September 7, 2010, 5:00 am

Media Conspiracy Theory

by: The Financial Blogger    Category: Financial Cliché,Personal Finance
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I was driving my car to work this morning (an hour ride each direction, there’s time to think a lot!) and I was thinking about the recent economic events and how they were reported in the media. I got this idea because as a banker, you are constantly confronted against what has been reported in the news and how your clients perceive that news.

When you look at how the media reports economic news, there are 2 big issues:

#1 Most individuals have a very limited background in finance/economics but since we all deal with money, think that they know what they are talking about. Therefore, they will take any economic news to the first degree and won’t do further research to understand fully why there is a recession or why there is a bull market.

#2 The Media industry (especially newspapers) is in the midst of a business model crisis. Therefore, the new “good” journalist is the one who reports the “biggest news”. So let me ask you a question:

What is more interesting between the following news items:

#1 The housing market in Canada will generally slow down based on our economic review and some inflated markets such as Vancouver, Calgary or Toronto might be facing a more important correction in housing prices.

#2 There will be a housing bubble burst in Canada! Interest rates will rise to 7%, people will lose their jobs and then their homes. Florida is nothing compared to what is coming our way!

I’d say that most editors will take option 2 as their headline ;-). I have my opinion on the topic (housing bubble in Canada?) but let’s take a look at some major economic news from past years:

2007: Oil price will rise to $200/barrel; We don’t have much oil left.

Back in 2007, we were surfing on a huge oil price rise and more and more “specialists” with tons of diplomas were writing theses on how little oil was left on earth. Gasoline was ridiculously high, people were investing in oil income trusts like they were GICs offering 10% interest and Alberta was so prolific that they cut their taxes and their inflation went through the roof.

Result in 2010:

– The barrel of light sweet crude is struggling to get to $80

– Nobody talks about the lack of oil anymore or about all that was spilled into the Gulf of Mexico

– We don’t even care to report US oil reserves in the news (at one point, it was reported weekly!)

2008: Economic crunch; this is the end of the capitalism and all banks will follow it to the grave

In 2008, the market plummeted like it was the end of the world. Economists on Oprah were declaring that our economic system will never survive and that our banks will collapse. Even in Canada, it was the end of our Canadian banks. They saw their stock price fall by 50% in a span of a few months.

Result in 2010:

– We are getting out of a big global recession but capitalism is not dead.

– Most banks survived and Canadian Banks showed interesting profits, even throughout the crisis.

– The stock went back up almost to their peak prices in 2008.

2009-2010: Economy is back in Canada; Interest rate to jump through the roof!

After seeing Australia increase their interest rate in late 2009, some economists increased significantly their Canadian interest rate forecasts. We were talking about the Bank of Canada increasing their rate faster than expected. I even heard about variable interest rates going up to 7% within the next five years (I wonder if the same guy called the lowest interest rates for 2008 back in 2003 😉 ).

Result in 2010:

– The Bank of Canada didn’t budge until June 2010 (which was announced 18 months prior)

– Variable interest rate hikes by 0.50% so far and no important increase is forecast for the rest of the year.

– Inflation is under control and there is no need to hike the interest rate anyways.

So back to 2010: Canadian housing bubble to burst or housing market going to slow down to a normal level?

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Nothing grabs a reader’s attention like a catastropy; that is why the media has a tendancy to manufacture them.

I am worried about the housing market in Canada because in Toronto and Vancouver prices have been high for a long time now. In 2008 it looked like we were headed towards a correction and there was a significant dip in the market. Then we recovered. I’m not sure what’s going to happen next but it does make me nervous. Prices have already dropped.

Housing prices in Toronto are not affordable. The average family makes about 76,000 per year and the average house is affordable for people making 96,000 per year.

Investors cannot buy most income properties and make a profit by renting.

Both of these are signs that the market is out of kilter. Incomes have not gone up, the economy is just OK and none of it supports the price increases we have seen in the last few years.

As for the future nobody knows, it could just freak out and plunge or drift sideways for years.

I agree with you about the media not really performing good journalism. News reports are often inaccurate and it is hard to tell what is really going on. That is why I read blogs! 😉 In general I feel that the economy is never as bad as the most dire reports but it is also never as good as the optimistic reports. The bank rates are still exceptional in my view but what I really want are personal income tax cuts. I want a lean, mean and efficient government. I was shocked in August when the city of Ottawa was talking about hiring a wellness consultant because municipal workers were taking on average 10 sick days per year. Stats Can said the National Average for a Public Servant was 13. Now that is ridiculous. Tax payers are paying for EACH Public Servant to take 2-3 weeks off for not feeling well. We are being taken to the cleaners. At my place of work we are allotted 6 days but the average amount used is roughly half that for a staff of 150 people. Public Servants should also only be given 6 days…and sick days cannot be carried forward, they expire at year end and are renewed in the new year. Put those savings to my personal income tax cuts!

Hmm….Rant Off, I forgot to press the On button before I started.