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Financial Fantasies

What truly moves markets is a mystery, but what moves humans to participate is pure fantasy.

Every day, the business press persists in devoting a broad expanse of valuable column space to its quixotic efforts to explain what took place the day before in the markets. It's not always front page news; absent a gaudy movement of more than 100 points, the Wall Street Journal will consign its market roundup to the Money and Investing pages buried inside. The Financial Times runs its overview on the back page of its second section. But no matter how quiescent the trading, there's always an assessment and an implicit attempt at explanation.

To cite a typical example, consider this paragraph that accompanied a Financial Times chart of the S&P 500's performance over the past few months, which appeared on 26 October, after a day when it lost all of two points: "A surprise increase in US new-home sales failed to soothe nervous investors as worries over the economic outlook remained to the fore. American International Group fell on concerns over its subprime exposure." Sounds plausible enough, so much so that it almost seems to deflect close attention.

The paragraph's matter-of-fact assignment of causes and effects ("nervous investors" neglected to buy stocks despite having a reasonable excuse for doing so) is calming, reassuring us that the markets have been tamed in a general sense by those paid to analyze it. It manages to construct the absence of a stock rally as "failure", reinforcing the tantalizing notion that bull markets should inherently be anticipated. (This same analysis could easily have been presented the opposite way: "Investors succeeded in revisiting the temptation to buy stocks despite the anomalous increase in home sales.")

Notice also how the explanation provided marries one claim about the market movements as a whole with a look at one particular stock. The statements aren't explicitly connected; nothing ties them together. But their contiguity is still meaningful, establishing the analysis at multiple levels of generality and implying that the same methodology at one level yields equally valid conclusions at the other. The parallel logic that's operating allows them to reinforce each other's plausibility, distracting us from the fact that these explanations are pure speculation. The S&P compiles prices of many stocks that have nothing to do with housing, so the phenomena isolated in the paragraph is, at best, an oversimplification.

The movements of stock prices likely have little to do with the reasons reported in the financial press; these explanations, to proponents of what is known as 'efficient markets theory', are nothing more than stories, pleasing fictions. In general, the efficient markets hypothesis holds that anything that might affect a stock is already priced in by the time the information is disseminated; a price, after all, is an equilibrium point that aggregates the wisdom of the crowds of willing buyers and sellers at any given moment. That's an enormous amount of opinion, shaped by inconceivable amounts of information, far more than can be meaningfully acknowledged in a 30-word market analysis.

Then what is that information that ends up in these blurbs? If the efficient-markets hypothesis is right, then the information presented in market roundups is less explanatory than ideological. The analyses are designed to tell satisfying stories rather than get at any kind of truth. This is not what I had expected when I started reading the financial press.

When I first decided to become an informed citizen and read a daily newspaper, one of the reasons I chose the Wall Street Journal was because I wanted something with as little to do with the local TV news as possible -- no scare stories about crime or what common household item will kill my children, no warm and fuzzy stories about the elderly reaching milestone birthdays or cute animals or the doings of celebrities, no high-school sports or expanded weather coverage. Basically, I wanted nothing with the taint of human interest; I wanted what I thought of as hard news.

I told myself that this was because it would be the most efficient use of my time, but secretly I thought it set me apart from the average information consumer, who sought titillation. None of that for me -- I wanted pragmatic news, and what could be more practical than the financial press, which seemed designed to give businesspeople only facts they could use in their all-consuming quest for profits?

I thought that by reading the Wall Street Journal, I would force myself to transcend mere entertainment and avoid the sensationalism and mundane escapism that the human interest stories sought to inspire -- inviting you to wonder what it would be like if your house burned down or you won the lottery. But on closer inspection, the pragmatism was merely a pretense, an alibi permitting a subtler species of fantasy: of being hypercompetent, of being wiser than the average person about the things that really matter. The dry data about prices and the dull stories about mergers and currency movements and trade disputes merely offers me entertainment in a subtler form, reassuring me that, yes, I am really one step above/ ahead of everyone else.

So financial news consumers are after stories, like everyone else, and one story they especially appreciate is about how they are smarter than everyone else. The information in a market analysis could be considered one writer's guess at what few things the average investor may have been taking into consideration when stock picking. Burton Malkiel, a Princeton finance professor who popularized the hypothesis in A Random Walk Down Wall Street, calls this the castle-in-the-air theory of speculation, wherein savvy investors kid themselves that they can deduce what average investors will be thinking on the whole and capitalize on it. The business press is more than happy to cater to this notion with specious analyses.

