The first real newspapers appeared around the 1600s in Holland, Yale economist and recent Nobel Prize winner Robert Shiller mentioned at a conference in Orlando last week. That was also around the time the Dutch tulip bubble formed. "I can't find much evidence of financial bubbles before then," Shiller said.
We've been having them consistently ever since.
Those two factors -- newspapers, then bubbles -- aren't coincidental, Shiller asserted. "The big fluctuations of bubbles are primarily social-psychological changes," he said. You need a well-armed media to drive that change. "You can't have a bubble with word of mouth."
Think about the last three bubbles.
Radio went mainstream in the 1920s. For the first time ever, Americans were connected to each other live across the country, listening to new ideas they had never been exposed to. "It connected you to the world," Shiller said. Radio not only made people optimistic about the future, but it spread new ideas -- like the power of investing in stocks, spawned in 1924 by Edgar Lawrence Smith's book Common Stocks As Long Term Investments. Soon came one of the biggest stock market bubbles in history.
The Internet did the same 70 years later. Virtually overnight, the entire world was connected for the first time, sharing ideas and being exposed to thoughts traditional media outlets had never covered. "It was hard for this not to make you optimistic," Shiller said. In the mid-1990s, Wharton economist Jeremy Siegel wrote the book Stocks for the Long Run, echoing Smith's message from the 1920s. A new mindset took hold. Stocks tripled in less than seven years. You know how the story ends.
Same for housing. From 1890 through roughly 1990, inflation-adjusted home prices nationwide were flat, if not declining. Searching through more than 100 years of newspaper archives, Shiller found almost no mention of home prices, except in construction trade journals. "It just wasn't on people's minds," he told me a few years ago. "No one cared. One expected to buy a home as part of normal living and didn't think to worry about what would happen to the price of homes." That all changed in the early 2000s, with a burst of media coverage on rising home prices. "In June 2005, there was this media explosion on housing as an investment," Shiller said. Newspapers, TV, and the Internet went nuts about how much money could be on homes. A TIME magazine cover that month read, "Home $weet Home." Prices peaked soon after.
Bubbles are complicated. No one can point their finger at a single cause. But more than most economists, Shiller focuses on the psychological aspect of bubbles. And wherever you find big psychological shifts, you find the media. "The news media are fundamental propagators of speculative price movements through their efforts to make news interesting to their audience," he said.
But is this cause and effect? Are stock and housing prices going up because the media is talking about them, or is the media talking about them because they're going up?
It's not hard to say it's the former.
In his book Irrational Exuberance, Shiller writes that most modern bubbles are global. Stocks didn't just rise in America in the 1990s, they surged all around the world. Same with real estate in the last decade. Home prices in Belgium, Spain, and the Netherlands surged more than American home prices last decade.
But most people don't pay attention to foreign media. So how can the media explain why bubbles are global? Shiller has an idea:
Of course reporters of the news, especially the serious news, feel an obligation to read the news from other countries, so as not to miss an important piece of news. But, beyond this, reporters learn from experience that an excellent way to produce good copy is to piggyback on others' successes. A sequence of stories in foreign news media is a sign of a successful story, and such a success can probably easily be replicated at home if the story is copied with only a few tweaks and adjustments for local tastes and associations.
As a financial writer, I can attest this is true.
Whenever a bubble bursts, we immediately seek someone to blame. It's usually people of authority: Congress, the president, the Federal Reserve, or Wall Street. All play a role in bubbles. Maybe they plant the seed, or ignite the fire. But it's often the media that helps grow that fire into a bubble. Laws are local. Ideas are local. Financial advisers are local. Media is the biggest thing connecting investors' mindsets around the world.
Two years ago, I asked Chrystia Freeland, a former Reuters managing editor now running for political office in Canada, if the media played any role in the 2008 crash. Not really, she said. "The world has been perfectly capable of recessions and long depressions long before the age of 24/7 media."
But was the media responsible for cheerleading the bubble before the crash? Maybe. "If you want to beat your breast as a journalist and say, 'Mea culpa,' really what we should be blamed for is not sounding the alarm more before 2008," Freeland said. "That's the big guilt, and yeah, I think the media is guilty, just as a lot of analysts were, a lot of bankers were, a lot of regulators were, and a lot of lawmakers were."
The media is more interconnected and headline-hungry than ever. That means you, the investor, need to be as cautious and selective with how you get your information as ever.
Last year, I created a how-to guide for reading financial news. In short, the three most important things you should do when reading financial news are:
1. Read stuff you know you're going to disagree with.
This is how you prevent confirmation bias.
2. Read old news.
This is how you learn not to take forecasts seriously.
3. Don't think every news story requires action on your part.
Because it doesn't.
At the end of his talk, someone asked Shiller if more information and a 24/7 media mean more bubbles. "Yes, absolutely," he said. "Bubbles will get bigger."
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.
