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[Finster]

Media Bias

This is to complain about unwarranted and extreme bias in the media regarding prices and inflation.

Today on CNBC an anchor casually asked in regard to the stock market "whether this rally can continue into the new year". The tone was hopeful.

No one bothered to ask why in the world anyone would want this rally to continue into the new year.

The same seems to apply to the prices of homes. There is so much hand-wringing about the current decline in home prices you can cut it with a knife. You never hear a television anchor wistfully ask "whether this decline can last into the new year".

No one bothers to ask why lower home prices are bad. Guess we are just supposed to accept that on faith. Personally, I'd be delighted to pick up two or three more homes at bargain-basement prices, but for whatever reason, my good fortune counts for nothing with the TV people.

Why are the media rooting for higher inflation? Inflation seems to be good if it’s in stock prices or home prices.

But not in energy prices, apparently. For years now, the media have uniformly characterized rising energy prices in a starkly negative tone. Even to the point of comparing it to a tax. For some reason, the very same phenomenon that is "good" when it’s happening to stock or home prices turns out to be "bad" when it happens to oil, natural gas, or gasoline.

And what about interest rates? If interest rates fall, why is that "good"? Why, when the media discuss interest rates, do they always seem to take the point of view of the borrower? Why not instead celebrate the increased income the lender receives from higher interest rates?

For every seller there is a buyer, and vice versa. A higher price hurts the buyer just as much as it helps the seller. There is no net benefit from a unilateral move in prices one way or the other. Yet the media side with sellers when it comes to stocks and homes, buyers when it comes to energy, and borrowers when it comes to interest rates.

Why?

[WDCRob]

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I suspect it has something to do with rising prices = 'profit realized' in stocks and homes. The person buying low has made a good investment and the person buying high has made a bad one, but neither have realized a gain or loss.

But we can keep score/make a final accounting for the seller.

So, I think it's not so much a bias towards inflation as it is the ability to see and report the outcome.

And you, of all people, should cheer this bias, Finster. Where would the contrarians be if the mainstream cheered the buying opportunity instead of the bubble?!

[Jim Nickerson]

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Finster,

Is your observation too narrowly construed to say it is about financial television?

For years I thought I was happy when the old FNN became available. If I had free time and was near a TV, I wanted it on that channel, and then the same when it evolved into CNBC. I thought I would learn something, and by watching it I was keeping my mind on the "pulse of the market." I think I was always alert to something that would be said that would direct me in investing. I was then no doubt less than whatever comes before "little league players." I might now be in what I remember as the next higher category--pony league, barely. I think I can say now, I never really learned anything at all about investing from watching financial TV, I have learned a bit from reading iTulip from guys like you who appear to know their elbows from their nose.

Even on this site there is a fair amount of bitching about CNBC, and it raised the question: If CNBC is such crap, why watch it? I guess the same can be said for Bloomberg, though I have less often crossed negative comments about it.

It has been perhaps 3 years now since I watched CNBC, and I cannot tell where I am any worse off--I definitely am not worse off. However, I continue to be fixated, somewhat to my chagrin, over what the markets seem to be doing each day. I "watch" them from watchlists on the trading platform from my broker and download the data of those items in which I am interested along with data from online.wsj.com data that are updated frequently, all this into a spreadsheet that attempts to say where things are now compared to where they may have been, what I am losing and what I am gaining. This way I can see what the items are doing, though certainly not gain understanding as to why--but then there is the web out there to provide some insight to that. If one is listening to the talking heads on TV, then I would argue one is really not paying attention to what the markets are doing. Maybe it is just me who has a hard time listening for comprehension while trying to engage in constructive thinking.

Finster, you are a great one for making people think about things, at least me. Your post here is another example of it. My conclusion is appreciate the reality of what you are saying and turn off the TV, unless one is an entertainment junky who must watch market TV, play games, and listen to an iPod simulatenously while worrying about how to make money in the markets.

[bart]

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For every seller there is a buyer, and vice versa. A higher price hurts the buyer just as much as it helps the seller. There is no net benefit from a unilateral move in prices one way or the other. Yet the media side with sellers when it comes to stocks and homes, buyers when it comes to energy, and borrowers when it comes to interest rates.

Why?

http://www.nowandfutures.com/grins/oz.wav
http://www.nowandfutures.com/grins/_n/mother_nature.wav

AKA, most times when "why" comes up, the answer is either s*x or money... can I have Vested Interests for $100, Alex? ;)

[Finster]

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Finster,

Is your observation too narrowly construed to say it is about financial television?

