Fake News

I’m not altogether certain why there is such a fuss about “fake news” these days.  The National Enquirer has been around for years, and that publication is my definition of fake news.  But I would agree that news can be spun in such a way that it elicits either a positive or negative response from the hearer/reader and, more to the point and purpose of the publisher of the news, causes the audience to continue giving attention to it.

 

I did not suspect fake news when I read the banner across the cover of the November issue of Money magazine: “This crash signal just flashed red”.  As soon as I had the opportunity I turned to page 36 to get the scoop on what the Money editors were seeing that caused them to think a stock market downturn and/or recession was imminent.  I found a surprisingly short article—one page, ten column inches, a graph, and a picture of stock traders that appears to be from the 1930’s.

 

The brief article explained the Sound Advice Risk Indicator, an index overseen by Sound Advice newsletter editor Gray Emerson Cardiff, that purports to predict stock market crashes.  The measure compares the level of the S&P 500 stock index to the national median price for new houses, and when the Risk Indicator level rises above two (and we are there now), a downturn is around the corner.

 

According to Money the last time the Sound Advice Risk Indicator reached this level was in 1998 before the dot.com crash.  It did the same before the big stock market declines of 1906, 1928, 1937, and 1965.

 

But here is where the reader needs to draw on his own knowledge of history and recall facts that are not in this article.  For example, there was a big crash around 2007/2008.  Remember that one, The Great Recession?  Why didn’t this index predict that?  Why didn’t it predict the recessions of November 1973 to March 1975, or the one in July 1981 to November 1982 when unemployment hit 10.8%?

 

And how about that supposed foretelling of the dot.com crash?  The Indicator hit “two” in 1998, but the crash didn’t occur until nearly two years later.  As Money quoted Cardiff acknowledging, “Stock prices often stayed high for many months, sometimes even a couple of years.  However, in all cases a major decline or crash followed, pulling down stock prices by 50% or more.”

 

So here’s what I take away from the article: The Sound Advice Risk Indicator can predict a big stock market crash—or not.  It often misses.  And when it does flash red, the crash could still be a year or two away; and that’s half an eternity in the investment world. 

 

It reminds me of an episode of the 1960’s television comedy, The Beverly Hillbillies.  Granny, a self-proclaimed mountain doctor from the backwoods of Tennessee, talked up her cure for the common cold.  All you had to do was take the tonic and in a week to ten days you were better.  This investment tonic is about as useless, in my opinion.  I go back to one of my favorite quotes, one from economist Paul Samuelson:  “The stock market has predicted nine of the last five recessions.”  A crystal ball that is right by accident and not always prescient is not a crystal ball at all.

 

The bottom line for anyone reading any “expert” advice on investing or on money matters in general is to apply common sense and his own knowledge to make judgments of what he is reading.  All that’s published is not fit to read.  Sometimes, like a National Enquirer headline, there’s just enough there to make a salacious headline, but the whole story is quite different.

 

Until next time,

 

Roger

 

“Do not call conspiracy everything this people calls a conspiracy; do not fear what they fear, and do not dread it.” Isaiah 8:12 NIV®*

 

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

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