Media Madness

Following last week’s column on the stock market collapse, I undertook a simple piece of research to find out how significant the “bloodbath” was. I wanted to get a fix on just what proportion of the market participated in the drop in share values. Upskir

Seventy-seven million shares were traded on Black Monday. My initial guess was that that represented a pretty small proportion of the total shares on the market, say 2 – 5%.

I phoned up the Toronto Stock Exchange last Friday to find out the total number of shares listed. I was connected to stats.

They didn’t know – “Try listings.” It was clear that in the two weeks since Black Monday, I was the first person to ask them this question.

Listings said, “Try stats.”

I protested. It was suggested I talk to the supervisor in stats.

Eventually stats came up with the number 28.7 billion shares.

Seventy-seven million is only 0.27 percent of that total number of shares. Since it is reasonably certain that many, probably most, were traded more than once on that day, we can conclude that “crash of ’87” was caused by less than one-quarter of one percent of the market that that tiny percentage was being cast as deciding the fate of the world economy. The flipside is than 99.8% of the stocks were not participating in the panic and it is a reasonable assumption that the owners of those stocks were reasonably happy with their holdings regardless of the price drop. Indeed many large corporations have moved to buy up any of their shares that go on the market at fire sale prices – they know what their shares are worth.

An analogy would be an appliance store with 400 TV sets for sale at $600 each. If I persuade (by fair means or foul) the owner into selling me one for $450, does that make the other 399 sets worth only $450? Why should the sale of a similar proportion of shares be regarded as affecting the value of the remainder?

The only shares that actually lost value in the last few weeks were the ones that were actually sold. The only people who lost money were the gamblers who panicked and sold out.

As those who read last week’s column will remember, I used the space to berate the casino atmosphere of the stock market system which has produced the wild gyrations over the past two weeks. As I stated, the crash in itself is basically irrelevant because the assumed losses are only on paper.

Black Monday will become a recession only if we make it one. If we postpone purchases or investments because of financial uncertainty, the economy will indeed slow down. (And market analysts will remind us of how accurate the market was in predicting the slowdown.)

People obtain the bulk of their information throught the media and for the last few weeks the TV, radio and newspapers have been full of all kinds of disquieting comparisons to the crash of 1929 and the Great Depression which followed. Our parents and grandparents lived through the 1930’s and their memoriesof their hardships have had a permanent affect on our national psyche, more so than either of the two World Wars. When Black Monday came, the public was accutely aware of what could follow.

The media trumpeted the fall with headlines four inches high. They talked about the trillions of dollars that had supposedly been lost. They sought out the super rich who had supposedly lost tens or even hundreds of millions. They published pictures of stock traders with blank, exhausted, shell-shocked faces. They quoted the bears of the market who (almost gleefully) predicted how bad it would be. They made dire predictions about what a bad Christmas this was going to be. In short they sensationalized. They sought out the drama and to heck with accuracy and balanced reporting.

Considering that none of them seem to have bothered to consider the shares that were not traded, the level of reporting was incredibly shallow… and dangerous. If the people respond to a perceived economic crisis by reducing their spending, they may precipitate that very crisis. The power of the media to provoke a world economic collapse is frightening. As a neophyte to the journalistic trade, I am shocked at the irresponsibility of my colleagues.

However, perhaps John Q. Public is smarter than we give him credit for. Perhaps he has already read too many four-inch headlines of gloom and doom to take them too seriously, for so far the general public reaction to the market collapse has been ho-hum. Major department stores gearing up for the Christmas season see no signs of caution among their customers and the owner of the major packaged tour company is in his best season ever with no slow down in the last two weeks (and vacations in the sun are definitely a luxury item).

Even the investing public has not shown much reaction. Mutual funds which have drawn tens of thousands of new investors into the market over the last couple of boom years have experienced only a 1.4% pullback over the last two weeks – far less than they expected.

The last two weeks makes the need for drastic market reform self-evident. Let the majority – the 99.8% of the market that kept their cool – decide the state of the economy.