Friday, October 24, 2008

YOU DON'T NEED A WEATHERMAN TO KNOW WHICH WAY THE WIND BLOWS: A few years back, Marketplace did a great but self-defeating little bit about how dumb it is to ascribe conscious thought to collective market behavior. One of the examples, I think, was "Dow falls a half-percent on growing concern about the war in Iraq." Think about that for one moment, and then ask how a financial reporter could possibly make that causal connection. Whose concerns drove the market down? How? Who did the reporter interview to get that information? A representative sample of traders and investors? Why exactly would concerns about the war in Iraq drive investors away from technology stocks (or, for that matter, media stocks)? The point of the piece was that the reporters' analysis is often little more than choosing the most plausible cause from a menu of the day's top stories. And yet different financial reporters usually isolate the same causes for the same behavior -- nobody picks "Britney shaved her head" over "war fears" -- meaning that either there's an element of chick-sexing (they actually know it when they see it) or common training (right or wrong, everybody learns the same cause-picking techniques).

I raise this now because for several weeks up to and including today, I've seen a version of the following headline: Stocks End Lower As Conviction About Global Recession Grows. Look, I'm no financial engineer -- I can barely aggregate large debt obligations and separate them into discrete risk-stratified interest and principal components -- but I don't see how this can possibly be right. The premise of that headline is that (a) there is a block of investors who were on the fence about whether or not the economy is (technical jargon alert) turdlike; (b) a portion of that block decided today to get off the fence; and (c) that portion was large enough to move the market 3%. The implication being that before today, that gigantic 3%-moving block was reading the Journal and going, "gosh, Bear, Lehman, AIG, Wachovia, WaMu, Fannie, Freddie, buck-breaking -- what a conceivably coincidental string of potential aberrations."

For there to be a "growing belief that [a] severe global recession is at hand," there first has to be some portion of people that aren't already certain that a severe global recession is at hand. Do these people exist? Isn't a more plausible explanation that everybody agrees that there is a disaster but that the market collectively is calibrating its depths differently on different days? In other words, aren't "market just about ready to agree it's bad out there" and "market despairs as it tries to figure out just how bad" entirely different stories?

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