Discussing the news coverage of the Argentinian president Cristina Fernandez’s nationalisation of YPF, the former state oil firm, I was reminded of why this blog is named Sell On News. The news in much of the mainstream media is a lot of things, but news it is not. The Economist, that last bastion of the faded glories of the British Empire, weighed in with some predictable Argentina bashing, announcing that the president had sacrificed her country’s relationship with its biggest foreign investor to satisfy her hunger for cash and nationalist symbolism. The only surprise was that the headline did not have yet another play on “Don’t cry for me Argentina”. The editors must be slipping.
What outraged the Argentinians is how little of the reasons for Fernandez’s action were reported. They pointed out that Repsol, the Spanish firm, had never paid tax and had an appalling environmental record. They claimed that Repsol had only 25% of the equity, not the 51% reported in The Economist (remorselessly getting its facts wrong is another badge of honour for The Economist; it seems authoritative right up until the moment you actually know something about the subject). But of course that is not the story. The story is that Latin Americans are crazy, and here we go again.
There are probably good reasons for criticising Fernandez’s actions, at least at the tactical level. It sends a bad signal internationally and she was no doubt playing to the electorate (as if politicians the world over ever do anything else). But the crucial point here is that the arguments in favour of her actions cannot be found anywhere in the English speaking media. Because it is not “the story”. The story is that Argentinians are clueless. One is reminded of that joke that the media never lets the facts get in the way of a good story.
It is stories that rule the financial markets, as well. Investment advisers are quite willing to never let the facts get in the way of some more brokerage fees. Get enough of them, and you have enough to move markets and the story is self fulfilling. Reading the story of the markets correctly is one of the keys to good investment. The head honcho character in the film Margin Call played by Jeremy Irons says he is top dog for one reason only: to hear what the music is playing as the game of musical chairs go on. He announces that he hears nothing and the job of dumping all the securities begins, causing a market collapse. Markets are an iteration of human behaviour and humans are moved by stories and myths.
Not all investors take that approach, of course. So called value or fundamental investors are effectively saying: “the short term story of market sentiment is either false or so much noise. What we should do is analyse the company’s financials closely to see behind that story and get to the truth”. The problem with that is that the financials are a story with numbers, and an historical one at that. They do not really predict anything more than the past. Little surprise that value investors do not fare much better than other types of investors. What really matters in the end is allocations amongst different asset classes, and that is driven by the macro-economic story.
Much mainstream economic analysis is of the same stripe. It purports to get behind the story of investment behaviour to the “real numbers”. Again, they are historical and in themselves a type of story. And the quasi-scientific arguments are always based on either a reversion to a mean or a rebalancing of things that are supposed to balance (such as government budgets or trade balances). Circular arguments, in other words.
Blogs like MB make a contribution because they try to interrogate the stories more rigorously, although they hardly escape the tension between stories and reality. Because no-one escapes. We are all enmeshed in stories, it is what we are. Even the algorithms of high frequency trading are a type of mathematical narrative. The only thing that changes is how the stories are told and who tells them.