Financial apocalypse or bonanza? A rant against the newsmedia

It was the best of times, it was the worst of times… or, at least that’s the case according to the newsmedia.

There’s a problem with the economy and it is NOT the Eurocrisis. It is the newsmedia.

Newsmedia companies need to sell more papers and get more eyeballs on their websites. So they are incentivized to spin the news to generate those sales and clicks.

To do that, reporters are forced to break open their thesauruses (thesauri?) and find ways to talk about the market in thrilling, reader-magnetizing ways. Then they file their story, send it off to an editor who is also incentivized to get more readers and viewers, and the story gets published.

To generate some “read-it-now” urgency, reporters use power verbs to describe market movement. So falling prices become plunges and dives and rising prices become surges and skyrockets.

Unfortunately, a regular stock market movement that no one might care about suddenly gains a boom/bust quality that whipsaws investors between financial apocalypse and bonanza.

This contributes negatively to the market because this alarmist writing creates volatility: Inexperienced investors (there are A LOT of inexperience investors) see that the market is “plunging” so they sell stock; or, they see that the market is “skyrocketing” so they buy stock. Thus, a story about a normal market movement, which has been juiced up by an eager reporter, creates a self-fulfilling prophecy

There are no winners in this scenario. The newsmedia has done a disservice to the public and the vast majority of investors buy at the wrong time because inexperienced investors are reactive investors who lose money by buying when prices are high and selling when prices are low.

Of course this issue has gone on for a long time but I’ve noticed it even more lately as widespread economic challenges around the world provide fodder for an eager-to-get-their-story-in-print reporter.

It concerns me because a Greek exit from the Euro will be difficult for Greece and will definitely be a blip in Europe’s economic reality. But from a global perspective, many people (in the economic powerhouses of North America, Russia, East Asia, and Central Asia) wouldn’t even notice Greece’s exit if we weren’t inundated with news about it over and over and over again. The same will be true when other countries exit the Euro.

How can I say that Greek’s exit won’t affect the rest of the world? Well here’s a quick example (there is more to it than this but I’m simplifying)… What would happen to the world economy if a hole opened up and swallowed Switzerland without any notice? Well, aside from needing to find a new source for Swiss cheese and secretive bankers, not a heck of a lot would happen. The world would go on. A little sadder, a little less chocolate and accurate time-pieces, but the world would go on. Well guess what: Switzerland has twice the nominal GDP as Greece (or another measure: 50% more GDP by population). Greece’s GDP is .004% of the world’s GDP and Greece isn’t falling into a hole. They’re just going through tough times. Those delicious gyros would still be made, and tourism won’t diminish either. (Disclaimer: GDP of course isn’t a complete measure of economic impact but I needed a quick familiar number to show you).

But because the newsmedia splashes Greece’s economic problems all over the news, inexperienced investors react negatively because it sounds bad. And when inexperienced investors react negatively, the markets drop. And when the markets drop, newsmedia writes stuff like “plunge” and “dive” and “crumble”.

This is not helpful to anyone.

What’s the solution? I’m not exactly sure; I’m still all frothed up from writing this rant. But I think the solution (which won’t ever become reality) goes something like this:

  1. Investors need to become more educated to understand the stock market. They need to know that a Greek exit will only affect them if they get jittery by it.
  2. Newsmedia need to have some accountability in how they report the markets. Viewer-generating (alarmist) headlines sell papers but hurt the market. This won’t happen because a headline like “Markets have a normal day” and “Greece’s exit doesn’t impact the rest of the world” don’t sell newspapers.

Without a doubt, there are economic struggles, and the people of Greece (and similarly struggling countries in the Eurozone) will face hardship. But I believe many of those struggles would be considerably less if inexperienced investors weren’t bombarded with alarmist news. The markets are self-fulfilling and they are heavily influenced by information that is motivated to make the markets seem worse.

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