“Bad is Stronger than Good”

We humans are a fickle bunch.  If there’s one thing you can pretty much guarantee, it’s that things are never really good enough.  We seem to focus excessively on the negatives in our lives at all times.  You’ve probably heard a lot about this in recent years about how the economy is terrible, how we’re in a “depression” or how we’re right on the verge of sinking into the abyss that we came close to falling into in 2008.  This isn’t all an exaggeration.  But a lot of the focus on the negative seems to be the result of a natural bias of ours – negativity basis.  And it can be extremely destructive if it’s not understood.

Negativity bias is the tendency to emphasize and recall negative events relative to positive events.  That is, fear of bad events plays a much more substantial role in our thought processes than positive events.  This bias was discussed in some detail in a 2001 study in the Review of General Psychology in a study titled “Bad is Stronger than Good”.  It’s a natural evolutionary bias – we fear that which can harm us.  And when it comes to financial markets and economics we tend to see this bias in spades.  Just look at the last 5 years of economic recovery during which negativity seems to have swept over the economic outlook with alarming regularity.  But how bad has this recovery really been relative to past recoveries?

If we look at some of the broader indicators we can get a better grasp of the overall picture here.  For instance, if we look at real GDP the data looks pretty weak, but not exactly a nightmare:

rgdp

 (Real GDP – Quarters Since Trough)

What about industrial production?  The 2009 recovery actually ranks up there with the past three recoveries.  In fact, it looks extremely strong:

indpro

 (Industrial Production – Months Since Trough)

What about private sector employment?  The 2009 recovery is middle of the road (bear in mind that almost all of the employment weakness in the last 5 years has been the result of government job cuts as I discussed here):

jobs1

(Private Sector Employment – Months Since Trough)

This doesn’t tell the most amazing story in the world.  It’s all certainly consistent with the “muddle through” theme I’ve been working with for the last 3-4 years.  But it’s also not the nightmare that the mainstream media and doom and gloomers sometimes imply.   In fact, there’s a fair amount of good stuff that’s gone on in the last 5 years.  And one can only imagine how much better things might have been had the policy response not been so underwhelming and misguided at times.  But I digress.

The point is, it’s a good thing that we often focus on the negatives in our world.  That makes us more likely to make improvements, resolve problems and avoid the same problems in the future.  But when we analyze the current state of affairs we have to also avoid falling victim to our negativity bias.  An excessive focus on the negatives in our financial markets will generally lead one to fall into the trap of believing that things are actually much worse than they really are.  And that can lead to very bad decisions.  Instead, it’s better to understand this bias and try to analyze the economy and the financial markets with a more balanced and pragmatic perspective.  That will help you understand the problems we face without falling into the trap of focusing so much on the negatives that you wind up thinking that the end of the world is always around the corner.

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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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Comments

  1. It sounds cliche, but this is also the “wall of worry” effect in the stock market. A lot of people fell for the Zero Hedge and doom and gloom scam in the last 5 years.

  2. This isn’t a typical recession. We’re in a period of a global deleveraging, which means much lower global growth. The world is riddled with excess capacity and there isn’t enough demand. The most important thing is to hold everything together for another 10 years until everything gets reset. We’re in a global depression and it could get worse before it gets better.

  3. I know you don’t intend this, but it reads like you’re trying to downplay the many problems that are very real in today’s financial world….

  4. Well you can just go to Zerohedge and the like to balance it all out. I think it makes sense to play things down a bit and be more realistic about things.

  5. Mainstreet feels poorer because they are: lower real household incomes, stagnant wages, increased medical premiums, and house prices that are below where they were prior to the last recession.

    It is entirely logical for the 80% of the country that barely owns any equities to feel miserable in the current environment. It may be muddle-through for corporate America but for the average household it still feels like a recession.

    This article from Barry Ritholz on the “Wealth Effect” is pretty informative:

    “The flaw in this thesis is even more obvious when we consider the distribution of equity ownership in the U.S. The vast majority of employees and consumers have only modest investments in equities. When we look at 401(k)s, IRAs and other investment accounts, we see these are primarily held by the well-off. Ownership of equities is heavily concentrated in the hands of the wealthiest Americans. Start with the top 1 percent: They own about 40 percent of stocks (by value) in the U.S. The next 19 percent owns about 50 percent. That leaves the remaining four-fifths of American families holding less than a 10 percent stake in the stock market.

