounts and it would go bankrupt. It's not hard to understand self-fulfilling prophecies. That is what is happening here.
...While I don't deny there's bias in reporting in the economy I think I can say with absolutely certainty, as someone on the ground, that the inflation of food prices, fuel prices and utility prices is severely affecting the economy. Inflation of goods is out pacing the rise in wages.
Inflation of Food prices?
-Isn't Congress that "legislative body" that passed the "Energy bill" that mandated bio-fuels/ ethanol use to replace "foriegn imported oil"?
Inflation of Fuel prices?
-See above.
-EXACTLY HOW MUCH hydrocarbons and / or "fossil fuels" are avaialble within the US?
-- Off-shore / ANWR Oil and Natural Gas?
--"Clean" coal?
-- Oil Shale?
before we ever talk about "renewables" (AKA wind / solar power)...
Inflation of Utility prices?
-"Not in My Back Yard" (NIMBY) no matter what it may be...Nuclear Power plant, Hi Voltage Electricity transmission line, even an Oil refinery (see above)
-Even when the local residents agree with construction of these facilities (more high paying jobs), enviro-lawyers tie up ANY such construction for YEARS, until the construction is abandoned as too expensive, or from bankruptcy.
SO, do you think there possibly some ways that policy (and not just meida bias) could effect the economy? (/sarcasm)
Besides the Ted Spread, there is the stock market.
Both are driven by Fear and Greed. Two important psychological phenomenon. Of course the whole thing is psychological. So is eating dinner (I get hungry!).
The question is "How much of the fear is media-driven?" Possibly deliberately to help Obama. We could survey the media reports leading up to the mid-September rise in the Ted Spread.
Speaking of Garage Sales...
Investment Grade Value Stocks At Ten Year Lows
There has never been a correction that has not proven to be an investment opportunity. While everything is down in price, there is actually less to worry about than when prices are historically high. More money has been lost by people who bought into last year's markets than by those who will buy into this one, at this stage of the correction. When the going gets tough, the tough go shopping.
Every correction is different, the result of various economic and/or political circumstances that create the need for adjustments in the financial markets. This correction is worse than most that I've experienced, but the doom and gloom scenarios many have been pushing are unlikely to come to fruition. Once the media elects a new president, they'll just have to start reporting better news: 96% of all mortgages are current sounds a whole lot better than 20% of all sub-prime mortgages are in trouble.
Some fundamentals in many excellent companies have eroded significantly (due in part to accounting rules that are being changed), but for the most part, interest payments are being made and few dividends have been cut. Bargain prices abound in both the equity and fixed income markets and interest rates are historically low.
A cocktail of credit market laxatives is working its way into a constipated world economy. Relief is on the way. Today's prices may well be looked at as the lowest of the next ten years! Here's a list of things to think about or to do while Investment Grade value Stock prices are at ten-year lows:
Don't beat yourself up by looking at your account market value. You should expect it to be down significantly because all security prices have fallen. Look for ways to add to your portfolios---that's what the smart guys are doing.
Keep in mind that someone is buying the individual shares that the others are selling. The buyers will hold on until they can turn a profit, and the cash on the sidelines will eventually find its way back into the markets as prices rise.
There are no crystal balls, and no place for hindsight in an investment strategy. Buying too soon, in the right portfolio percentage, is nearly as important to long-term investment success as selling too soon is during rallies.
Take a look at the future. Nope, you can't tell when the rally will come or how long it will last. If you are buying quality securities now, as you certainly should be, you will be able to love the rally even more than you did the last time--- as you take yet another round of profits.
As, or if, the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely so that you can add to them safely later. There's more to "Shop at The Gap" than meets the eye, and you may run out of cash well before the new rally begins.
Cash flow is king, so take smaller profits sooner than usual as long as there are abundant buying opportunities. Today, nearly eighty percent of all Investment Grade Value Stocks are down more than 15% from their 52-week highs.
In looking at your income securities, cash flow is the primary concern; as long as it continues unabated, the change in market value is merely a perceptual/emotional issue. A loosening of the credit markets should move CEF prices back into normal ranges.
Note that Working Capital keeps growing in spite of falling prices. Examine your holdings for opportunities to average down on cost per share or to increase your yield on fixed income securities.
Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on Investment Grade Value Stocks; it's easier, generally less risky, and better for your peace of mind.
Stop examining your portfolio's performance in market value terms--- it leads to fearful, often frantic, decision-making. Keep your asset allocation and investment objectives clearly in focus and try to think in terms of market and economic cycles as opposed to calendar quarters and years. The Working Capital Model provides a calmer way of dealing with portfolio dislocations during severe corrections.
So long as everything is down, there is really less to worry about. This is the result of panic selling by ETF and open-end mutual fund owners and the beginnings of year-end window dressing by fund managers.
Corrections, regardless of cause, will vary in depth and duration, but both characteristics are only clearly visible in rear view mirrors. The short and deep ones are most lovable; the long and slow ones are more difficult to deal with. If you over-think the environment or over-cook the research, you'll miss the after-party.
Unlike many things in life, Stock Market realities need to be dealt with quickly, decisively, and with zero hindsight. Because amid all the uncertainty, there is one indisputable fact that reads equally well in either market direction: there has never been a correction/rally that has not succumbed to the next rally/correction.
Get out there and buy low for a change.
Steve Selengut
http://www.kiawahgolfinvestmentseminars.com/
http://www.valuestockindex.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"
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