Shootings. Ebola outbreaks. Terror threats. Watching the news can be like taking a ride on a roller coaster—things are up, then down, then up and quickly back down again. All it takes is 5 minutes of channel surfing to see that the media is constantly bombarding us with a bleak perspective on the world. Not only that, but it has monopolized our attention and given us a short-term perspective.
Does the Media Get it Wrong?
In many cases, the information we get through the media is fragmented and usually lacks long-term perspective. I would bet that few of us question the accuracy of what we hear from “experts” on the news, and rarely do we hold them accountable for their inaccuracies. This happens on the international scene as well as the financial.
According to Charles Morris, author of The Sages, of the 102 separate forecasts for both unemployment and GDP made in late 2007 or early 2008 at the height of the credit crunch, 101 of them were wrong in the same direction. The actual fourth-quarter-to-fourth-quarter real GDP change was 0.8 percent. Only one expert forecasted -0.4 percent. All the others expected positive real growth with a mean estimate of 2 percent and the top estimate a giddy 5 percent.
On unemployment, all of the forecasters expected a much better outcome than the actual 6.9%. The closest any of them came to the real number was 6.2%, while the [actual] mean forecast was a rosy 5.2% and the cheeriest, 4.3%. 1
According to economist Brian Wesbury, during the last four months home sales have increased at an annualized rate of 121.8%. In actuality, new home sales increased by 9.4% since July. Again, the numbers forecasted by an “expert” were much more optimistic than the housing market showed.
Morris shows that the majority of financial experts were wrong when making predictions about future unemployment rates, GDP and sales on new homes.
Forecasts, Not Facts
Forecasts are just that, predictions of the future. Yet many of us act on these predictions as if they were fact. To accurately forecast something is very complex because it is difficult to predict the unintended consequences that follow our actions, whether they are to our benefit or detriment.
When the Wright brothers were initially experimenting with bicycles, they did not expect that the principles they discovered would help create the first flying machine.
When NASA created the first on-board computer, there was no thought that the iPod would follow.
When I planted 10 bushes in my backyard, I had no idea they would weaken my neighbors fence.
The long-term ripple effects of the decisions we make are just too complex to predict accurately. There are endless unknowns that can’t be foreseen. Even with advances in technology, computer modeling and simulations often get things wrong.
When the weatherman reports a chance of rain and there is not a drop to be found, we simply shrug it off. We know inherently that forecasts are just predictions and estimates, yet we do not hesitate to believe the weathermen, analysts, and economists.
Perhaps we so easily put our faith in them because we’re afraid of not knowing what tomorrow will bring, and they are the ones to tell us.
On the other hand, perhaps not knowing is a gift. Think of the horror show of our recent financial crisis of 2008 which lasted till the market bottomed out in March of 2009. The crisis included the nationalization of Fannie Mae and Freddie Mac, the failure of Bear Sterns, Lehman Brothers and AIG, the government’s role in forcing the Merrill Lynch merger with Bank of America, and government ownership of Citibank, Chrysler, and GM.
If we followed the minute by minute developments of each crisis, and acted emotionally based on what the experts were telling us, we would be living in a continuous state of Armageddon which would eventually lead us to complete paralysis.
A Long-Term vs A Short-Term Perspective
What were you thinking on March 9th 2009 when the S&P 500 hit 677 and Dow was at 7,608? Did you believe that this time was different and the market would never bounce back? I’m writing this post on August 30th, 2014. The S&P 500 is at 2,003, The Dow is at 17,098.
In the long-run, people and markets are resilient. We recover and history repeats itself in cycles.
The short-term is what remains unpredictable. Even Buffet, Paulson, and Bernanke could not have predicted the crisis that was coming and in one sense, not knowing the near-term future is a precious gift and is what makes us truly human.
The fact that we don’t know what will happen next doesn’t mean we can’t be sure of what will ultimately happen. The market improves. Man finds a way to get out of the apocalypse du jour, and ultimately the good gets translated into the capital markets.
“We know for instance that through peace and war, booms and busts, and every other extreme of human glory and folly, equities have–over the 80 odd years for which we have reliable data–delivered a return net of consumer price inflation (big cap and small cap blended equally around two and a half times that of bonds). Nick Murray 2
Today the geopolitical headlines are gloomy: the Middle East, Russia, the threat of Islamic extremists, Iran, Argentina, the crisis in Ukraine and the list goes on.
Still, according to George Friedman, “This will be the American century ” and the United States will experience a golden age in the second half of the century.3
Though the media offers us a bleak, short-term perspective on world events and the current financial market, focusing our attention on that is like staring at the bottom-side of a tapestry—everything looks like a tangled disaster of knots and snarls. But from the other side, from a different, larger perspective, we see not a meaningless tangle, but a clear, poignant image. We experience not a roller coaster of ups and downs, but a steady, hopeful incline. Let’s stick it out for the long-run because all good comes in time.
As always, feel free to email me if you need a “pep” talk.
1 Morris, Charles. The Sages. Public Affairs NY, 2009
2Murray, Nick.August News Letter, 2009
3Friedman, George. The Next 100 Years, Doubleday, 2009