Occam’s – “The Emperor Has No Clothes”

Why Powerful Segments in Financial Media Want You to Believe Predicting the Future Works

It is a fairly common theme that when you follow financial media on a daily basis, (a) it has an agenda, but will never disclose it, and (b) it is very much not the friend of the long-term, goal-focused, patient, disciplined investor.

A couple of interesting examples came to the forefront in the last couple of months. We draw them to your attention as compelling, if anecdotal, evidence of two of journalism’s most particularly distressing proclivities. These practices have three general characteristics in common: (1) they are remarkably consistent throughout financial media, suggesting the existence of a kind of Groupthink Central; (2) the investor is so relentlessly exposed to (indeed, submerged in) these practices that one may no longer be conscious of their existence, much less their effects; and (3) although this should almost go without saying: they are not true.

The first of the two agenda items under study today is the illusion that there is a direct, causal relationship between today’s “news” headlines and what the equity market is doing right at this moment. Investors must realize that financial journalism is almost always positing a cause and effect which does not actually exist, but which is intended to keep you glued to the news. Financial journalism has zero interest in making you a good long-term investor. Indeed, the longer-term your perspective, the less you will have recourse to the 24-hour financial news cycle. Thus, financial journalism must, in its own self-interest, encourage you as nearly as possible to fixate on the news, as distinctly opposed to the truth of long-term historical perspective.

The really fun thing for financial journalism is that it gets to pick and choose the news items that it will employ to explain whatever the market is doing at any given moment. Case in point, on February 28, there were three items of genuine financial news in the morning: 1) The Purchasing Managers Index (PMI) edged up for the month of February; 2) The most closely-followed index of consumer sentiment was reported to have also ticked up more than economists’ consensus forecast; and 3) The Commerce Department slashed (journalism’s verb) its estimate of fourth quarter GDP growth to a 2.4% annual rate, down sharply (journalism’s adverb) from the first estimate of 3.2%. The media reported this in its usual apocalyptic terms –focusing not on the growth, which was actually quite good, but on the downward revision, especially in consumer spending. (It is a staple of journalism’s Negativity Narrative that the American consumer is cash-strapped; more about this in a moment.)

The stock market went up that morning, probing into a new high ground. And the headline on Yahoo! Finance by 11:00 a.m. was, inevitably, “Chicago PMI and Consumer Sentiment Trigger Stock Market Rally to All-Time High.” Please tell me you already intuit where we’re going with this. The folks at Groupthink Central, who get to assign causality where none exists in order to make you think the news is important, cherry-picked the morning’s two positive developments to explain the market’s rise. But you cannot and must not doubt that, had the market fallen that morning, the headline would have most assuredly been, “Stocks Plummet on Sharp Slash in GDP Estimate”, or words to that effect. That is, journalism would have selected, with equal facility, a negative stimulus and used it to explain an utterly random negative response. That’s what they do. And we have become so inured to it, that we no longer see what’s being done to us. No one knows for sure why the equity market does what it does on any random day. And no long-term, goal-focused, patient, disciplined investor cares. These are the facts, and not only will journalism never acknowledge them, it will fight them with every ounce of its strength and fiber of its being. Journalism is not your friend. Good news this morning causes the market to go up; bad news this afternoon causes it to go down. Is it any wonder that those consuming such news become increasingly myopic – indeed even manic – with their investment decisions?

That brings us to the second manifestation of journalism’s hidden agenda, which happened to crop up in recent days: when something really good happens in the economy, put the most negative possible spin on it, giving no indication that you’re switching from straight reportage to your own hidden-agenda-driven editorial commentary. Case in point: the Federal Reserve’s March 6 report of U.S. household net worth in the fourth quarter of 2013.

The fourth quarter financial accounts report was one of those very rare phenomena in economics: an unalloyed good, without a caveat in sight. Net worth for households and non-profit groups rose 3.8% over the previous quarter, or $2.95 trillion, to a record $80.7 trillion. That’s a record, as in this is the richest we’ve ever been, lest you harbor any doubt. The value of financial assets, including stocks and pension fund holdings, held by American households increased by $2.52 trillion in 4Q2013, paced by a 9.9% quarterly rise in the S&P 500, capping the best year for equities since 1997. Household real estate assets rose by $40.1 billion, as the S&P/Case-Shiller national home price index soared 11.3% in 4Q2013 vs. the same period in 2012, the biggest year-over-year gain since the first quarter of 2006. And just when you think this story couldn’t possibly get any better, owners’ equity as a share of total household real estate holdings rose to 51.7% in the quarter, from 50.6% in 3Q2013. That is, not only are home values up, but our percentage of equity in them popped as well.

Once more, with feeling: an unalloyed good. And there is nothing on this earth that financial journalism hates worse – because it so authoritatively contradicts the Negativity Narrative – than an unalloyed economic good. But since it can’t fudge the numbers, journalism must find ways to editorially inject its own special brand of naysaying, again not alerting you to what it’s doing. We could not make this up. Reuters’ first headline when this report broke was something pretty close to, “The Rich are Doing Better, the Rest of Us Not So Much.” And Bloomberg suddenly opined, “Additional gains in the labor market and household wealth will be needed to give consumers the means to spend on goods and services, boosting economic growth.” Read: no matter to what extent household assets are increasing in value, and no matter how significantly household indebtedness is decreasing, such that household net worth is setting records, we pledge allegiance to the myth of the cash-strapped consumer. The facts don’t matter, the numbers don’t matter; Groupthink Central has decreed that the consumer is still living from hand to mouth, and so he must be.

In her essay, “Truth and Politics”, Hannah Arendt identifies the deliberate confusion of fact and opinion as a form of lying. We would suggest that the reader of this essay consider financial journalism in just that sense. You may expose yourself to it in the interest of finding out the news, if you dare. If investors accepted the fact that the predictive views of financial “experts” were worthless, the ramifications would be profound. In the absence of sensationalism, much of the financial media would cease to exist. How many brokers would exist if they couldn’t sell that siren song of “research”, as their clients would view their advice through the lens provided by well-researched academic studies and the views of the sound theories of Eugene Fama and others? This result – threatening the very existence of such a powerful segment of our society as Wall Street and its sycophant financial media – is simply not going to happen.

While much of the financial media and many brokers are driven by this secret agenda to maintain their livelihoods, you should ignore their musings and base your investing decisions on reliable data. But if you’re looking for truth, we believe you would do better to seek the counsel of your trusted financial advisor.


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