Thursday, 21 May 2009


Today I am going to write about financial markets and how the press reports financial news.

Sadly, I don’t write much about the markets because I need to be careful about what I say and what message I convey. Conduct of Business Rules and FSA Approved Persons, etc. There are far too many conmen out there and I cannot give you advice that suits your personal circumstances.

If you follow the news, today you will have read that S&P, the credit rating agency, has released a note on the outlook for UK sovereign debt.

The note was received in Bloomberg terminals at about 0924h.
The note is not available to the public but the BBC has a half-decent article about it.

In the minutes just after the announcement, GBP went down against both EUR and USD.

Immediately, the newswires went mad and the media reported that the decline of GBP was a consequence of the S&P note.

Even my favourite financial blog –for now- reported the story at 1000h:

I want you to look at that Bloomberg graph very closely. Notice that the time in the screen is 0928h, merely 6 minutes after the note release, with the post being published at 1000, just about 30 minutes after the news became public.
The graph only covers the previous 12 hours trading.
At 1008h, yours truly humbly suggests to the journalist to change the time period of the graph to 2 days.

It would have shown something like this:

Yet, this did not stop the FT or the vast majority of the media to make a bit hoo-ha about how the markets were reacting very badly to the S&P note.
Even FT Alphaville (a blog for the pros) kept publishing posts about it, despite my best attempts.

So, in the immediate aftermath of the press release, GBP went down about 1.8% vs USD but rebounding back very quickly so that 2 hour after the press release, the decline was only about 0.8%. Still, it was somewhat above yesterday’s closing price.

And this is the problem with financial journalism: market noise is mistaken as market reaction and since the market just produces noise 95% of the time, lots of effort, time and energy are spent trying to concoct explanations about events that are, the vast majority of the time, just random movements.

Yesterday, Wed 20 May, between 14-17h UK time, GBP went up about 1.5% against the USD, but there was no S&P release or other news item to justify an explanation.

Check out this graph:

As I write this at 2115h UK time, not only has GBP not reacted negatively to this morning’s S&P note, but is actually higher than when the note was published!
And the questions is: will this “market reaction” generate as much media frenzy as was unleashed this morning and early afternoon? Probably not.

The problem I have is thus:
I would also expect the tabloids, or The Times, to have a go at the Government publishing misinformation.
I fully expect uninformed, malicious and politically-biased numpties like Guido Fawkes to post something like “S&P downgrades UK government debt” [link].

In fact, nothing of the sort has happened. Not even close.
S&P has merely updated the market saying that it sees the outlook for the UK economy as negative, and that it is worried about the state of public finances and public debt levels.
When I read the note this morning, the first thing that crossed my mind was: “tell us something we don’t know!”
So, to recap.
+ It is a revision in outlook.
+ Before a downgrade happens, first an issuer (normally) is placed in “negative watch”.
+ After a bit of time in “negative watch”, then the downgrade follows.
+ This has not happened today.

As for the S&P’s record on analysing public (or private) finances, I refer to the sub-prime mess, the CDOs, Enron, Parmalat, etc, etc. Just for the record, S&P did not alter its outlook on UK debt during the ‘90s hyper-inflation years, when debt as a % of GDP was slightly higher than today’s levels.

Notwithstanding the huge problems in the economy and the massive amounts of household, government and, particularly, corporate financial debt, today’s events and news coverage is a wonderful example of what Taleb describes as noise and the narrative fallacy.

Somehow, we have built a system of news coverage where there is an obsession to attach a narrative to events, to seek causality regardless of the logic or empirical proof behind it.

I have only been in this business for about 7-8 years, but being a sceptic has helped me a long way to differentiate between reasoned analysis and logic and crap. Today was a lesson on crap journalism by a lot of media outlets.

If we cannot get a FT or BBC journalist to expand a simple graph to show that, actually, nothing has happened compared to yesterday's trading session, can you imagine when they have to explain something mildly complex to the public?

For the record, I attach below GBP-USD rates for 5 days and 3 years.

Update 11/06/2009

I have officially given up on AV: what a bunch of twats.

Unable to cope with any criticism of their flawed narrative logic, they removed one of my comments on the whole GBP/USD rates saga.

And today, in a trivial story about the signings of Kaka and Ronaldo by Real Madrid, I get yellow-card and then blacklisted for no reason that to write something that is public record –and because some arsehole Real Madrid took exception to it. What a joke.


trabizonspor said...

Dude, can you get an excerpt or something into your Atom feed? That way we'll know whether the rant is going to be sensible or cataloony.

Rab said...

There is no easy way to write this: I am struggling with Atom feeds and the like, I feel suitable ashamed.

Any technical hints would be appreciated even if the come from a nutter like you, such is my predicament

Graeme said...

Rab, go to your configuration tab in your blogger account and choose the site feed option. There you have a choice of permitting a full feed (all of it appears), a short one (more or less the first paragraph), or none.