“News” and “stories” in the market

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Published: January 22, 2010

I”m always annoyed by the blather about “stories” in business and markets media. I don’t mean real stories about something. I mean the “stories” market prognosticators are talking about when they say they “like the reflation story,” or they “like the cap-ex story,” or they like the “IMF Greece bailout story.” You hear this kind of stuff all the time on CNBC and other frat-boy style business media.

These aren’t stories. They are theories. Such as big amounts of government cash will reflate the economy, or (and this goes back to early 2007) that long-tightfisted corporate giants around the world would boost their capital expenditures in the coming year, or (and this is happening today) that the IMF will loan money to Greece and save that country from defaulting and affecting the Euro. But they’re the sorts of provisional theories that analysts often make their investment decisions and recommendations on.

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Something that’s a little scarier is the misuse of the word “news” for things that aren’t news. I’ve noticed this phenomenon a few times in recent years: forecasts of economic performance (often based on “stories”) referred to by others as “news.”

Here’s an example of that I heard at Manitoba Ag Days in Brandon this week: An analyst referred to general analyst predictions of Canadian economic growth in 2010 of three percent and 3.3 percent for 2011, then said “So, some pretty good news in terms of the economic front.”

Those forecasts aren’t news. They’re guesses. Even if generally held. I suppose you could bend the word “news” to cover just about anything, but I’d like to think the word “news” refers to things that have a real impact. In this case, if it was being argued that these widespread forecasts for gentle economic growth were having an effect on the markets by keeping prices rising, fine. It would also be news if someone came out with a divergent opinion and that moved the market. The market being moved by a forecast is news. But this averaging of analysts’ outlooks was being held forth as if it was news itself, as if it truly was the shape of things to come. That, to me, is a dangerous blurring of the line between extrapolation and data and a common cause of so much of the mispricing of assets in the marketplace. Not just is information and knowledge imperfect, but understanding of the difference between fact and speculation is imperfect too.

The danger of this can be seen what happened to both commodity and equity markets between 2005 and 2009. As this presenter said, the commodity surge “was believed to be a fundamental shift up in the demand curve for commodities.” As the world economy deflated, commodity prices dropped “as demand shifted down.” Also, of course, crop production increased. But there we have it, the problem: so much of what we build into our supply and demand curves is future-looking projections based on the theories we call “stories,” and which can ravage those S and Ds when they prove to be bogus stories. Wise analysts know they are making a pile of assumptions when erecting any S and D framework for a commodity or market, and they often point out their assumptions and the limitations of their model. But too many economic analysts rely on a mechanical understanding of the markets and present iron-clad forecasts that are far less solid than they sound. They need numbers to plug into their machines and don’t like to dwell on the fact that much of what they’ve built their castle upon is no more solid than the sands of “stories” and “news.”

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Ed White

Ed White

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