Pounding the self-fulfilling prophecy drum

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self fulfillingBefore he was a tennis champion, Andre Agassi was famous for more flash than success. His iconic series of advertisements with the tag “Image is everything” epitomized that era.

These days, we face a troubling echo of that slogan, more accurately now defined as “perception is everything”.

 

As I watch the current turmoil in the financial markets across the world and most particularly here at home, I am dismayed by the loss of perspective on the part of the markets and the potential for that irrational behavior to become its own self-fulfilling prophecy of doom.

The basic spiral looks like this: “Investors” (in this case, more institutional traders and fund managers) look at global markets and presume the malaise gripping the rest of the world will eventually “infect” the U.S.

They come to this conclusion despite overwhelming data that the U.S. economy is chugging along fine. Anemic growth, to be sure, but growth unabated.

The psychosis, in full grip, takes all good news and turns it on its head. Oil prices dropping so low consumers have more money in their pockets and car sales are booming? No, the disastrous impact on the U.S. oil industry will lead to banks collapsing due to oil company bankruptcies (this despite oil loans on bank balance sheets are miniscule as a percentage).

Jobs and wages growing in the U.S.? No, the growth is in industries that cannot sustain the pace and the wage gains are not widespread enough to benefit the economy (this despite continuing increases in retail sales, the true engine of the U.S. economy).

Go down the list and you see every piece of good news is flipped by financial markets as bad in order to rationalize the irrational drop in stock markets since the beginning of the year. The U.S. consumer won’t sustain the economy, they all cry.

But here’s the problem. Eventually, the consumers (that’s us, by the way) will lose confidence in the economy.

They’ll look at the stock markets and think the smart financial people must know something that we don’t.

They’ll look at their shrinking retirement and investment accounts and think, we better not spend any more because there won’t be any money in the future for us.

The glass-fully-empty drivers of the stock market will create their own downturn in the economy by their own actions. They will convince everyone the sky is falling even though there is absolutely no support for that belief.

I don’t know any solution to that dilemma. I don’t expect every American consumer to suddenly start boning up on economic theory. All I can hope for is that enough of the positive data that’s been floating around about the economy finally gets through to the makers and shakers on Wall Street.

Otherwise, rumors of a bad economy will become a self-fulfilling prophecy.

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