Brokers, bankers and business people are all shaking their Magic 8 Ball to find an answer to our most pressing economic question: Will the recovery happen soon? While Magic 8 Balls are not necessarily known for consistency or accuracy, the universal response appears to be “Don’t count on it”.
There is an old saying in the investment world that the stock market is driven by two things: Fear and Greed. Since the stock market is a market just like any other, than it’s fair to say that virtually all markets are driven by these two emotions. It seems counterintuitive that markets, which are tracked through quantitative expressions such as graphs, indexes and averages, can be so dramatically impacted by emotions which may be overheated or illogical. But that’s world in which we live.
Like other emotions, Fear and Greed can be rapidly transmitted from one person to the next and from one group to the next. While prognosticators may look to yesterday’s economic downturns to divine the answers to today’s problems, today we are faced with unique circumstances which make comparisons difficult, adding credibility to columnist George Will’s observation that economics is the “science of single instances”.
Our 24 hour news culture, with an emphasis on the emotional and sensational, can create a self-perpetuating sense of optimism or pessimism, which quickly translates into real decisions concerning investments, strategies, and jobs. As a market goes soft, senior management decides that caution dictates reduced expenses and a reduced workforce so as to “weather the storm”, leading to a ripple effect in that market which drive more bad news stories and other companies taking similar steps. This is not to say that the television media causes the trouble we’re in, but certainly the steady drumbeat of bad news creates an immediate – and shared – concern in the minds of businesses and consumers around the world. I suspect that as a result of mass media and the psychology of economic behavior, we will see more volatility in our markets in the coming years than we did in the past.
Because of the global economy, what happens in our hometown can impact what happens in a town in Europe or Asia. No matter where you go today, the mood appears to be one of shared worry. I spent the past week in India, where the following thought occurred to me as my driver swerved to avoid a cow in the middle of urban rush-hour traffic: I’m in a very different place. That having been said, the differences didn’t seem quite so stark when I arrived at a restaurant playing western pop music and my dinner companions texting people from their mobile phones. India is grappling with the impact of the recent terror attacks in Mumbai, just as New York, London and Madrid did in years past. The added stress of the world economic slump has many businesses concerned, but this will only slow, but not halt, India’s continuing economic expansion.
This is an example of where yesterday’s lessons fail us. We may hear comparisons between today’s economic crisis and the Great Depression, but during the 1930s, a privileged Indian was probably fanning a British soldier and had zero impact on the U.S. economy. Today, the great-grandchildren of that Indian might be worrying about their call center job as the U.S. market contracts.
Over time, I believe the innate adaptability of workers in the U.S. will create innovative solutions to people’s problems, and at some point economists will again be talking about another bubble in the economy.
As for when this is most likely to happen, I’ve consulted my Magic 8 Ball, but all it told me was “Reply hazy, try again”.
Published February, 2008.
