Using media headlines to predict economic cycles
Exclusive: Jody Tallal tells of his Dallas research into front-page stories
In my last column, we began a discussion about how the economic cycle interplay with real estate cycles; with the real estate cycle lagging behind the economic one. Additionally, the real estate cycle, due to the investor influence, rises higher, and falls deeper than the true economy. However, as we will see, both are actually motivated and ultimately driven by the media.
Land investing is the truest contrarian investment vehicle I have even seen. To make money and survive the long term, one must be willing to operate 180 degrees opposite of the prevailing investor attitudes. This means sometimes buying when everybody else is selling and sometimes selling when everyone is buying. Additionally, when the newspaper headlines are screaming a message of doom and gloom, it also means standing strong and not panicking. Finally, it means when everyone is touting the market like there is no tomorrow; always remembering that there is one.
In a recession, there are no buyers; therefore, the prices drop dramatically. However, when is the best time to buy? Should you buy during a recession when everybody is fleeing the market and prices are plummeting?
Nothing is gained by buying too early. Therefore, since time is your biggest element in the investment yield formula, how do you determine when is the right time to buy?
Back in the early 1990s, I concluded an interesting research project I would like to share with you. Using the information we have just discussed over the last couple of columns concerning economic and real estate cycles, I applied some basic technology I learned from the best-selling book “Megatrends,” by John Naisbitt. In “Megatrends,” an interesting premise is set out for analyzing the public mood and changes. Mr. Naisbitt points out that the front page of any major newspaper, over time, is the pulse of that community.
In other words, since a front page has a finite amount of space, the publishers must put on that front page what they think their readers will be most interested. He points out that you can actually conclude the major topics and issues of the day simply by surveying the headlines of the front page during any period. For example, in the past, front-page issues have been Obamacare, Trump’s presidency, North Korea, ISIS, tax reform, the stock market, etc. The point is simple: If a publisher is any good at reading his audience, his front page will reflect their interests and their concerns.
I borrowed this idea, moved it to the front page of the business and real estate sections, and started to see if I could find any patterns that paralleled the real estate cycles.
The exciting news is that one definitely exists. Again, because I had immediate access, I am going to use the Dallas area as an example. In doing this research in my office back then, we compiled every article we could find printed nationally concerning Dallas and its real estate market into sets of biweekly files. These included national publications that report on the real estate activity of the DFW community, including the Wall Street Journal, Dallas Morning News, Barron’s, The Daily Commercial Record, Southwest Real Estate News and the outlying local community papers.
What we were looking for in this research was generally the media’s overall moods or attitudes. The front page of each biweekly file set had a cover page that simply stated all headlines of the enclosed articles.
When we looked at these headlines in bulk, we started to see patterns developing. When a recession was in full force, all the press is bad. Therefore, we marked all negative articles with red X’s in its left margin. On the other-hand, we mark all positive articles with green O’s.
One thing I noticed was that the press’ perception is very much like the optimist/pessimist example of whether the glass is half full or half empty. For example, during 1986, it was a raw fact that Dallas’ net office supply was about 6.1 million square feet. Now, this could have been reported in one of two ways. The first way would have been, “Dallas’ office absorption of 6.1 million square feet places it No. 2 in the nations for net office absorption.” The second way would have been, “Dallas’ office absorption is off 40 percent from last year.”
Both were correct because for the previous three years Dallas had leased 10 million net square feet of office space. This set a national record high for any major metropolitan city. Then when it dropped to 6.1 million square feet, that was a 40 percent reduction from those previous record-setting highs; however, Dallas was still the second-highest in the nation.
The latter of these two headlines was chosen. The reason was that during a recession, the glass is always half empty.
If we go back to Dallas in the late 1970s, DFW was experiencing a terrible real estate recession. Therefore, naturally all of the headlines in the papers were red X’s. Then something big happened to reverse the pendulum.
In my next column, I will share with you what that big event was that reversed the pendulum’s swing and what happened after that.