Recession: A Self-Fulfilling Media Prophecy?

I received a refreshing report this weekend from Punk Ziegel's banking analyst Dick Bove. Mr. Bove has been around the financial block more than a few times, and I generally find his work to be unencumbered by the usual psychological errors, group-think, and conflicts of interest found in most Wall Street research.

Bove postulates that the media is unknowingly doing their best to promote recession through a self-fulfilling feedback loop. He receives many calls every day from journalists of all stripes: regional papers to televised media. Before answering any questions, he has been polling each of these folks as to whether they had heard anything positive about the economy in the last two months. Amazingly (or perhaps predictably) not one has conducted a single interview in which anyone had suggested that we would avoid recession or financial failure.

Furthermore, you have supposed free-market advocates like Paulson and Kudlow proposing interventionist programs that make Hillary's ideas look moderate. Consumers and business persons are listening. They are pulling back on spending and becoming more defensive. Call it what you will. feedback loop or death spiral - we may well get a recession (or already be in one) if we don't get some guidance to combat what Bove calls "intellectual bankruptcy".

Bove points out the following:

- A variety of stats show that households are working, growing their incomes and wealth, and slowing spending while actually reducing their debt burdens.

- Fed "caterwauling" (I called it whining in a previous post) needs to stop. The markets control interest rates. Never once in more than 20 years has the Fed moved before the T-Bill. The Fed follows the market, they will this time. Bove: "The market is setting interest rates, not some quasi government agency with gents who write indecipherable, overly-pompous pieces of academic gobbledygook".

- There is a crisis of confidence in lending, not a lack of funding.

- Banks are trading at valuation levels last seen in the late 80s, yet things are far better now. In 1987, 9.5% of all banks and thrifts were designated as troubled. Today, 0.8% fit this bill and no big banks are listed. Second, the world economy today is far different. Back then there was a serious capital shortage, and lesser-developed countries had no reserves, vs. trillions in reserves today. There is no capital shortage worldwide, and we are already seeing overseas fund begin to pour in.

- Banks overall are healthy and should not be trading at 1987-1991 levels.

Feel free to agree or disagree here, but we all know that this is far different from the conventional wisdom. TV business journalism is financial porn, and right now bad news and recession is the fetish of choice for the masses. Bove started warning about the pending credit crisis in late 2006, when the fetish du jour was cheap money and pricey real estate. He was right.

I don't represent that I personally have any ability to forecast the economy. But I do pay a lot of attention to investor psychology. Heck, I used to study fish behavior in a prior life - markets are more interesting even if they are far less rational. I wrote the following on my website in December 2006:

Everyone, almost every last person, is so positive about the market and the economy that regardless of what I think the future will bring, my gut is screaming that we are due for a nasty bout of mean-revision. The term "Goldilocks Economy" is flying out of the mouths of barbers, taxi drivers, and Spongebob. The number of bears out there probably does approximate three, give or take a couple. Not one of the economists in last week's Barron's was bearish. Greg Ip writes a page one article for the WSJ about how THIS TIME IT MIGHT REALLY BE DIFFERENT. Maria Bartiromo is so giddy by 3pm every day that I fear I will have to witness her accidentally swallowing her ears. Cramer will surely spontaneously combust before long, with Larry Kudlow soon to follow ("greatest story never told" - sure Larry, whatever you say)... No predictions, that's not what I do. But if I had to bet one way or the other, I wouldn't put my money on Goldilocks. Every time I've heard that story, the bears win in the end, even if there are only three of them.

Clearly we are at the exact polar opposite in terms of sentiment right now. Something to think about...

Comments

[Malkiel]

So in other words, facts don't matter, you don't want the financial press to report on consensus opinion or public opinion if it doesn't suite your purposes? That's like blaming the Iraq war on the media because they reported to us that Bush wanted it. I think you've got a feedback-loop problem in your brain, guy, you're such a creature of right-wing economic dogma that you can't stand seeing it be embarassed by facts.

The current downturn is being generated by the public's loss of confidence and loss of home equity, which people at ground level began feeling last year and began transmitting to the market through their market behavior, i.e. sell stocks and cut back on consumer spending. Should the press not report that? Should the press not analyze it? Should they willfully deny it in order to avoid the appearance of being part of a pack mentality? Are truth and fact just commodities in your game? Guys like Kudlow didn't exacerbate the problem, they denied it for much longer than they should have and now do the right thing by acknowledging it and discussing the changed reality on its own terms.

I sure wouldn't want to be the client of an investment advisor who's determined to fool me for as long as possible...

[SmartGuyStocks.com]

If you think everyone is bearish, go to Barnes & Nobles and look at all the 2008 prediction editions of the top financial mags. They are ALL bullish. So long as those forecasts are still held my a nice size of the masses, we cannot say everyone is over bearish.

Second, if everyone was overly bullish in Dec. 2006, there was still some awesome gains before peaking in October 2007. Thus, there is no info to trade here. We may have to wait until fall (the season) before EVERYONE is in fear ...

[THofler]

I have to agree with Smartguy in that Mr. Kenyon's Dec. 2006 opinion might have kept me out of the market then. In 2007 I had some good stocks and some poor, but my largest mutual fund holding was up 80%. That's a pretty good reason to be in the market, in spite of too much bullishness.

[Sam131]

great article !!!

nicely put ......just another cycle !
wall street has already priced in all the mortgage crap headache ......by the end of this month .....the media will start looking for signs that we are out of a recession......
guess what the smart money is already doing .....

[chagrinned1]

Have to agree with this author. The media specializes in bad news. Good news is NO news at all. That applies to markets as well as the War on Terrorism..