Thursday, July 19, 2007

Why so much economic and financial 'news' is crap


I shouldn't speak badly about the practices of my former employer.

So I'll let Andrew Charlton do it for me.

Below the fold is a telling extract from his just-released book Ozonomics.


Here's a highlight:


I have to admit that while I understand the meaning of
these market movements, I can't explain their significance,
because ... well, they don't seem to be very significant at all.

I can't imagine many people watching the news from their
living rooms would be thrilled by minor movements in
the price of gold. Maybe a few traders working in financial
markets are excited by this stuff, but they have their own
sources and don't rely on the six-o'clock news for their
pricing information. At least, I hope they don't.



Here's the full extract, in wonderful prose:


"On the television screen in the corner of our living room,
a doe-eyed presenter is reading the economics and finance
news, animatedly reporting that the price of gold has risen
two cents today.

'Huh?' Jo sniffs.

The price of gold is followed by charts reporting to day's
stock exchange figures, and an economic pundit is being
interviewed to explain the causes and consequences of these
numbers.

Most days this information passes unconsciously over Jo's
head - perhaps her eyes and ears disengage to allow her mind
to shift focus onto more interesting thoughts. But today she
wants answers, and she presses me for them.

'Does this mean anything to you?'

'Well, yes and no: I reply feebly.

I have to admit that while I understand the meaning of
these market movements, I can't explain their significance,
because ... well, they don't seem to be very significant at all.

I can't imagine many people watching the news from their
living rooms would be thrilled by minor movements in
the price of gold. Maybe a few traders working in financial
markets are excited by this stuff, but they have their own
sources and don't rely on the six-o'clock news for their
pricing information. At least, I hope they don't.

Most normal, intelligent people probably approach these
issues in the same way my housemate does. They are exposed
to a huge amount of economic information, but it doesn't
sink in. The reason, as far as I can tell, is that very little of it
makes sense.

Today, I checked the 'breaking news' section of the website of a
top-selling daily newspaper, looking for exciting
and meaningful reporting of economic issues. Today's
finance headline reads 'Dollar down on jobs data'. The
article gravely reports the apparently troubling news that the
Australian dollar has fallen against the US dollar. Somewhere
on Wall Street in downtown New York, some all-powerful
investment bankers have decided to downgrade our national
worth - and thereby insult us in the great beauty contest that
is the international currency market.

Today's article includes a quote from one of these
ubiquitous financial-sector pundits. He confidently explains
that the dollar's drop is due to 'soft employment numbers'
(by which he means that more people were looking for work
this month than last month) and 'ambiguity in commodity
prices' (by which he means that he doesn't know the price
of wheat and metal and he's worried that nobody else does
either). The pundit gravely notes, 'These are important
numbers, there's no question about that.'

By how much has the dollar fallen today, you might ask?
Well, before anyone folds up the deckchairs and declares a
banana republic, closer inspection of the article reveals that
yesterday the dollar bought 73.39 US cents, and to day's
'fall' brings it down to 73.31 US cents. This is not the kind
of plunge that should cause you to cancel your New York
shopping vacation - it is less than one-tenth of one cent.

Given that the Australian dollar oscillates frequently in
a thirty-cent range,3 one-tenth of one cent is not a fall of
very much importance at all. In fact, it's almost completely
insignificant, and is certainly completely unworthy of the
column space it occupies.

Even more confusingly, that piece of 'breaking news' was
posted at midday, but when I scroll down the page I find
another alarming headline posted at 7 am that morning,
with the title 'Dollar up as $US retreats'. It turns out that
before the Aussie dollar went pear-shaped in the afternoon,
the newspaper was reporting on its triumphant rise against
the US currency that morning. The earlier article quotes yet
another financial pundit, who perceptively explains that the
reason for the rise was a 'stronger fixed-income market in
the US'. Again, before anyone gets too excited, the size of the
change was almost the same -less than one-tenth of one
cent - and, as I had already discovered, the good news had
been reversed by midday.

Scrolling back through the breaking-news archive of the
last few days reveals that the dollar has been on a veritable
rollercoaster ride - some news is good and some, is bad,
but all these urgent stories, on closer inspection, are utterly
insignificant. Two days previously the pessimists had been
vindicated by the headline 'Dollar closes weaker', and the day
before that the champagne corks had popped to the tune of
'Dollar rises off lows'. It's enough to make concerned readers
chew their fingers to the bone and tear out their hair.

Well, it would be, if any of it mattered - and if anyone
cared. But fortunately, non-economists take no notice
because they don't know enough about financial markets to
make any sense of this information, and economists know
enough to realise there is no sense in it. This week's financial
headlines are a waste of everyone's time. They look like news
and they sound like news, but they're not news.

The day-to-day movements of stock prices and currencies
don't tell us much about historical or future trends, and are
fairly likely to be reversed tomorrow and never remembered
again. These financial news segments tend to be so boring
that networks usually scramble to follow them with visually
emotive stories about fluffy cats stuck up trees - presumably
to wake their audiences up. It's the kind of news that
makes people feel informed without really conveying much
information at all.

Economic information like this isn't informative.
It floats around us every day like space-junk, orbiting
in perpetual, directionless motion: up and down, back
and forth. It has a mesmerising rhythm - it's the
financial equivalent of elevator music.


Australia has some great economic journalists, but
their insights are easy to miss among the frenzied crossfire
of daily information about the economy. It's hard to sort the
news from the noise, to uncover which headlines are genuinely
important to our daily lives and which are merely the flotsam
and jetsam that media outlets raft together into recycled news
and churn out to fill their columns and segments."



4 comments:

phil said...

Well,it means that short term thinking is actually over a shorter term than we care to admit.

meika said...

It's just to make sure everyone know the price of everything and the value of nothing.

I remember being in Britain 20 years ago and a friend saying that there was all this economic drivel suddenly being put on the airwaves in some Thatcherite "but are they one of us" type thingummy, and house prices he said, every just talks about property all the time, then about ten years ago or more it started in Australia, meaningless drivel the gold price etc, oooh, its winter and it's really cold in Hobart today, goodness gracious me. I used to call property talk the Sydney Conversation but its nationwide now. I even do it. Is my life any better for it?

We used to joke about tractor production making the news in the former Soviet Union, and so many left shoes made today, and now look at us. It's propaganda. It's pap.

So who is it we hate today, Oceana? China? I forget, but I do know that Telstra closed at 4.69.

Meaningless drivel.

Dave Bath said...

There's "business and finance" reporting, but that is merely a small part of "economics" which is about the distribution of resources. For myself, there is NO interest in BRW or Fin Review, but LOTS in The Economist (and the associated EIU), which have demonstrated their interests in the true scope of economics by developing things like the Global Peace Index and talking about the outcomes of economic policy and activity in human terms.

BAM said...

Ups and downs in the dollar is watched everyday by farmers I know!Neverthless good economic journalists to interpret most of the figures we hear day in day out are invaluable if we are to be enabled to remain involved as good citizens of a democracy. Our grasp on a democratic society is becoming tenuous. All these issues need to be considered in this light.

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