The Power of Wishful Thinking

by Inya Ivkovic, MA

I find it truly amazing how weak economic data can look so good when compared to catastrophic economic data. But that would be the power of wishful thinking working its magic. After what we had survived last year, nearly every number hitting financial presses as of late has been instantly beautified after an easy stroke of comparison. But the dangers of this beautification by comparison are numerous, because comparisons in and of themselves do not provide for sound reasoning.

Back in February, when the U.S. economy wobbled and staggered through the worst downturn in a generation, the Federal Reserve chairman, Ben Bernanke, warned of something he called “the adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing.” His worry had been that bad economic data could make things only worse by fortifying the negative sentiment. Right! But would Bernanke care to clarify what other sentiment should have been fortified?

Following the same line of reasoning, the possibility of a positive loop, albeit a misleading one, would not be a reason for alarm, then? Apparently not, because that is how we must have arrived at this curious state, whereby the “not-as-bad” news managed to create the warm and fuzzy feelings among consumers, businesses and investors, insinuating that things are going to get better sooner rather than later and that the worst recession in a generation is finally over. And, apparently that is how the “not-as-bad” news must have fortified the positive sentiment to the point that even some positive data started arriving this summer.

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By all means, this summer was not short on positive numbers. North American auto manufacturers produced more cars. The U.S. real estate showed that it had a pulse again. And gross domestic products of some of the developed countries finally edged into positive territory. But all that is still a far cry from signaling that the worst is over and that things are finally getting better. To get a clearer picture, all you need is context.

True, North American auto production has risen, but literally from the ashes. To say it rose from record lows somehow does not do it justice. And true, home prices have risen, too, but after plunging about 30% and not coming even close to covering the outstanding debt of consumers that the real estate bubble helped create in the first place. And while some developed countries have posted their first quarter of positive output, the U.S. GDP is still negative, which is an understandable state, considering the country’s insane amount of national debt and budget deficits.

Obviously, things are not getting better necessarily. It just means that the economy is not in as bad a shape as the last time that economic data were collected. But as far as I’m concerned, this not-as-bad-a-shape is still bad enough, even though I appear to be in a surprisingly tiny minority.

I have to admit that months on end of bad news, weak readings and bleak forecasts have worn out many people. Far too many were starved for signs that the worst has passed. Far too many spirits needed a boost, willing themselves to believe that the recovery is close. That is how the “positive feedback loop” in stock markets happened and that is how the “positive feedback loop” in other segments of the economy might happen, too. After all, what better tool to perpetuate this collective illusion than lowering the collective’s expectations to the point that even a miniscule of good news, in or out of context, could create a market rally or push consumers in droves back into malls, car dealerships and real estate offices?

I hope that PROFIT CONFIDENTIAL readers are not as gullible as that. I hope we have warned you sufficiently of the perils of wishful thinking, if for no other reason than to reason what is logical. And this is what is logical right now: 1) measuring current economic data against that from the beginning of the year is misleading; 2) “not-as-bad” economic data are insufficient to sustain recovery momentum; and 3) the expectations bar cannot stay this low for much longer.

The end result: the year-end rally is not likely to occur this year, simple as that! Until Americans feel secure about their jobs and incomes, it will matter little how much “not-as-bad” or even good news was released. We have finally realized how much we value sleeping soundly at night and waking up without fear. Imagine that! We’re even willing to pass on some of the best prices in decades just to get back that peace of mind.