Fallout: The Financial Crisis

The Dow is falling! Or not?

Marketplace Staff Jul 9, 2010
Fallout: The Financial Crisis

The Dow is falling! Or not?

Marketplace Staff Jul 9, 2010


Tess Vigeland: So there I was last weekend, enjoying the holiday, looking forward to an Independence Day party later in the afternoon. But first, as I’m often wont to do, a check of the Sunday New York Times. What’s this I see here? A lengthy profile of one market forecaster, a gentleman named Robert Prechter who basically ruined my day. So here’s a little taste — from the Marketplace Players — of Prechter’s predictions for the U.S. economy.

Robert Prechter, played by Rico Gagliano: We have entered a market decline of staggering proportions. Perhaps the biggest of the last 300 years. Individual investors should move completely out of the market and hold cash and cash equivalents like treasury bills for years to come. Buy-and-hold stock investors will be devastated in a crash much worse than the declines of 2008 and early 2009, or the worst years of the Great Depression or the panic of 1873. The Dow is likely to fall well below 1,000 over five or six years. The time for reckoning is near!!!

By Wednesday, I was seeing something completely different in the Wall Street Journal. No surprise there, of course, but listen here to pieces of a story headlined “Double Dip Fears Are Overdone.”

Michelle Phillipe: Things can look unnecessarily gloomy the morning after the party’s over. Markets needed to sober up from last year’s stimulus-induced highs, but investors are succumbing to exaggerated fears of a double-dip recession. The resilience of credit markets this year is a strong plus and an important signal. Markets need to snap out of their gloom before it becomes self-fulfilling.

Now to be fair, on any other week, you could probably reverse which paper ran what. But really, what on earth are we supposed to make of stuff like this? Joining us, perhaps with some answers, is Felix Salmon, who blogs for Reuters and is a regular guest on Marketplace. Hi Felix.

Felix Salmon: Hi Tess.

Vigeland: So, what?!

Salmon: It doesn’t make a lot of sense does it? The Wall Street Journal piece concludes that markets need to go up, otherwise, they’ll go down.

Vigeland: Brilliant.

Salmon: We can all take that one to the bank, that and a buck-fifty will buy you a cup of coffee.

Vigeland: This to me really encapsulizes why people are so freaked out about what’s going on right now, because they read one thing here, they read anything there and nobody knows what’s going on really, right?

Salmon: The New York Times was particularly alarmist, and all of this talk about Dow 1,000 — which of course is ridiculous. I mean, it’s pretty much physically impossible, given where the Dow divisor is to even get to Dow 1,000. You just can’t have stocks trading at that level. It’s basically giving people permission to panic, and that’s really not very helpful.

Vigeland: It’s not. Frankly, I don’t find any of this very helpful. But people do read the newspaper and they do follow things like this, despite the fact that we tell everybody your personal finances are very individual and you can’t try to predict what’s going to happen.

Salmon: Especially not by reading a random piece in the New York Times, talking about a guy who draws lines on charts and then pulls a number out of thin air. These things are not based on any real fundamental analysis, he’s not an economist. Even if he was an economist, you probably really shouldn’t listen to him, because economists are notoriously bad at forecasting anything. But this guy basically just draws lines on charts. He’s an astrologer.

Vigeland: So, OK, is there no role for financial journalists, like, say, you Felix? Or me?

Salmon: Not much. Honestly, feel free to ignore us. If you listen to anything, just listen to us telling you to ignore the noise. People don’t benefit from reading the financial press, and in so far as they do, they need to read it incredibly critically. And the skills you need to read something like the Wall Street Journal, critically, are rare indeed and you probably don’t have them. And if you don’t have them, you’re better off not reading it at all.

Vigeland: And yet, they are widely disseminated. I mean, the piece on the New York Times, where they had this guy talking about Dow 1,000, this remained on their most-emailed list for days after it came out.

Salmon: People love these doom-and-gloom stories, and they love to also… Remember that people are very risk-averse, and what this guy is saying in the New York Times piece is, “You know what? Just keep that money in the bank, keep it under your mattress and then it won’t evaporate when the market crashes.” And that’s true. If you feel that you can’t afford to lose this money that you worked so hard for, then sure, it makes a certain amount of sense to keep it all in cash. There’s no rule which says just because you have a certain nest egg it needs to be invested in the stock market. So maybe what’s happening here is that people are passing this story around, and they’re basically saying to each other, “Hey, these markets are dangerous. Stocks can go down, why don’t we just ignore the stock market for the time being, and not have to worry about where it’s going?”

Vigeland: What’s your advice then for, you know, just the average investor, the average consumer who is bombarded by numbers, by predictions day-in and day-out in the middle of what is supposed to be a recovery, and really doesn’t know what to make of it. But you can’t ignore it at the same time.

Salmon: Oh you can, and you should. THere’s really no reason to read this stuff, and if you do read it, you should treat it as some kind of spectator sport, watching all of these silly forecasters, when they’re certain to be wrong. No one ever gets these things right consistently. And so, what you do, while they’re all making fools of themselves, is go off down the beach and have fun, and don’t worry about it, because you will learn nothing of use from these pieces of journalism at all.

Vigeland: Alright, so tell me, Felix, is the time for reckoning near or are investors succumbing to exaggerated fears of a double-dip recession?

Salmon: I’ll tell you that the Dow is going to be exactly 9,437 points at the end of the year. You can quote me on that.

Vigeland: We’ll take that one to the bank. Felix Salmon of Reuters, thanks so much.

Salmon: Thanks Tess.

Vigeland: You can hear more of Felix nearly every Friday on the Weekly Wrap on our sister program Marketplace.

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