Seventeenth century mathematician Blaise Pascal once wrote: “People almost invariably arrive at their beliefs not on the basis of proof but on the basis of what they find attractive.” And things haven’t changed much since. If anything, they’ve got worse.
This is because, in this age of anxiety, investors can’t escape bad news. The global media is magnifying every problem in sight in a desperate bid to compete for our attention and advertising spend.
In the wake of recent news items, it’s getting pretty hard to leave the house for fear of encountering gangs of dangerous suicide bombers or paedophiles.
I was alarmed to read the headline to a stock market report recently, saying: “Washington gridlock takes toll on risk assets.” It looked like the end for the financial world. Again. Gloomily contemplating the state of my investment portfolio, I gritted my teeth and read on.
OMG! It transpired “Washington gridlock” was a tired rehash of views by Republican Congress speaker John Boehner, opposing high government spending amid discussions on ways to stop the US diving over a “fiscal cliff.”
None of this amounts to a “toll” on “risk assets”, the pejorative term for equities popularized by bond managers over the last few years.
I went on to read that US stocks were only down 0.1% on the week, after a buoyant two months, following encouraging jobs data. European stocks are scaling 18 month peak. China has bounced, pushing global indices up 0.5%.
In essence, the article was nothing more than a reiteration of views faithfully relayed to anxious reporters by anxious market commentators, topped off with a dramatic headline. No one had done their homework properly.
Far from gridlock, progress is being made on talks between Republicans and Democrats to get a $1.3 trillion deficit back in order through tax rises and spending cuts.
The Republican’s Tea Party wing is even starting to rediscover a taste for pragmatism in the wake of their drubbing in the presidential election, as they get to know their rivals better.
President Barack Obama gets on better with Boehner than you might think, meeting at the start of the week to chew the fat. Deputy president Joe Biden enjoys cordial relations with Senate Republican minority leader Mitch McConnell and Congress majority leader Eric Cantor.
Putting aside the budget issue, Biden and Cantor have been working together to salvage amendments to the Violence against Women Act. Beneath the bluster, each man knows the way the world works.
The recent decision of Republican senator Jim DeMint to quit politics robs the Tea Party of one of its leading hawks, as opposition to tax rises within the party erodes. Republican senator Bob Corker said Obama’s proposed rise in tax rates for the wealthy was “the best route for us to take.”
If a deal isn’t agreed by early January, the US will, indeed, dive over a “fiscal cliff”, when spending cuts and tax increases are imposed by a pre-arranged programme.
The phrase, invented by Federal Reserve chairman Ben Bernanke, is enough to make anyone feel anxious.
But the measure is actually nearer to a gentle “fiscal slope”. It implies spending cuts of $109 billion a year, plus some modest tax increases. It might lead to a 0.5% cut in US Gross Domestic Product, but this scarcely matters given the annualised rate has risen to 2.7%.
In the same way, in Europe, anxiety is mounting over “austerity” measures, such as Chancellor George Osborne’s budget, which are rarely as extreme as they look.
A month or so back, China was facing problems. Suddenly, on the back of an annual rise in industrial output to 10.1% in November, it is supposed to be rebounding.
It scarcely matters whether you are talking about the US, Europe or China. The conclusion is the same. Politicians will say they are doing things they are not. The media will report things as serious, when they aren’t. And investors can’t believe the truth.
Anxiety, after all, is a powerful feeling, generated by the more primitive parts of our mind. It is a survival instinct, which makes us alert to potential dangers. It can trigger heart palpitations, tension, fatigue, nausea, chest pain, shortness of breath, headaches, sweating, trembling and panic attacks. Or all of them at once, as the body readies itself for fight or flight. No one can think straight.
Regulators are responding to political pressure by becoming increasingly tough. Banks are demanding more collateral for their loans. Bonds are staying in favour despite their ludicrous ratings. Companies are hanging onto their cash rather than reinvesting. Shareholders are expecting companies to meet increasingly tough environmental, social and governance standards. An angst-ridden economy demands no less.
Reaching decisions on the basis of truth has never been more important. But, in this age of anxiety, as Pascal would be the first to agree, the truth has never been more difficult to perceive.