When collective psychology changes, coverage of the news changes with it.
I realize how that statement can be understood in at least two ways, so let's get specific. Am I talking about "changes" ina) how news will be covered, orb) the version of news that has been covered already?My answer is: Both. Which is to say, psychology can and often does change everything. In the case of changing the version of news that has been covered already, the most obvious recent example is the Federal Reserve's bailout of Bear Stearns, which was engineered during the weekend of March 15-16.You may remember some of the particulars from the news at that time -- the sense of fear was palpable, as print and broadcast media were full of stories that speculated about which big bank "might fail next" and "how much worse this will get." Bear Stearns was so reckless in its subprime lending that bankruptcy was at hand, and the firm's chairman was away at a bridge tournament when the crisis turned critical; J.P. Morgan had agreed to the "buyout" of Bear for $2 per share, and was widely lauded both for helping the economy at a critical moment and negotiating a good deal for itself; the Fed was even more widely lauded for "doing what it had to do" to "restore confidence" in the markets and "avoid a sudden market-shaking crash."Yet on the first trading day after the story broke (March 17), the S&P 500 hit an intraday low that in fact marked the start of a rally; prices have mostly moved higher in the time since. That low accompanied the psychological turn. Indeed, this week included a new version of the Bear Stearns story. In testimony before Congress, Fed Chairman Bernanke faced hostile questions about how the central bank's bailout created a "moral hazard"; J.P. Morgan has had to renegotiate the $2 share price back up to $10 per share; Bear Stearns executives say that the firm's "balance sheet was strong" at the time, and that they weren't reckless but instead victims of rumor. Today's Wall Street Journal story about the Congressional hearing included this:
"Lawmakers repeatedly questioned the panelists about how such a crisis of confidence could sweep through markets and topple one of the nation's largest investment banks.Bear's Mr. Schwartz said that despite weeks of soul-searching, 'I just simply have not been able to come up with anything, even with the benefit of hindsight, that would have made a difference.'"
The "anything" he couldn't come up with is, simply put, that the bearish fear which began last October ended with a crescendo on March 15-17, at the expense of Bear Stearns (among other entities.) Now that the psychology has turned, the story itself is being retold.
As for how news "will be" covered, this very day is a perfect example. At 9:27am this morning, I read an AP wire story that began with this sentence: "Wall Street shares headed for a higher opening Friday and Treasuries rallied following news that the economy gave up 80,000 jobs last month, the biggest loss in five years." Please read that again. The "consensus estimate" for job losses was 50,000. This was bad news by any reasonable definition. But psychology is often anything but reasonable.
If you know the trend, you can usually predict what effect the "news" will have -- whether it's good or bad is irrelevant.
