Media Hype/Myths

Credit Crunch II: A Box Office Flop!

By, 11/06/2007

Story Highlights

  • The media has decided the credit crunch is back
  • Close inspection of the logic behind a resurgent credit crisis reveals it doesn't hold water
  • Most likely, pundits and forecasters are using backward-looking data to rationalize fears and minor market volatility—a classic investing mistake

A fresh narrative has taken hold of the media's psyche—Credit Crunch, Part II! What a sensational story. The credit crunch sequel! We were trying to think of some good taglines:

  • The credit boogeyman dies hard, and this time he's back with a vengeance!
  • The Toxic Avenger of credit nightmares returns to destroy America…and only Bernanke stands in his way
  • The secret debt only CEOs know…could destroy us all!

Clearly, we weren't born marketers. But you get the idea. It's the stuff of hokey horror films, but the credit crunch sequel plays well for talking heads in today's era of tabloid journalism.

What's going on here? As stock market volatility continues, the media, rather than reporting facts, is clamoring to give us a rationale. (Never mind that stocks are up nicely for the year and close to all-time highs, or that stocks surged over a percent today, or that short-term volatility is perfectly normal, or that GDP surged last quarter, or that most long-term interest rates are lower today than a year ago—of course all that's just an anomaly.)

Understanding how folks rationalize their own irrational thoughts provides important clues to market behavior as well. This article provides great insight:

Go Ahead, Rationalize. Monkeys Do It, Too.
By John Tierney, The New York Times

Today's financial headlines are clear attempts to rationalize market volatility with irrational fear, pessimism, and a general dour worldview. Have a look at these headlines: Typical monkey-ing around if you ask us.

Markets Fear Banks Have $1 Trillion in Toxic Debt
By Sean O'Grady, Economics Editor

And we quote:

"A new phase in the credit crunch, one of ‘$1 trillion losses' seems to be dawning. The crisis at Citigroup and renewed doubts about some of the world's leading banks disquieted stock markets on both sides of the Atlantic yesterday, with the fractious mood set to continue."

Nowhere in this article can we come up with the right kind of math required to get to a trillion dollars in "toxic" debt. The only way would be to count every single penny of subprime as "toxic" (or, a 100% default rate), which is absurd. Most of this logic is based on speculative extrapolations based on past reports.

Current Financials earnings reports have folks downright chilled—all these asset write-downs must mean credit crunch round two! To see how faulty that logic is, one only need realize that earnings are not a forward or even contemporary metric—they explicitly look backward. As in, the earnings being reported today are about what happened in the third quarter (the time of the so-called original credit crunch). The market priced this stuff in long ago and probably didn't need an official GAAP-approved earnings report to see it in the first place.

A similar argument is used here, where future fears are based on a backward-looking report from Merrill Lynch:

The 1987 Crash -- a Dress Rehearsal?
By Sham Gad, The Motley Fool

Ah, and one of our favorites: Using charts and other backward-looking "technical" data as if it were tea leaves to guess the future:

Arbeter: Time to Head for the Hills?
By S&P Equity Research via Businessweek

And lastly, Foreclosures—sweeping the nation! (Is this a news headline or an advert for the latest dance craze?)

Foreclosure Wave Sweeps America
By Steve Scheifferes, BBC News

To point out just one illogical statement with this one, why would the city of Cleveland knock down allegedly abandoned homes? Legitimate foreclosed homes aren't knocked down—they're sold! If Cleveland wantonly destroyed a true housing asset, the banks who own that property are probably going to be pretty angry. Could it be—just maybe—those "homes" in question are more like derelict, dilapidated buildings of miniscule value that needed to go? (See the picture of the two shacks in question in the article if you don't believe us.)

As tempting as it is to call the financial press a bunch of monkeys, we'll refrain. (Frankly, it wouldn't be fair to the monkeys.) But we will call this a case of rationalizing stuff that doesn't need to be rationalized—a basic function of the human psyche. Short-term market volatility doesn't need some grand systematic causation. Some days folks just sell more than they buy for reasons that have little to do with the macro environment.

Avoid the boogeyman headlines and stay bullish—the credit crunch sequel is a box office flop.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.