What is the bad news?

151000 work positions were added in the US last month, missing the estimate. The number of jobs created in July is 271000, so the economists forecasted 180000 jobs could be added to the economy in August. The jobless rate remains at 4.9 percent for three months in a row. Missing the estimate could be a piece of bad news; however, I do not really view it as bad news. Yes, the estimate was missed; however, the news of missing the estimate should be expected, as the current unemployment rate is historically low already. It is not just my opinion, the US stock market index turns green today, as S&P 500 is up by 0.42%.

What is really bad news for the markets as well as the economy? The worst news has the lowest probability to happen. If something bad has 50% chance to happen, then roughly half of the people can see its coming and prepare for its coming, which means only around half of the people will actually lose. Such probability is acceptable. However, once the probability decreases, for example, the probability drops to 1%, maybe there could be 1% of the population wanting to get ready for its coming, fewer then 1% of the population would actually get themselves ready, due to the pressure from the mainstream (the state of 99% probability), then when the event with 1% actually happens, much fewer people are actually preparing for its coming and the consequence to the whole society could be very damaging.

In the past, we often see that some economists and othe experts saw the coming of the financial crisis before it actually came, but it seemed the majority of the financial sector did not see its coming, especially all the big investment banks had suffered huge losses in the last crisis. Did they really know nothing about the coming of the financial ciris? I certainly think at least some people in the industry did know the danger of what they were doing and this group of people might be larger than what we expect. Why did they speak out about the weakness in the system? The answer is simple, the risk was too high for them to speak out about the weakness. Imagine if they talked to their investment banks that the banks should short mortgage-backed securities and collateralized debt obligations, firstly it was not easy to stop the trading immediately, secondly the crisis could come later than their expectations, which could let the banks doubt about the credibility of their warning, thirdly if the crisis did not come, then it could cost their careers. However, when they did not warn their institutions, and the crisis hit the industry, they could blame each other, and some might have to leave their jobs and when the economy recovers they can come back to their previous positions. Therefore, the best strategy for them is not to warn the institutions about the danger with a very small probability.

Overall, the really bad news is often hidden inside the market and whispered by a small group of people but never has been spoken out to the public or even their employers.