July 2008

What I am discussing in this month’s FYI is the overwhelming amount of pessimism in our great country, and in particular the markets. While the economy certainly has its problems and sugar coating it won’t help, reporting everything in a negative light isn’t helping either. It doesn’t matter whether I am listening to the radio, watching television or reading the highlights on my Bloomberg, I can’t help but become depressed. What I’m referring to is being in a state of feeling sad. The reason is, I believe the objective of the news programs is to make us think of the other definition of “depression,” that of being in “a period of general economic activity marked especially by rising levels of unemployment.”

Once I take hold of my senses I quickly go from being depressed to being upset. Why? Because it appears everything being reported has a negative bias. Reporting stories about half empty glasses rather than half full ones seems to raise the shows ratings. These days the news shows are competing for ratings with shows such as 24 or 60 Minutes. Have you ever heard a reporter announce on the 6 o’clock news that the employment number that came out today was at 94.5 percent? Of course you haven’t. But, how many times have you heard it spoken, using a voice of concern that “unemployment for May came out this morning and it was at 5.5 percent.”  I am old enough to remember when 5.0 percent unemployment was considered “full employment.” In 1999 it was said that the “full employment” number was between 4.0 and 6.4 percent.

I must admit “the glass is half empty” attitude is most disturbing when the current message is compared to the recession of 1973, or worse. The comparison, on the surface, is for two reasons; the high price of oil and the War in Iraq. Why is the current economy compared with past economies that were in recession, when in fact we haven’t officially declared that the U.S. is even in a recession? Every recession since the recession of 1971 has been associated with rising oil prices and a federal funds rate that is going up. At this writing, that does not describe the current economy. 

The catalyst of all of this pessimism is the current housing crisis. On occasion I have seen the current situation referred to as a “housing depression.” Certainly in some areas that is accurate. But here again, the glass is being portrayed as half empty. I say that because 68.7 percent of Americans are homeowners, and of that, 40 percent own their homes outright or no longer have an outstanding mortgage. While the number of homeowners who have defaulted on their outstanding sub-prime mortgages (as a percent of the total population) is small, the psychological impact is huge and the media’s method of reporting is not helping.

A recent example of this comes to mind: Goldman Sachs reported recent earnings were down 11 percent in three months. That is one way to report the information. I also saw it reported like this: “Goldman earnings beat estimates on gains in commodities.” The key is that they had positive earnings. Which way states the glass is half empty and which way states the glass is half full? More importantly, which way makes you feel good and which way depresses you?

I have said several times over the years that it is not reality I am worried about, it is the perception of reality that keeps me up at night.