Did the Media Help Sink the Stock Market?
I am usually the last person to blame the media for anything. As a publishing type and author, I believe that the more media, the more sunlight—the better. However, I have been giving a great deal of thought to the role of the media and it’s potential effect on the economy and the financial markets. The key question is whether or not the media—whether it is the financial news channels, the cable networks, the Internet, etc.—has contributed to the present collapse in the stock market.
Before answering, let me say that I believe that the greatest culprits in our sinking economy are the fools in the housing market who altered the rules of the game (and the people who took the money), the even bigger and greedier fools in the financial institutions who bet wildly on bad commercial paper, and a weakening global economy that spanned from the U.S. to Europe to China.
But I still assert that the media has had its role in all this. That’s because while there have been several recessions in the last century, we live in unprecedented times in one relevant, important way. First, we have never had a deep recession like this one in the age of the cable news networks. If you watch the cable networks like hundreds of thousands of people do each day, you will hear the “D” word (Depression) multiple times every day. That certainly does not help one’s psyche, especially if you have already been burned in the market. And who wants to buy a big ticket item if all you hear about is a crashing market and a Depression just around the corner. That has caused at least tens of thousands of people to buy less, invest less, and pull what’s left of their investments out of the market. That’s because the “smartest” economists of our day, Paul Krugman and Nouriel Roubini, are predicting economic calamity that could last for several more years (and even CNN has done extensive pieces featuring Roubini’s predictions). Krugman’s latest book is called Depression Economics, and Roubini is calling for a bottom in the stock market no sooner than the fall of 2009 (after a further decline in the stock market of 20 to 30 percent), and an “L-shaped recovery” that could last for years.
Who wants to put their retirement money and/or their kids’ college money to work in the financial markets under those conditions? Well, me, for one. That’s because I do believe in something that many people have abandoned, and that’s the “Efficient-Market Hypothesis,” Nobel Prize winner’s Eugene Fama’s brainchild, which holds that whatever we think we know about the financial markets is already reflected in stock prices. We will know if that is true when we get more horrendous news and the stock market rises despite all the bad news. We have seen a little of that this week with a 600 point rally in three days, but three days does not a bull market make. We still have many days and weeks and months before we will get any idea of what we are really facing. But for the record, as a long-term investor, I think we will look back on these days of Dow 6,500 – Dow 7,000 as a great time to invest. Of course, the smartest amongst us, those who know a great more than me, feel that I am prematurely optimistic. But if that’s the worst thing they could call you, then you’re probably ahead of the game.