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The talk economy

December 19, 2008

In today’s global economy the world’s reality seems a parallel of the stock market where reality follows the news.   It’s becoming self fulfilling.    In theory, investments are made based in part on an entity’s present worth, state of operations, and future prospects.    I contend that much of the wall street action, and resulting behavior in the world is driven not by the fundamentals, but by people’s perception and resulting behavior which create the reality and change the underlying fundamental.

Let’s ask ourselves a few questions about reality.   Look at fuel and oil prices – driven to exhorbinant prices on the vague notions of unrest in the middle east, rising demand, etc, etc.   Now the price has fallen 60% in just 3 months after rising for 8 years.   Ask yourself how your real usage of gas, oil, diesel has changed over the period.  Are you really driving less, consuming fewer grocieries, etc?   Maybe a little bit, but 60% less?  No.  Perception is creating our reality.

Five years ago, I watched as the media destroyed Enron, although the stories run were about corruption, and “house of cards” deals.  Let’s look at the last period of economic unwinding of our markets in 2001-2002 in which time the financial media pumped a steady stream of gloom and doom articles which triggered a sell off, which would lead to standard and poor or moodys to cite the falling stock as a reason to reduce bond ratings of company’s like Enron.  Then the next day, the same financial media pundits would write more “what if” scenarios about how that bond rating affected the ability to raise more cash through sale of more bonds to retire previous debt.  The cost of bond interest was going up as the ratings declined.  This triggered another stock sell, and another de-rating.  I watched in awe as the media and the market unwound a company.   Being naive at the time, I didn’t believe you could destroy a company with some electronic ink.  I bet that reality would prevail.  I bet wrong.

Today,  I’m reading a reuter’s story on GE and seeing the same self fulfilling kind of story being written… I’ve bolded the words to make my point about how reality is being led by speculative statements about what could happen…

NEW YORK, Dec 18 (Reuters) – U.S. stocks fell for the second day on Thursday after Standard & Poor’s threatened to strip General Electric of its ‘AAA’ credit rating and slumping oil prices crippled energy shares.

General Electric (GE.N: Quote, Profile, Research, Stock Buzz) shares tumbled 8.2 percent to $15.96 and ranked among the top drags on the Dow industrials after S&P said there is at least a 1-in-3 chance that it will cut the company’s credit rating from the top “AAA” tier in the next two years. [ID:nN18404621]

“It’s certainly not good news for GE and their ability to borrow,” said Michael Cuggino, president and portfolio manager at Permanent Portfolio Funds in San Francisco. “It just supports the broad-based economic decline.”

Some bozo writes that there is a 1 in 3 chance that the AAA rating might be reduced within the next 2 years, and the company stock, and investors – (our 401’s, our personal investments) take a 8% haircut overnight.    This decline will fuel more negative stories that will trigger further sell off’s. 

Here’s the deal –  if my stock funds are flush, my retirement growing, I’m going to spend.  I’m going to buy products and services, and those companies will buy products from the company I work for, and that company will consume goods and services from other companies.  I’ll spend my paycheck in my community, buy goods at Target or Wal-Mart, or Best Buy.  I’ll go out to eat, and restaurants will stay in business – their cooks and wait staff will have decent paychecks with which to re-invest into the economy.  Maybe we will all continue to pay our mortgages and credit cards, or even buy a car – heck maybe even a Ford, GM, or Chrysler.

What’s the real recovery plan?  The world won’t recover until people believe tomorrow will be better than today and invest accordingly – spending into that circle of commerce,  investing in company stocks and bonds.   And the world isn’t likely to have that belief until the media stops talking things down.

Think about it.   We all have a good or service that we provide – to each other, to our employer’s, to the world.   How are we investing in each other so that tomorrow will be better than today?   It’s not up to the governments to fix the problem – our behavior is the problem, and it’s within our collective power to change things.

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2 Comments leave one →
  1. December 19, 2008 3:21 pm

    Utterly damn frustrating isn’t it?

    News: “The world is coming to an end. Consumer spending is down!”
    Joe Public: “Consumer spending is down? I’m a consumer, I guess I should spend less.”

    Fuck it, I’m going to buy some cool shit DESPITE what the news says! And OPEC will get their share too, as I’m doing over 10 hours of driving over the holiday. Take that “dour economy” news reporters!

  2. December 21, 2008 5:44 pm

    our media needs a checks-and-balances system.   i don’t doubt that morale is down, spending is down, and FUD is high thanks to our news providers spoon feeding us uncertainty.   media is supposed to be unbiased.   it is not.   the media has swayed public opinion on too many recent events: the economy, global warming, and our most recent election.   while i do believe we deserve to ingest certain daily and worldly events, we as americans would likely be better off not listening to the news.   currently it’s nothing more than biased negativity.   we won’t get anywhere without first fixing our information delivery system.

    and, i concur with tim 100%.   i’ve definitely bought myself some cool shit this month — some stuff for work, some stuff for play, and some stuff for other people.   i’ve simply kept the media at bay and taken what they’ve tried to sell me with salt.   sorry, media, but i’m a free-thinker and my soul isn’t for sale.

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