Aug

28

P McDIt seems every day for the past few months we heard another story about how bad the economy is. The mainstream media have had a monotonously lugubrious message about how bad it is. Against this backdrop we have today the salutary news that GDP rebounded at an adjusted annual rate of more than 3% in the second quarter. Simply put, the widely predicted recession never happened.

This still begs the very real question as to why the mainstream media are so bearish on the economy. There are several reasons for this but one is often overlooked. Part of the blame for the bearishness of the press can be placed on Google.

Clearly the people at Google are not sending out negative messages nor are they inherently pessimistic. In fact the opposite is true. Google is one of the most successful companies in history. Most of its employees are active participants in its success story. So the folks at Google are just short of euphoric on the economy. It is working very well for them. But that is exactly the problem. Google has a had enormous disruptive influence on other media companies. It has adversely impacted newspapers, magazines, radio, TV and pretty much every other advertising medium.

Across the board things are bad for almost all media companies who do not have a significant Internet presence. Sales are falling and consequently earnings have been decimated. No question, the media industry is in a Google-induced depression. So it should be no wonder that the mood in the financial press is depressed. They are losing their jobs wholesale. Over the last year many if not all senior columnists or reporters have been replaced in many companies. Typically they are being replaced by younger, prettier and, most importantly, cheaper talent. Many of these Young Turks have never seen a bear market. The guidance of the financial media has never been very good at its best, but this new generation may represent a new level of ineptitude. They are far too quick to hit the panic button.

However that is no reason that the rest of us need to panic. This time it is not different. Financial crises happen all the time and with a certain cyclical regularity. The GDP number tells us the worst is behind us and that the non-financial non-real-estate part of the economy is just fine. I believe stocks are more undervalued than at any time since 2003.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008


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8 Comments so far

  1. Greg Vinately on August 29, 2008 9:02 am

    Beyond Google, I have to say that 2008 is the year of the cattle. The minds and attitude of market participants closely resemble the digestive system of such animals. Day in and day out investors regurgitate and rechew the same events over and over with incessant pessimism.

    Crude oil at $145? No problem, it’s going to $200
    9 failed banks? Why stop there?…another 200 to come.
    Recession? No, it’s a depression coming.
    Gold at $1000? No, it will be at $2,000 by year’s end.

    But rest assured that right behind the cows the entrepreneurial spirit lives on. This spirit turns the manure into fertilizer and sooner or later this spirit will take the cattle to the slaughterhouse.

  2. steve on August 29, 2008 9:13 am

    You ask the question why the mainstream media is negative on the economy.

    Answer: They are in the business of being negative. "If it bleeds it leads" is a popular phrase. The general population is caught up in Schadenfreude. They love to see train wrecks. How else can you explain such coverage as little Caylee in Florida or Terry Schiavo. Look at how they treat George Bush. When the campaign in Iraq was going badly a year ago the NYT and others could not print enough negative journalism. Keith Olbermann finishes his show with " this is the xth day since mission accomplished." Today not a whisper about Iraq. Unemployment at 5% ARRGGGGGG!!!!!!!!!!. When not so long ago, economists argued the Phillips curve as full employment.

    Answer 2: The mainstream media is notoriously liberal and hysterically anti-Bush. So if they are going to get their man Obama elected, they have to make the case that things out there are horrible, nobody is working, oil will break our backs, rich republicans are the only ones with money, all our money is going overseas etc. And the only way to save your life and the lives of your children is to change our 8 years of bad luck. Like Bush broke some illusory mirror. 

    Finally, Timing is not very good right now for stocks and the market in general. September and October are historically bad months for the investor. Compounded by the general election in November and this is reason enough for pause. And lest we forget that there is a potential category 3 hurricane bearing down on the Gulf Coast and we need to remember how disastrous the last big one hurricane Katrina was. With a sensitive oil market, anything could happen with this industry.

  3. John on August 29, 2008 12:00 pm

    Today we got the news that real consumer spending fell 0.4% and personal income fell 0.7% in July. The tax rebate checks were a crutch to prop up consumer spending while the banks and financial institutions recapitalized. Unfortunately the magnitude of the asset deflation that we are experiencing was underestimated and the stimulus ran out before the process was completed. The press is bearish because things have been bad and they are a lagging indicator. They will continue to be bearish until well after the inevitable upward turn in this credit cycle, at which time they will start talking about a ‘possible’ recovery well after the recovery has been complete and the next bull run begins. Opportunities for profit abound when you realize that what is reported today, is yesterday’s news.

  4. Greg Vinately on August 29, 2008 1:11 pm

    "…and the stimulus ran out before the process was completed"

    There is evidence to the contrary…I suggest that you look at the May/June savings rate numbers.

    The stimulus should start coming from under the mattress in direct  relation with any upside move in consumer sentiment.

  5. gaston monescu on August 29, 2008 5:54 pm

    google-induced depression? google is the recipient of much of the cream… but ‘change’ is another term for the current job losses in the various print medias. calling it something else may be akin to not owning up to the situation. which could prevent one from being
    ‘nimble’ during a time of flux.

  6. George Parkanyi on August 29, 2008 9:54 pm

    Phil,

    This is encouraging. This is good. Makes me want to go out and mortgage something …

    Greg’s comment is a good one too. I watch Bloomberg in the morning (because there’s nothing else financial to watch on my cable package), and every day it’s one talking head to the other “Have we seen the bottom for the financials?”. (Insert inane, meaningless response here)

    Reminds me of driving with my kids - “Are we there yet? Are we there yet? Are we there yet?”

    I’d love just for once to have some analyst answer the bottom-for-the-financials question with … “Um, I have to go pee.”

    Cheers,
    George

  7. Invictus on August 30, 2008 5:39 pm

    I recommend you dissect that quarterly GDP number. Things to keep in mind GDP Deflator Manipulation.
    How accurate are the Hedonics and Imputations calculations.
    Look at the divergence between GDI and GDP and honestly tell me the worst is over.

    Google allows the masses to look behind the force fed headlines of the media and search for the truth themselves. Obviously being an election year the motives behind what stories are highlighted is worth scrutiny, but the reality is things are probably worse than what the MSM is telling you.

  8. Adam on September 1, 2008 10:47 pm

    “However that is no reason that the rest of us need to panic. This time it is not different. Financial crises happen all the time and with a certain cyclical regularity.”

    For some reason this reminds me of the old Bernard Shaw line, “You see things; and you say, ‘Why?’ But I dream things that never were; and I say, ‘Why not?’” Perhaps it’s time to consider a world in which Financial crises do not happen all the time nor with any cyclical regularity.

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