The financial pages of our morning paper always contain an article, with no clear attribution, which tries to summarize and explain the previous day's market movements. Which major stocks and indicies were up, which were down, and some brief explanation of why. How do you get that job? Just think -- you could come up with almost any vaguely plausible story and who could say you were wrong? That's got to be the easiest gig in journalism -- and the most powerful.
Recently, for example, during the run up to the election as the stock market took a small dip, our morning paper explained how this was due to investors nervous that John Kerry might win the presidency. After the election, as stocks rallied, the paper provided the helpful analysis that this was investor happiness with Bush's reelection. No evidence was offered to support these conclusions, nor is it clear that any could be. No opposing hypothesis was presented -- such as that the market always falls during any time of uncertainty and rises when the political landscape is more stable, regardless of which candidate wins or loses -- nor would there be any way to distinguish between competing hypotheses if they were.
This is the fallacy of the punditocracy -- what is true is what they say is true because they say it's true. If you are looking at a single company and the market reaction to its most recent earnings report, perhaps you could identify a real cause of stock price fluctuations. And perhaps there is, on any given day, a major cause of the final total market variation, but overall the complexities of millions of shares of trading cannot be boiled down to a single overriding message about the entire market's rise or fall. Nonetheless the market analysts will do this day after day, month after month. And people allow them to get away with it because they feel that there should be an explanation.
These explanations, drawn for the same pool of possible explanations from whatever school of thought that the pundits represent, repeated over and over every day in everybody's financial pages, become a kind of self-fulfilling prophesy. Individual investors start to act on information the way that the pundits have said that other investors acted in the past. After all, everyone wants to beat all their competitors in the short-term parimutuel game, so they need to know how the other investors think. Thinking the same -- the way the pundits said they think -- the group moves the market the way the pundits said that they would. Except days that they don't -- but everyone is wrong sometimes.
The curious side effect of this is that our national economy has a kind of Tinkerbell quality -- it's only strong as long as everyone believes in it. Despite warnings in the alternative press about tenuous dollar prices, or the impending meltdown of the oil standard, none of these doomsday scenarios will find themselves in the major investment rags for fear that the very news itself would trigger the crises that they predict. Clap your hands, little children, if you believe in the economy! Clap your hands if you believe, and she will be strong!