Malkiel also mentions how speculators hope to profit on stocks with sellable stories, which the financial publications are also good at fomenting -- the endless litany of stories about the next great innovative company, or the firm with the especially keen CEO or with the game-changing product on the horizon. Such articles tend to be designed to make readers feel as though they know something special when they've finished that can be turned into a shrewd market play -- or even more likely, that they would turn into a shrewd investment if they had the money, the leverage, the time, the inclination, the ability to get onto Etrade on their cell phone...

But fomenting investors' daydreams is merely how the business press functions on a micro level, in terms of individual readers and how they can divert themselves with fantasies of greed triumphant. Economist Robert Shiller explores the macro level in his article, "Sniffles That Precede a Recession (New York Times 15 October 2007):

Consumer confidence indexes have not yet fallen as they did at the onset of the last two recessions. But confidence is a delicate psychological state, not easily quantified. It is related to the stories that people are talking about at the moment, narratives that put emotional color into otherwise dry economic statistics....

It is clear that salient, emotion-arousing narratives -- those that capture the popular imagination and damage public confidence -- are central to the etiology of recessions. As these stories gain currency, they impel people to curtail their spending, both in business and their personal lives.

This view, likely familiar to anyone whose spent time in a cultural studies program, is basically a restatement of the idea used to justify new historicist approaches to textual interpretation: How narratives work culturally is crucial to understanding that culture; that manipulation of those narratives can dictate the course of history; that the values individuals subscribe to can often be traced to narratives that have cultural currency.

Narratives that render the economic data comprehensible at an emotional level are clearly significant, but Shiller attributes those narratives to what "people" are saying. The business press mainly exists to fashion those narratives, and many of them take that responsibility to heart and continually cheerlead for the economy, trying to implant confidence-building stories about the current situation in the general public.

Unlike daily market roundups, whose main subterfuge is to confidently present explanations of why markets moved in this direction or that, things like BusinessWeek's "Business Outlook" section, the weekly roundup of the market's performance and its interpretation of new data for various indicators. This column is perpetually optimistic, finding the bright side to any grim piece of economic news and promising recovery or further growth or bigger profits or higher stock prices around every corner. It's a testament to how slippery data is, and how many different factors and figures can plausibly be evoked in providing a picture of the economy -- the sunshine gang at BusinessWeek can simply keep digging around until they find some indicators or some time frames to contextualize numbers and spin them positively.

In reality, the economy has far too many moving parts to accurately describe the interaction of all of them; this opens the window to ideological interpretations of carefully selected partial accounts of the total situation. Usually at stake in these narratives is the eventual level of state intervention in the economy, though other messages are often embedded: hard work pays; only greedy speculators disrupt the operation of markets; growth is benevolent and leaves no one behind; containing labor costs (i.e., wages) ultimately benefits everyone; freedom is best understood as purchasing power and entrepreneurial opportunity, and so on.

If the business press is there to cheerlead for market forces' benevolence, and sustain investors' confidence, how does the recession narrative get started and catch on? It may be a matter of data too discouraging to ignore, though just a look at how the National Association of Realtors' economists spun away the problems in the housing market for so long is enough to make that premise seem questionable. They may not get started until after the fact, when they can be comfortably cast in the past tense, which may be why recessions are often not identified until well after they've passed, as Shiller notes. And the business press ultimately has to represent conditions realistically in order that those who consume the information can profit. There's still money to be made in a recession, after all.

Recessions, according to Shiller, hinge in part on consumer confidence, and the advertising industry is a more significant force than the business press in sustaining consumer confidence. The advertising industry is always touting the benefits of consumption in increasingly intrusive ways. And these messages become self-reinforcing; once we accept their basic truth, we may at some level yearn to see them reiterated, which makes us more attentive to ads and the fantasies they enact.

A study of the appeal of fiction -- studying literature -- can perhaps be useful in understanding how ads design their own fantasies and make them efficacious. The vicarious pleasures experienced in consuming experiences supplied by the media may translate into a faith in shopping to provide similar joys, reinforcing the identities people want to construct for themselves. And our sense of confidence then rests in how effectively we can make those identities from things we buy and consume rather than other sorts of prospects -- that our identity stems primarily from being consumers makes sustaining consumer confidence something of a cinch, so the financial press has noted.

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