Jeff over at A Dash of Insight has written another excellent article, this one entitled “Do Internet and Media Resources Help the Individual Investor?” However, he makes a couple of points which themselves reveal a bit of bias, and I’d like to look at them through my particular shade of Rose-colored glasses.
I Reject the Facts Based on my Anecdotal Observations
Jeff points out that Ms. Olick from CNBC overgeneralizes based on what she sees as “typical behavior,” implying that her view on real estate is unreasonably biased. He says that
“Homeowner behavior is a distribution, not a unique point.”
I completely agree, which is why Jeff’s example (his Utopian neighborhood where the homeowners are thriving and confident, the men are strong and all the children are above average) is at least as misleading as Ms. Olick’s.
Homeowner behavior is a distribution– one which has already shifted significantly due to uncertainty about the future value of our homes, and which will continue to shift as this uncertainty becomes a self-fulfilling prophecy of negative sentiment and reduced spending.
Rising home equity has fueled the spending binge which has largely contributed to keeping our economy afloat the last decade. As that equity stops rising (or worse, begins to fall), we’ll get an extreme slowdown in spending as people find their credit card balances bouncing up against their limits (again), but this time discover they’re unable to “cash out some equity,” pay down the balance, and keep on spending. It will take some time for the credit cards to max out (pay $200, charge $300, balance gradually and inexorably creeps upward), so the most serious slowdown in spending will lag the recession in home prices by some months. In other words, the worst is yet to come.
I Have More Letters Behind My Name Than You
As for the impressive credentials of Mr. Blinder and Mr. Gault, they do imply that these gentlemen are far more qualified to talk theory than Ms. Olick (or me). But it doesn’t make their opinions about the future any more valid than those of a reasonably intelligent person who has taken the time to educate himself, examine the evidence and form a considered opinion.
How many experts were alerting us to danger in 1999, compared to the number using the words “New Paradigm”? How many experts publicly warned of falling home prices before the fact hit them in the head like a brick? (I’m no expert, and even I saw this coming).
As a matter of fact, I’d argue that those same credentials often insulate people from reality, leading the “experts” to ignore even flagrant evidence if it contradicts them. Thus catastrophe sometimes results as these people begin to think of themselves as infallible. Remember Long Term Capital Management? Myron Sholes and Robert Merton, both Nobel prize winners. Two of the smartest guys on earth. Lots of letters behind their names.
How about the multitude of hedge funds which are currently in the process of imploding or at least unwinding? Many of them populated with Ph.D. “experts” from the top educational institutions in the world. Not a single secretary or cotton farmer to be found among them. Does that mean that the secretaries and cotton farmers can’t see what’s going on with the economy and that their opinions about the future are less valid?
Personally, I found Ms. Olick’s (limited) part of the segment to do a great job of making a connection between the jargon of the experts and the concerns of the average person. The expert guests both agreed that the housing slowdown is a fact, and nothing Diana said contradicted them. Here’s her part, as best I could get it from the CNBC video (which I kept having to restart until I finally gave up):
It’s about sentiment. Obviously people feel that their wealth is in their home. For Americans, it’s their biggest investment by far. So when you feel that your home is not worth what it once was, that you can’t pull home equity out of your house like you might have been able to a couple of years ago, you just don’t feel as wealthy as you once did, and that of course translates into consumer spending and how we’re going to spend our money.
We’re already hearing from the homebuilders that renovations are starting to fall… and that dribbles over into places like Home Depot that fuel everything that goes into our houses. All of these things have a ripple effect, so when you feel that your home is not worth as much as it was before, even if you’re not putting it on the market, it definitely has a fundamental effect on how you see your own wealth.
I Agree With Jeff
The above being said, I wholeheartedly agree with the premise of Jeff’s article: that the media and much of the “information” on the internet are likely to do more harm than good, particularly by misleading investors into thinking this stuff is easy, and usually with the hidden motive of trying to sell them something. I hate marketing disguised as information or education, and I think Jeff has hit the nail on the head with that point.