Financial television merely served as the focal point for the broader issue. How much of it is art imitating life or vice versa is open to question ...

[Finster]

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I suspect it has something to do with rising prices = 'profit realized' in stocks and homes. The person buying low has made a good investment and the person buying high has made a bad one, but neither have realized a gain or loss.

Ahh, but suppose I sell you 100 shares of stock. If the price is $75 instead of $50, I may be $2500 richer as a result, but you are $2500 poorer.

But we can keep score/make a final accounting for the seller.

Did I keep score correctly above?

So, I think it's not so much a bias towards inflation as it is the ability to see and report the outcome.

Is it? To examine the question, let’s isolate the stock prices. Assume all else is equal in two scenarios. In Scenario 1, the DJIA ends 2007 5000 points higher at 17,500. In Scenario 2, the DJIA ends 2007 5000 points lower at 7,500. To make it tough as we can, we also assume the outcome is most favorable to higher stock prices being better - i.e. that we all intend to sell stock at the end of the year.

Meanwhile, the global economy produced the same amount of goods and services in both cases. In Scenario 1, each of us has $17,500 per share of stock. In Scenario 2, each of us has $7,500 per share of stock. Since the total available goods and services is the same, it means that the goods and services that cost $7,500 in Scenario 2 cost $17,500 in Scenario 1.

By referring to "profit realized" you claim that we are richer in Scenario 1. I claim that we are not one iota richer. Despite having more than twice as many dollars. The only difference is that the dollars are worth much less. Are you sure that the inflation wealth illusion is not distorting your analysis? Its effects can be very hard to avoid …

[jk]

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Is it? To examine the question, let’s isolate the stock prices. Assume all else is equal in two scenarios. In Scenario 1, the DJIA ends 2007 5000 points higher at 17,500. In Scenario 2, the DJIA ends 2007 5000 points lower at 7,500. To make it tough as we can, we also assume the outcome is most favorable to higher stock prices being better - i.e. that we all intend to sell stock at the end of the year.

most people are happy to look at the bigger number on their brokerage statement. they don't have to sell to feel happy.

Meanwhile, the global economy produced the same amount of goods and services in both cases. In Scenario 1, each of us has $17,500 per share of stock. In Scenario 2, each of us has $7,500 per share of stock. Since the total available goods and services is the same, it means that the goods and services that cost $7,500 in Scenario 2 cost $17,500 in Scenario 1.

no, that assumes that all prices rise equally. in fact relative prices are important, and the goods you buy may not have increased in price by an amount equal to the rise in your portfolio. also, as i mentioned above, most folks will just look at their statement and smile [in scenario 1], without thinking about other prices. that's why inflation is also called the money ILLUSION.

By referring to "profit realized" you claim that we are richer in Scenario 1. I claim that we are not one iota richer. Despite having more than twice as many dollars. The only difference is that the dollars are worth much less. Are you sure that the inflation wealth illusion is not distorting your analysis? Its effects can be very hard to avoid …

you again assume that all prices rise equally. in fact asset prices often lead consumption goods prices. that's what has allowed the fed to make believe we don't have much inflation. so under scenario 1, stock owners, direct stock owners that is, not just potential pension beneficiaries, are likely to have their nominal wealth rise before a rise in the price of interesting consumption goods. again, they feel wealthier and, in fact, they are wealthier - at least until the other prices catch up.

[Finster]

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most people are happy to look at the bigger number on their brokerage statement. they don't have to sell to feel happy.

I don’t know about where you live, but around these here parts the gas stations and grocery stores are not very impressed by how happy I feel. They actually want money.

no, that assumes that all prices rise equally. in fact relative prices are important, and the goods you buy may not have increased in price by an amount equal to the rise in your portfolio. also, as i mentioned above, most folks will just look at their statement and smile [in scenario 1], without thinking about other prices. that's why inflation is also called the money ILLUSION.

There is no way to encapsulate the entire global economy in a few paragraphs. Hence, we make some simplifiying assumptions to illustrate the principle without doing violence to reason.

In fact, if the debate is to be about whether high prices of financial assets = good and low prices of financial assets = bad, we have no choice. You may be familiar with the scientific concept of a control. We have to hold all else constant or we hopelessly contaminate our experiment with noise and random influences.

