Loans and cash

“The 1988 A’s,” the story said, “are the best team the American League has sent to the World Series since Charlie Finley’s teams of the early 1970s. These A’s may be even better.” Having thus been anointed one of the greatest baseball teams of all time, the A’s went on to lose four straight World Series games to the Cincinnati Reds. The “experts” aren’t very good at predicting recessions either.
Economic recessions do not announce their arrival the way Jack Nicholson announced his arrival in The Shining—by breaking down a door with an axe and scaring Shelly Duval out of her wits as he announced: “Honey! I’m home!” Rather, recessions tend to arrive on muffled oars, quietly, arousing little or no suspicion until one day the Commerce Department announces that, “Guess what? We have been in a recession for the past 6 months. Have a nice day, and good luck paying off those loans that you took out to expand your business at precisely the wrong moment.”
Yet another classic example of the “experts’” inability to predict recessions was evident in July 1989, when Fortuneannounced there would be “No recession this year or next.” Of course, the reces- sion of 1990 was already in the process of beginning, but none of the experts Fortunerelied on saw it coming.
You can use the media to call turning points in both interest rates and oil prices. Here’s a classic. On September 16, 1987, The Wall Street Journal’s front page lead story was headlined: “The Bond Bears: Debt Securities Prices May Slide for Years, Many Analysts Think.” The implication was that interest rates would be rising for years into the future. This front-page story, amazingly enough, coincided with the exact peak in long-term interest rates. When this story appeared, the 30-year Treasury bond was yielding around 10.25 per-cent.
Bond prices then embarked on a relentless 6-year rally, which carried the yield on the 30-year Treasury down below 6 percent by late 1993.
In another classic example, Associated Press managed to catch the exact bottom in crude oil when it ran a story on March 9, 1986, entitled: “No Bottom to Oil.”. This story managed to appear at the precise bottom in the price of oil, which rose from $12 to $36.50 a barrel within 4 years of the story’s appearance.
How did The Wall Street Journalmanage to run a lead story that was negative on bonds at precisely the peak in interest rates? How did the Associated Press proclaim that there was no bottom in sight for oil prices at the exact bottom for oil? They did what came naturally: They got used to a persistent trend and felt compelled to write about that trend for their readers. When The Wall Street Journaland Associated Press reporters went to their “expert” sources, these sources had also gotten used to a trend that had been in force, and simply extrapolated that trend into the future. It’s always easier to explain what has been happening than to stick your neck out and suggest that something new is about to transpire, which is why you tend to see the media make a very big deal out of trends and people just as they are about to fizzle out.
Pack rat that I am, I have numerous examples of the media shining the spotlight on the wrong trend or the wrong person at precisely the wrong time. Here is one more example, a cover story dated October 26, 1987. This issue of Fortunehit the newsstands the very week of the 1987 stock market crash, and it said: “Why Greenspan Is Still Bullish.” On October 19, 1987, the same week this issue appeared, the Dow Jones Industrial Average fell 508 points, a 1-day plunge of 18 percent.
Of course, following the monstrous stock market decline, the very same news magazines that had been touting prosperity and a forever-rising stock market shifted gears and began running cover stories about the coming recession and possible depression. The message of the stock market debacle, we were told, was that “hard times” were coming and that investors and businesspeople should batten down the hatches. Wrong again. The media went overboard on the meaning of the 1987 crash, just as it went overboard on the rally that preceded the debacle. The consensus of the media and its “experts” following the 1987 crash was that this could be just the beginning, a harbinger of severe economic problems for the world financial system. Even Robert Samuelson, Newsweek’s economic columnist and a man about as mainstream as you can get, ran a column after the crash entitled “The Specter of Depression,” in which he asked the question: Did the market crash serve as a warning that an economic depression was imminent? His answer, delivered not entirely convincingly: “Probably not.”