    With so few people actually invested in the results of the stock market, how can it have such a broad effect on consumer spending? It doesn’t, unless the Fed wants to make the case that it is driven primarily by the trickle-down effect. I doubt they would want to do so for obvious political reasons. “

  6. Good or bad is in the eyes of the beholder.

    CNBC sees the economy in the slow lane but it will be better in 5 years as we are in year 5 of a decade long economic malaise as researched by Reinhart and Rogoff. http://www.cnbc.com/id/101402528

    Joe Stiglitz sees it from the perspective of the ordinary person and it’s not quite as rosy.
    http://www.cnbc.com/id/101400190

    So in the end it boils down to the way each participant views the economy. Blue skies for now but when do a few less railcar loadings or a hat trick of poor unemployment reports change our views?

    Whether it’s an expansionary recovery or economic malaise is debatable, but what we can be certain of is love is stronger than death:
    http://www.youtube.com/watch?v=tiK-mmr7n4g

  7. Great post. For most Americans, things are not getting better.
    And I find it patronizing and insulting to tell them, ‘Hey, it’s not so bad. Don’t focus on the negative. Sure, you are muddling through, but my portfolio was up 25 percent last year!’

  8. A lot of the pessimism stems from widening wealth inequality. It’s becoming ever clearer to the middle classes and below that they are never going to attain the quality of life they had envisaged – and that the .5% at the top are amassing ever greater wealth, and are seemingly untouchable.

  9. So despite the advances in technology and productivity along with strong GDP grown and incredible growth in the global economy, the average American is no better off.

  10. That data is cyclical and lagging, but also has a clear long-term positive trend. I doubt many people were using this as evidence of economic weakness in 2007 when it was at its cyclical highs. Besides, should we really judge the health of the entire economy based on median wages near a trough in what is clearly a highly cyclical indicator?

    Also, this seems like an indication of something that’s consistent with muddle through. If it were depressionary or a total disaster I’d expect that chart to be pointing negative by a good margin….Wouldn’t you?

  11. Humans reacting irrationally to emotions isn’t anything new — been doing it for millenia. Those that recognize this are the ones that profit when we overshoot and undershoot what the fundamentals say we should logically be doing.

    At one time or another all of us have filled up on salad and bread before a gourmet meal and kicked ourselves for being “so stupid”.

    Move along nothing to see here.

  12. Here is the money question: What is going to happen to the markets and the economy if we go back into recession while the Fed is at 0% interest rates and still has 4+ trillion on their balance sheet? Cullen even you have suggested this is a very real possibility. QE2+3+inf is a huge gamble that has proven to have very small positive effects on the real economy while creating a possible catastrophic set of circumstances: an impotent Fed facing a new recession.

    It is not a question of being negative but what is the risk/reward at this point is time. Momentum is still positive and probably enough to push the markets higher here. But if the market starts to sniff out the above outcome the downside is huge compared to the gains left here.

  13. It’s looks like a structural decline and not cyclical.
    If it was cyclical, wages would be going up. If it was cyclical, we could point to evidence.
    If you track that chart against the top 5, 10 or 25 pct, you would see a real divergence.

    I think your particular bias in this case is that the median doesn’t matter, so long as the groups you serve are doing well.
    If the price of financial assets ran concurrent with median income, then we would be hearing some real gloom and doom on the financial blogs.

  14. “I think your particular bias in this case is that the median doesn’t matter, so long as the groups you serve are doing well.”

    How do you come here and make such outlandish comments without knowing what you’re talking about? My business is not a hedge fund dealing only with high net worth individuals. I work with a lot of blue collar people and do reviews for clients ranging from middle class to extreme upper class. I don’t “serve” one group of people that leads to a biased perspective. You don’t seem to have any clue about this yet you consistently project this type of belief into your comments thereby discrediting them.