Consider that those financial assets are of absolutely no use whatsoever to their holders except by virtue of what useful goods and services they can be exchanged for. They will not feed your family, drive you to the beach, or light your bulbs. The only way our net material worth rises is through the increased production of things that will. A mere change in the ratio between the market value of one financial asset and another does absolutely nothing except possibly effect a wealth transfer. This is true even if the first financial asset happens to be a dollar bill and the other a share certificate.

you again assume that all prices rise equally. in fact asset prices often lead consumption goods prices. that's what has allowed the fed to make believe we don't have much inflation. so under scenario 1, stock owners, direct stock owners that is, not just potential pension beneficiaries, are likely to have their nominal wealth rise before a rise in the price of interesting consumption goods. again, they feel wealthier and, in fact, they are wealthier - at least until the other prices catch up.

Now, JK, it sounds like you’ve been reading Finster. Indeed, inflation tends to first affect the prices of financial assets and later things like wages and consumer prices. Now all you need to do is connect the dots … we can confidently declare that over time there is utterly no increased wealth created by virtue of higher versus lower prices of stocks, bonds, buildings, etceteras.

Nada.

[Finster]

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http://www.nowandfutures.com/grins/oz.wav
http://www.nowandfutures.com/grins/_n/mother_nature.wav

AKA, most times when "why" comes up, the answer is either s*x or money... can I have Vested Interests for $100, Alex? ;)

You win the $100 prize! It's all about the transfer of wealth to Finster's version of the Axis Of Evil ... which extends from Washington to Wall Street.

Once upon a time, before we had systemic inflation, people could save just by putting their money in a bank and earning interest. Interest rates were well above inflation, so it was a tenable option. It was really only the wealthier folks that invested in things like corporate stock. This was inconvenient for corporate managements, however, because they had a fussy pool of savvy investors watching over them. They had to be good stewards of capital or be out of a job.

The combination of systemic inflation and articifially low interest rates, however, neatly takes care of this little inconvenience. Interest rates barely above inflation - often negative in real terms, and very often so after taxes - make traditional savings fruitless for the average Joe. He is either forced to consume or find other places that offer the prospect of protecting against inflation. He has almost has to buy stocks. This in turn gives those corporate managements a relatively unsophisticated pool of captive investors and makes it much easier for them to to raid the cookie jar with things like stock options bonanzas and obscene golden parachutes.

Of course, politicans like inflation, too, because it allows them to spend more than they tax and therefore appear to be actually producing something. They know that they can buy votes with programs much more easily if they don't have to present the taxpayers with a direct bill for them. We poor chumps don't realize that we're paying for politicians' promises every time we pull up to the gas pump or pay our monthly bills.

Most people don't realize that we didn't have systemically rising stock prices before we had systemic inflation. Prior to the advent of central banking, stock prices fluctated mostly sideways. Dividend yields were higher than those on bonds, and that's how stock investors got their returns. Stock prices rise not because of prosperity, but because of inflation.

So we have been trained to think that rising stock prices are good.

The biggest heist in all of history.

[bart]

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So we have been trained to think that rising stock prices are good.

The biggest heist in all of history.

At least there's a growing awareness of what is actually going on, albeit slowly. The truly sad and heinous part is that it will be very expensive for many to become more well educated.


edit/add:

Off the subject, but it seemed to fit here better than any other active thread - I just had a warning flag go off in the stock market breakdown area. The basic situation is that the Fed and Treasury have added a very large amount of liquidity into the system in the last two weeks (over $7 billion in coupon passes or permanent repos, and over $35 billion in TIOs)... and the markets barely moved.

Here's the main charts I'm looking at - they're basically both the same thing except one is a short term term picture and the other covers all of 2006. Just notice how the TIO spikes have been quite reliable in producing significant moves up in the S&P 500... and the recent one failed. Let's just say I have no long positions any more...

[Finster]

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At least there's a growing awareness of what is actually going on, albeit slowly. The truly sad and heinous part is that it will be very expensive for many to become more well educated.


edit/add:

Off the subject, but it seemed to fit here better than any other active thread - I just had a warning flag go off in the stock market breakdown area. The basic situation is that the Fed and Treasury have added a very large amount of liquidity into the system in the last two weeks (over $7 billion in coupon passes or permanent repos, and over $35 billion in TIOs)... and the markets barely moved.

Here's the main charts I'm looking at - they're basically both the same thing except one is a short term term picture and the other covers all of 2006. Just notice how the TIO spikes have been quite reliable in producing significant moves up in the S&P 500... and the recent one failed. Let's just say I have no long positions any more...

