Conspiracy Theories

Today's economic headlines contain all sorts of conspiracy theories and superstitions, but don't use them to make investment decisions.

Story Highlights:

• Conspiracy theories are common around the world, but the popularity of a belief doesn't translate into truth.
• A number of popular economic beliefs today are founded on fears rather than fundamentals.
• Take the time to examine the difference between popular beliefs and reality before making an investment decision.

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Every day, a bearded, disheveled-looking guy stands on a street corner in downtown San Francisco holding a sign that says, "The end is nigh!" No one ever seems to take heed. But turn on the TV and you'll likely see a similar looking talking head with a beard (usually calling himself an economist, or worse an analyst) telling us the economy is doomed.

Call us crazy, but we see parallels.

Superstitions and conspiracy theories thrive in our culture. There's an alarming propensity for folks to believe in things either unproven or demonstrably untrue. An amusing article published by The Economist highlights some of the most well-known conspiracy theories by way of Google hits.

The Hidden Hand
By Staff, Economist.com
https://www.economist.com/displaystory.cfm?story_id=10715149

While we don't doubt reptilian humanoids secretly run the world (in the guise of politicians), we'd note the popularity of a conspiracy theory doesn't necessarily translate into fact. Superstitions and false beliefs can last a very long time and can even calcify in a culture to the point they become canon, giving social cachet and acceptance to those who share similar views. Perhaps this is one reason why many hold onto beliefs without any demonstrated truth—even when data expressly proves otherwise.

A good investor knows unproven theories and blind assumptions make for investing peril, but market superstitions persist. In the spirit of things, and for a little fun, we decided to see if we could identify a few of our own economic conspiracy theories.

Conspiracy #1: "high oil prices" + "conspiracy" = 189,000 Google hits

Rally Killer: Crude at $100 Weighs on Dow
By Peter A. McKay, The Wall Street Journal
https://online.wsj.com/article/SB120347844976579307.html

Oil has received much attention, especially with prices topping $100 a barrel recently. But oil and natural gas prices have been steadily climbing for some years and showcase nothing more than increasing demand against constrained supply. That's a demonstration of economic strength, not weakness.

Even more interesting, if you do a Google search for "high oil prices" + "stocks" you get 4.57 million Google hits! But it's been demonstrated time and again energy and stock prices aren't correlated. Historical prices of crude oil look nothing like stock market movements over the same period. Oil prices are a result of a booming global economy, not the cause of stock market gloom.

Why Oil Prices Haven't Crippled the US Economy Yet
by Tim McMahon, Financial Trend Forecaster

(Note: this one was written in 2006 and is still right!)

Conspiracy #2: "credit crunch" + "conspiracy" = 130,000 Google hits

Tight Credit Poses Risk: The Great D(eleveraging)
Commentary, The Wall Street Journal
https://online.wsj.com/article/SB120338127431775701.html

A credit crunch is defined as a sudden reduction in the availability of loans, or an increase their cost, to borrowers. News headlines, financial analysts, and the general public are certain we are suffering from a credit crunch and have been for some time. But the truth is credit is still widely available to healthy borrowers and while some financial institutions are more cautious in their lending, loans are still being made. Investment grade debt today is actually cheaper and more plentiful now than a year ago, helping firms finance cash-based merger and acquisition activity (which posted record numbers in 2007). And although some proclaim the Federal Reserve Board's January 2008 Senior Loan Officer Opinion Survey paints a bleak picture, the survey also shows lending volume and demand haven't changed much in the last few months.

Conspiracy #3: "US recession" + "conspiracy" = 127,000 Google hits

New Reports Signal Economic Slowdown
Reuters via The New York Times
https://www.nytimes.com/2008/02/21/business/reuters-econ.html?scp=3&sq=recession&st=nyt

We've seen it plenty in the headlines already: The US economy is in a recession. But we've yet to see even a single quarter of negative economic growth—traditionally two consecutive negative quarters define a real recession. Other measures of a recession are so complex they make a simple determination of a real recession even harder.

Conspiracy #4: "US dollar" + "conspiracy" = 127,000 Google hits

A Sinking Feeling for the Dollar in China
By Don Lee, Los Angeles Times
https://www.latimes.com/business/la-fi-cheapdollar19feb19,1,4692293.story

We don't think the weak dollar will disrupt the US economy or the stock market. The dollar has risen and fallen throughout history and global stock markets have fared well. See our MarketMinder story, "What Dollar Story?" 12/26/2007, for more.

These are just a few examples.

Conspiracy theories play on humans' inherent tendency to find exciting (and sometimes harebrained) explanations for complex phenomena. But humans also have an innate capacity to place faith in intangible notions and presumptions. When conspiracies and superstitions dominate financial headlines, emotional responses can make for some hefty volatility, but they can't make a bear market. Only the market's true underlying weakness or strength determines a bear or a bull. Today, facts say the US and global economies are on solid footing. Maybe those talking heads on TV would be better suited ranting on the street corner after all.