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Awhile ago we were making posts implying that much of the economic downturn was due to prediction/pessimism. At that time, it seemed the only thing happening was that the housing market was "slowing down" - houses weren't selling for as much. Then the credit problems became more apparent, gas hit a zillion dollars a gallon, and people started changing their driving habits. Now, banks have failed, investment firms have failed, the stock market has taken a dive, and gas prices are now really cheap.

Here is a long 3-paragraph quote from Tuesday Morning Quarterback that kind of gets at our previous ranting (taken from ESPN.com):

"Oh No! Gasoline Prices Are Falling! Just last winter, gas at $4 a gallon was said to represent a super-ultra emergency, and ExxonMobil profits were said to be obscene. Now gas is $2 a gallon and this is bad, according to CNBC economics bobbleheads, who last week warned the lower pump price will depress oil-company profits. Just last winter, rising consumer prices were said to represent a super-ultra emergency -- now that consumer prices are falling, that's supposed to be bad too, owing to the possibility of deflation. But innovation and rising labor productivity are supposed to drive down prices. Lower prices are a core goal of capitalist economics!

These points should serve as reminders that the mainstream media always present all economic news as bad. Higher interest rates? Bad for borrowers. Lower interest rates? Might cause inflation. Normally, the media's penchant for spinning all economic news as bad doesn't matter -- but right now it does, as pessimism more than logic seems to be driving the weak economy. Speaking as someone who pulled the election lever for Barack Obama (and whose daughter worked for the Obama campaign round the clock for months), I agree with John McCain's statement, "The fundamentals of the economy are strong." They are. McCain was right! Innovation is high. Labor productivity is high. There are no shortages of any resource or commodity. Pessimism is driving the downturn, and that pessimism is advanced by relentless media negativism.

Even the Wall Street Journal is spinning events in the most pessimistic light. A page one story declared, "Investors in the U.S. stock market have lost more than $9 trillion since its peak a year ago." But there is a distinction between a decline and a loss. The paper value of U.S. equities has declined $9 trillion since the peak in October 2007, but many investors have suffered no loss because they haven't sold. Many people's houses have declined in value in the last two years, but most people haven't lost a dime because they haven't sold -- just as many people's houses rose in value from 2002 to 2006 but most people did not gain, again because they did not sell. Doing nothing can be the smart move in a bear market, and those investors, individual or institutional, who have cleverly done nothing have incurred no losses and are likely to come out ahead in the long run. Yet some insist on claiming $9 trillion has been "lost." Exaggerating the negative only worsens the economic-confidence picture."

One other point - TMQ is in favor of requiring tax exempt organizations (or at least institutions of higher learning) to spend 5% of their endowments each year. In a down market wouldn't that be making those losses real, then? Yes, unless the endowment moolah is in fixed-return kinds of investments.

© 2008 Dime Brothers

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Category: Finance/Business