I'm glad you mentioned that, and am paying very close attention. This is one of those rare instances where our work has substantively diverged. I just updated my forecast page and am still showing a continued upward bias in the S&P 500. http://users.zoominternet.net/~fwuthering/FFF/Forecasts There's a period of weakness showing up around mid year followed by a vigorous surge into the end of 2007. Although I don't use these forecasts exclusively for investing (and don't recommend anyone else do so either) I do have a substantial broad stock market exposure at this time. I was considering upping it, but in light of your comment am going to have to reconsider. Maybe I'll wait until the next significant decline ...

[bart]

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I'm glad you mentioned that, and am paying very close attention. This is one of those rare instances where our work has substantively diverged. I just updated my forecast page and am still showing a continued upward bias in the S&P 500. http://users.zoominternet.net/~fwuthering/FFF/Forecasts There's a period of weakness showing up around mid year followed by a vigorous surge into the end of 2007. Although I don't use these forecasts exclusively for investing (and don't recommend anyone else do so either) I do have a substantial broad stock market exposure at this time. I was considering upping it, but in light of your comment am going to have to reconsider. Maybe I'll wait until the next significant decline ...

There's little question that I could be wrong and that the very unusual failure of a TIO operation is "just one of those things". Perhaps we'll just power through to new highs, with either no correction or a small one... but it sure is very odd to have a huge set of injections fail like it did. Maybe there'll be a big bounce back on Tuesday?

[Finster]

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There's little question that I could be wrong and that the very unusual failure of a TIO operation is "just one of those things". Perhaps we'll just power through to new highs, with either no correction or a small one... but it sure is very odd to have a huge set of injections fail like it did. Maybe there'll be a big bounce back on Tuesday?

Also worth noting is that my forecasts are not as oriented towards short-term timing as yours ... a two to four week or less selloff wouldn't really be terribly inconsistent with my projection. So I may have exaggerated the divergence some. So, I think I will nevertheless defer to your analysis and hold off on that buy action for now. The idea was not to try and jump on some imminent rally anyway; more that I am underweight equities and am looking for a good opportunity to reduce that bet.

Also, it's not that equities are undervalued in my book. It's more a matter of bonds being overvalued. Interest rates are simply too low given the broader financial landscape. The only other major asset class alternatives are cash and commodities (including gold), and I already have a plenty good weighting in those. The process of elimination simply leaves nothing else except equities. Meanwhile, excess cash is as good a place as any to park while I wait ...;)

[bart]

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Also worth noting is that my forecasts are not as oriented towards short-term timing as yours ... a two to four week or less selloff wouldn't really be terribly inconsistent with my projection. So I may have exaggerated the divergence some. So, I think I will nevertheless defer to your analysis and hold off on that buy action for now. The idea was not to try and jump on some imminent rally anyway; more that I am underweight equities and am looking for a good opportunity to reduce that bet.

Also, it's not that equities are undervalued in my book. It's more a matter of bonds being overvalued. Interest rates are simply too low given the broader financial landscape. The only other major asset class alternatives are cash and commodities (including gold), and I already have a plenty good weighting in those. The process of elimination simply leaves nothing else except equities. Meanwhile, excess cash is as good a place as any to park while I wait ...;)

You beat me to it. I had a similar thought about the differences in our trading/investing styles and was going to come back and add it but got sidetracked with normal weekend tasks (and a chart compulsion ;)). I just posted the charts and opinions since its far outside my expectations and could be an indicator of an imminent (days to 2-4 weeks) correction.

And you're the expert in the valuation of bondage too... ;)

[Finster]

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You beat me to it. I had a similar thought about the differences in our trading/investing styles and was going to come back and add it but got sidetracked with normal weekend tasks (and a chart compulsion ;)). I just posted the charts and opinions since its far outside my expectations and could be an indicator of an imminent (days to 2-4 weeks) correction.

And you're the expert in the valuation of bondage too... ;)

For sure, if the action of the past couple days is any indication, we may be into it already. Even to a non-CB guru like finster, it's still surprising that it is contemporaneous with that high-powered liquidity injection.

Even more striking is that that liquidity surge comes at a time when liquidity has become a buzzword in the financial media and the Fed so openly frets about inflation. What are they thinking? Widespread media coverage of something it supposed to mark a peak, right? And yet the Fed is stomping on the accelerator even harder?

Is it well into squandering-its-precious-credibility mode here or what?