Tuesday, July 7, 2009

Dangerous media distractions

























Typical of some of the recent "sky is falling" economic angst roiling the markets lately is this recent opinion piece by New York Times columnist Paul Krugman (pictured above).

Since the disappointing June jobs report issued Thursday, those who were certain we are in a repeat of the Great Depression and those who are certain we need more government stimulus (Krugman fits both categories) have stepped up their alarms that the illusion of recovery is a false one and that we are actually on the brink of economic armageddon.

In Krugman's piece, he begins by saying "OK, Thursday's jobs report settles it," and then goes on to warn of possible "descent into Japanese-style deflation" and the likelihood of "savage budget cuts" in the states. He finishes by warning that without drastic action, we are heading straight to an economic repeat of 1937. Other recent commentators focused on foreclosures and the effect that lower home prices have on consumer spending.

We have addressed many of these concerns in previous posts, pointing out our view that the recession was the result of a technically-induced banking panic and that direct comparisons to the Great Depression such as those Paul Krugman makes in his recent piece are inappropriate (see for example "It's a panic, not a Great Depression," from January 21, 2009).

We have also pointed out the economic data from numerous fronts which indicate that a recovery is indeed underway, including sharp "V-shaped" turns upward in the ISM Manufacturing Index, the Empire State Manufacturing Survey, the Baltic Dry Shipping Index, the Bloomberg US Financial Conditions Index, the Port of Los Angeles' outbound shipping containers records, and other measurements of economic activity, which are depicted in an earlier post entitled "A picture is worth a thousand words." Jobs data is notoriously volatile, and is well-known to be a lagging indicator -- businesses typically begin expansionary activity and then they hire new employees, rather than the other way around.

As for calls for greater "government stimulus" such as the one with which Paul Krugman ends his piece, it is quite possible that the recent struggle in the markets have less to do with fear that the economic recovery is an illusion than with fear that there will be more government intrusion around the corner (including recent talk of a "second stimulus"). We have given reasons previously for our belief that such stimulus plans do nothing to actually stimulate the economy and in fact are actually harmful in that they can unbalance it further.

The important point for investors in this debate is that we believe the myopic focus of much of the media over the past few days on the question "Are we really going to avoid the Great Depression II?" can obscure the tremendous changes on the horizon that are beginning to take shape but that almost nobody is talking about.

We are referring to the paradigmatic shift in bandwidth capabilites that we highlighted in previous posts such as "The Unstoppable Wave," and the tremendous impact that it will have on everything from the way that visual content is delivered for entertainment (a model that has profoundly shaped our culture for over fifty years and which is about to change radically) to the way that people monitor their health, the appliances in their homes, and even inanimate objects such as the socket wrenches and torque wrenches in their garages.

We have also explained that, due to recent increases in unnecessary and counterproductive government intrusion into the business landscape (to say nothing of calls from individuals like Paul Krugman for more such intrusion), investors will have to be unusually discerning in the years ahead when it comes to selecting individual businesses for the investment of capital. Simply "owning the market" may well be inappropriate. We have developed this concept further in posts such as this one and this one.

Having a true perception of what is taking place in the larger picture is critical for successful investing. The media can sometimes be a tremendous distraction towards gaining that kind of vision. One of those times may well be right now.

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For later posts on the same subject, see also:

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