    Further, there’s no evidence that backs your claim that this is a structural change. The linear trend in this data is very clearly upward sloping and positive. You might not like the recent performance and short-term trend, but your biases don’t change the fact that there’s a very clear positive linear trend in the secular data here.

  15. It’s not outlandish at all. I’m just searching for an explanation of why you downplay the evidence of the past 22 years.
    Btw, blue collar wages are down most of all, so the fact that you serve some blue collar people isn’t representative of the big picture.
    I say it’s structural rather than cyclical because if you track other recoveries, you’d see that gains in manufacturing, for example, lead to gains in income. Not happening this time.

  16. The point is, you’re engaging in a dishonest debate tactic by trying to frame me as something I am not. If you can frame me as some rich, self serving aristocrat then you can frame me as the biased bad guy. But that’s not true at all. No one who knows me would ever describe me as some sort of rich serving snob. And my business certainly isn’t designed only to serve wealthy people.

    And I am not downplaying the data. It’s quite obviously in a long-term uptrend. You seem intent on implying that this data is somehow downward sloping when it’s obviously not. The median American is better off than they were 30 years ago. Cherry picking one data point in a cyclical low doesn’t change that. And my guess is you won’t cite this data at all in 5 years when it’s at a cyclical high again. This indicator is highly cyclical and lags the business cycle by several years. But you prefer to ignore that.

    You seem biased towards assuming that everything is always much worse than it really is. In fact, I don’t know if you’ve ever left a comment that ever implied anything in the economy was remotely positive at all. You’re falling for the very bias I am trying to help everyone better understand in the original post!

  17. Real median income is close to where it’s at in 1988.
    The gains of the 90s were wiped out by the 2000-01 recession. The subsequent recovery didn’t get us back to the highs before the 2008 recession.
    A similar recovery in the next couple of years won’t get us back to the previous low.
    The big question is: Why have all the economic gains in the past 20 years not been broad-based as they have been historically.
    You’ve been asked to address this repeatedly by many posters, but chosen instead to highlight the positives — positives which accrue mainly to the top quintile.
    My bias is the median, because for several years there I spent a lot of time giving advice to the median. Note: The median doesn’t have any money! So I stopped doing that.
    But when I see weak job reports, I see the impact on people’s lives. I don’t brush it off because the market continues to go higher.

  18. The job reports have not been weak. Private sector employment has been strong the last 5 years. It’s the govt that’s cutting all the jobs. In past posts you’ve been in favor of this, but here you are implying that the labor market is weak. Yes, the only reason it’s been weak at all is because the govt is busy cutting its workforce! So you’re contradicting yourself.

    Also, here’s a good chart of real median household income. Again, there’s a clear secular uptrend here. Americans are not worse off than they were 20 or 30 years ago and the gains of the 90’s have definitely not been “wiped out”:

    Now, is there growing inequality and is that something that’s worth discussing and exploring further? Probably. Does that mean we need to go around implying that the world is ending and that suddenly the country is on the precipice of collapse? No.

  19. It depends on the assets the private sector holds as well. You can’t look at the liability side of a balance sheet to determine its health without looking at the asset side. One thing I hate about this monetary system is that credit can basically grow endlessly.

  20. That’s a dramatically different chart than the FRED chart.

    Robert Samuelson had a good piece this week pointing out the government discretionary spending is being crowded out by entitlement spending. Basically, we have a government that just sends out checks and doesn’t do what it used to do.
    This is because we have more retirees and the working population is participating at a lower rate.
    Again, that goes back to the employment crisis and the lack of good jobs for the working class.

  21. We have an environment where our govt is firing workers and then they’re signing up for federal aid through various programs and then the people who are in favor of the govt job cuts complain about the growing size of the govt aid programs. At least before we fired these people they were actually doing work for the income. Now they’re just collecting a check and praying that a private sector company hires them.

    The employment “crisis” is largely the result of ignorant policies in place and not a lack of jobs, something the data clearly refutes:

    http://research.stlouisfed.org/fred2/series/JTSJOL

  22. Yea, it’s a transfer from the young to the old. The only reason private sector credit is growing is because of student loan growth. That’s just old school debt slavery.

