Tinkerbell Economy...

The financial pages of our morning paper always contain an article, with no clear attribution, which tries to summarize and explain the previous day's market movements.  Which major stocks and indicies were up, which were down, and some brief explanation of why.  How do you get that job?  Just think -- you could come up with almost any vaguely plausible story and who could say you were wrong?  That's got to be the easiest gig in journalism -- and the most powerful.

Recently, for example, during the run up to the election as the stock market took a small dip, our morning paper explained how this was due to investors nervous that John Kerry might win the presidency.  After the election, as stocks rallied, the paper provided the helpful analysis that this was investor happiness with Bush's reelection.  No evidence was offered to support these conclusions, nor is it clear that any could be.  No opposing hypothesis was presented -- such as that the market always falls during any time of uncertainty and rises when the political landscape is more stable, regardless of which candidate wins or loses -- nor would there be any way to distinguish between competing hypotheses if they were.

This is the fallacy of the punditocracy -- what is true is what they say is true because they say it's true.  If you are looking at a single company and the market reaction to its most recent earnings report, perhaps you could identify a real cause of stock price fluctuations.  And perhaps there is, on any given day, a major cause of the final total market variation, but overall the complexities of millions of shares of trading cannot be boiled down to a single overriding message about the entire market's rise or fall.  Nonetheless the market analysts will do this day after day, month after month.  And people allow them to get away with it because they feel that there should be an explanation.

These explanations, drawn for the same pool of possible explanations from whatever school of thought that the pundits represent, repeated over and over every day in everybody's financial pages, become a kind of self-fulfilling prophesy.  Individual investors start to act on information the way that the pundits have said that other investors acted in the past.  After all, everyone wants to beat all their competitors in the short-term parimutuel game, so they need to know how the other investors think.  Thinking the same -- the way the pundits said they think -- the group moves the market the way the pundits said that they would.  Except days that they don't -- but everyone is wrong sometimes.

The curious side effect of this is that our national economy has a kind of Tinkerbell quality -- it's only strong as long as everyone believes in it.  Despite warnings in the alternative press about tenuous dollar prices, or the impending meltdown of the oil standard, none of these doomsday scenarios will find themselves in the major investment rags for fear that the very news itself  would trigger the crises that they predict.  Clap your hands, little children, if you believe in the economy!  Clap your hands if you believe, and she will be strong!

- jack*

Comments

[loyopp]

Yes, anyone basing investment decisions on those daily overview articles is a sucker, and there's one born every minute. Those journalists just gin up a story people can grab onto so they think they're a player. Another mass-man fallacy with your coffee today? Small guys dutifully thrash their portfolios. Buy and hold? No, you're much smarter than that. You can pick winners! The brokers pocket their fees on all the buy high and sell low orders.
I wouldn't fret too much about stock price fluctuations caused by this kind of noise, though. The economic outlook is affected far more by fundamentals. The current oil supply situation, for example. That's worth worrying about.

[Arrlaari]

Conservative economics doesn't think this is as crazy as it sounds. In fact, Herbert Hoover conciously decided that the way out of the Great Depression was for Americans to clap their hands and believe in the "fundamental soundness" of the system. Hoover's entire economic policy was based on this theory, hence the numerous efforts to display "confidence."

[Steve R]

It seems to me that today we're getting lots of lip service on how everything is getting so much better and if we'd just keep believing that the crud we're being fed things are better. Business is dying right now and all we get is these glittery reports from the government on how good things are going. Fairy dust will be the next trick or maybe clapping our hands will do it.

[Dmitriy]

I'll be here with my sparkle feignrs when you need them, because I'm really proud of you.Until then I got passed by the official end of race vehicles at my first TWO marathon finishes. My first marathon attempt was canceled due to heat when I was at about mile 14. I did 3 more miles in a re-routing pattern to the finish line and got a BS medal that I didn't earn. When we crossed, we were told, You did NOT just complete the Chicago Marathon. Congratulations on your Chicago Fun Run finish. Thanks, assholes. Fun run, my ass.The second marathon (first finish) involved lots of crying on the side of the road and hobbling to the finish line.The third went really well until I got sick around mile 20 and got passed by the end of race around mile 21 or 22.BUT. My fourth was the most awesome experience ever. ;)Hugs to you.