Tuesday, August 21, 2007

Calling It 1998 Again Is Lazy and Misleading

(From TheStreet.com, provided by LexisNexis)
Publication: TheStreet.com

Marek Fuchs

You can always learn from history, and for the business media, finding a parallel in history is easy-peasy: Just go back to the last time something even remotely similar to what you are going through now happened and peck out a quick 700 words.

The complex threads of history? The nuanced differences between separate series of unfortunate events? The possibility that history might repeat itself, but not that tidily and frequently? What are you, a wuss?

Damn the torpedoes of truth -- full steam ahead. Business journalists, like military generals, are always fighting the last battle. This time it means an almost comically misguided focus on 1998, because what is happening in the stock market and economy today is exactly like what happened in 1998, or so they say.

Oh my aching head, have they been saying it. But I've popped Advil like Skittles, so I'm in proper condition to tell you: They are wrong. If anything, today is the flip side of 1998.

I'll start with Reuters but then make my way over to the Financial Times, which seemed to have turned itself into a 1998-theme party newspaper. (Don't forget to take your Monica rubber mask out of the closet.)

But first Reuters, which keeps both feet planted firmly in the air in an article about where things stand. Check out this headline: "Fears abate but still linger post-Fed." Got that? Fears have abated. But they still linger. (The headline has since been changed to "Fears tempered but not doused by Fed.")

The article comes accompanied with a photograph of the Federal Reserve building in Washington, with storm clouds looming behind it, but the first words of the article are about how everyone breathed a sigh of relief, thanks to the Fed. The entire article is tied in a nasty knot because when you force an historic parallel -- as they are to 1998 -- you tend to trail more questions than answers.

And speaking of questions, my only one after reading this morning's Financial Times is: Were free hamburgers being given out to reporters who mentioned 1998?

Do an archive search of the paper's Web site for "1998" and your computer will go into overdrive and begin to smoke. There are five mentions of the year today, after more in the past several days.

"Analysts look at history to predict response," headlines one article, which gets right to the emerging business media party line in its lead: "To work out what the Federal Reserve will do next to contain the crisis in the financial markets, many forecasters are studying the central bank's response to a similar shock in 1998."

Similar? Ugh. Wait, they are hardly done:

"While no two financial crisis are alike, many parallels with that episode are likely to influence Ben Bernanke, the Fed chairman." Umm, last week we were hearing all about how Bernanke studied the Great Depression, so his reaction would be determined by his old class notes, which must be dustier than my Monica mask.

Nah, forget the '30s. The Financial Times is not done with 1998, by any measure. Another article today tells us: "In many cases, the data suggests that the markets are in the grip of a liquidity crunch and pull-back in risk appetite comparable to that of 1998."

Meanwhile, in a separate but equally obsessed-with-1998 article, we are hearing an anecdote about a fund manager who went to visit a client in 1998 to talk about a holding that had gone bankrupt. This tale of 1998 ended happily: "They ended up holding on to the position and making the money back. Today, he is one of the bank's top clients." Awwww ...

Still elsewhere in the Financial Times, we are reading about how the yen enjoyed its sharpest rise last week since 1998 ... and just in case you think the Financial Times and Reuters are alone in living in one particular flash of the past, The Wall Street Journal leads on A1 today with a story, Lessons of Past May Offer Clues to Market's Fate, in which they start by positing that (you guessed it) 1998 (and, for good measure, 1987) "bear striking similarities to the present."

Look: in his next book review, The Business Press Maven is going to deal with The Panic of 1907: Lessons Learned from the Market's Perfect Storm.

As a point of comparison, this thesis, in a book to be released at the end of the month, which is already being spoken about widely is at least interesting. And going back this far in history takes some talent and thought. But 1998?

Puh-lease. The lazy man's method of historical analysis -- assuming that history repeats in such tight circles -- is bound to mislead. You can see it in forced headlines about how fears have abated but lingered, or anecdotes with simple happy endings.

Kudos, then, to the FT's Gillian Tett, who manages to earn her newsroom cafeteria hamburger by mentioning 1998 without offering investors a false parallel. The headline: "The credit compass offers no direction" represents a copout but I'll give out props for this welcome morsel of dissent:

"But do not be fooled into thinking that this summer's turmoil is a direct replay of the events of August 1998 -- or, at least not in the sense that it can be blamed on the dénouement of just one big victim (as with Long Term Capital Management in 1998)."

There you have it, sort of. The credit crisis of 1998, which only rose to the level of crisis in headlines and never did in substance, essentially involved one high-profile hedge fund run into a ditch by some hustling academics who were acting like they knew it all. Despite the hand-wringing, the failure of LTCM was not a big deal. Hedge funds were less of a thing then and this was only one, with some specific problems. What was a larger problem then was global liquidity, in places like China.

In fact, what we have now is closer to an exact opposite of 1998 than 1998. Hedge funds are a larger force in society and they -- like other financial institutions -- are tethered to the same problem: subprime exposure. But the international economic scene, rather than a sand trap, is a comparative oasis, something that can help pull American business through, whether through liquidity or the purchasing of goods, which has been helping the bottom line of so many companies.

Look -- these are confusing times. And trust The Business Press Maven: in confusing times, you might not immediately have the answer. But you are guaranteed to be misled by pat historical parallels.

Do not party like it's 1998.

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Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.