    Bureaucrats and central planners are too dangerous, stupid, ego-maniacal, short-sighted and greedy to expect them to make good long term decisions for our society. Socialists (and others like MMTers) don’t think there are any negative consequences to bureaucrats and central planners having increased power. I think that’s naive and stupid.

  23. Data may be cyclical or lagging, but still weird things continue to plague traditionally well-functioning markets — real head scratchers.

    “Nearly half of the homeowners who could refinance their homes have not done so despite the prolonged availability of record low mortgage interest rates.” This quote taken from a recent Fannie Mae article on Mortgage News Daily.

    Why would this be the case? There are any number of reasons folks choose to refi or not, but not having the income they “used to have” is likely cause number one.

  24. If Cullen is correct and we have another recession while in the ZIRP situation then we will be forced to use fiscal policy. Fiscal policy has been working against the recovery. If government jobs (all forms of government) per capita were at at the level they had been for two decades before the recent crisis there would be ca. 2 million more direct jobs, and depending on the employment multiplier we might expect there to be 1 million more indirect jobs. All other things being equal, this would put the unemployment level close to 4.5%, or better than almost any other point since 1970.

    An unemployment rate near 4% would likely be a very different world. Likely there would be inflation pressures due to wage increases, the Fed would abandon the ZIRP, and this would be a very different discussion.

  25. The inequality issue shows that people perceive their situation in relative terms. People living at the median household income today are almost certainly better off materially than in 1965. I grew up in an upper middle class neighborhood (SF Penisula, where the houses in our neighborhood are now in the $2.5 million to $5.0 million range). Back then it was doctors and lawyers and executive and small business owners. Many families had only one car, few had more than one TV, toys were bats and balls, and very few kids in high school had cars, …

    This is not to argue that inequality is not a problem, only that a lot is in how we perceive the world.

  26. What about the quality of the jobs created? Even if one is to ignore how the calculation is done (birth death adjustments and so on), there is no denying that the quality of jobs being created has been very poor. Income stagnation is proof that this decline has become structural and at soe point will impact the bottom line in a negative way. For now, it has been a plus through lower cost but eventually it will show up on the topline through less consumption. In fact, it may already be showing if one is to look at the retailers latest numbers. Even perma bull Cramer has admitted retailers are struggling.

  27. That is where we are headed. Instead of taking some pain to restructure the economy they ahve created a monster that needs more and more government intervention to continue on thei upward trend.
    There is a saying that the stock market crash of the 30’s didn’t cause the great depression, instead the great depression casued the stock market crash.
    I am afraid this time around it will be the other way. One day, there will be doubt in the ability of the Fed and other CB’s to support asset prices and when that day comes, look out below. I think that is when they buy stocks. So no, things are not as good as they seem. It has taken 30 to 40 trillion dollars of support worldwide to reach all time highs once again.
    I think they believe it was necessary and eventually the fundamentals witll catch up with elevated asset levels. This may be wishful thinking since greed and the current appearance of a can’t lose market will not allow fundamentals to catch up. They created this and we will all pay for it. Sad

  28. FIscal policy *is* monetary policy.
    If we exploded the deficit, the Fed would wind up buying the debt on the secondary market (a form of monetizing in itself) so that rates don’t rise and crowd out more useful federal spending.
    If we think it would be good to get deposits out of the hands of the wealthy and into public spending, we should just tax them and not give them ‘guaranteed’ interest on their deposit.

  29. Cullen,

    I’m not trying to get involved in the debate you two are having, but I am curious why your chart is so dramatically different than the charts posted above from the St. Louis Fed in the links above? Thanks.

  30. I agree that we’ve had excessive bearishness the last 5 years. Still on net, this has been a slower recovery than what we’ve seen in the past. When you fall as far beneath trend as we did you’re supposed to see a strong bounce back like we saw in the Depression as well.

    The other problem is that when you say it’s not been so bad conservatives will spike the ball and say ‘See we didn’t need any stimulus after all. Just fiscal austerity and NGDP level targeting.’

  31. Agree 100 percent.
    We need to focus on real assets and the fundamentals of economic growth instead of supporting the prices of financial instruments.