Outside the Box

Money, markets and media mangling

We’ve all seen this kind of thing on the TV. Smiling news anchors telling us that “the stock market just reached a new all-time high”. Or frowning ones telling us that “the currency fell 1% today”. Or disgusted ones telling us that “Megacorp Inc. has reported billions of profit”. But why are these matters of money and markets seen as good or bad in media world? Often the exact opposite is true.

Why are high stock prices almost always reported as a good thing?

They could be a sign of a strong economy and fast growing corporate profits. But equally they could be a sign that market valuation multiples are stretched.

That’s another way of saying that future investor profits are likely to be disappointing. Or that a market crash is more likely. When something is priced for perfection, imperfections are sure to show up soon enough.

High stock prices are good for sellers looking to cash out. Say the retiree who has been saving for 30 years and wants to splash out on a yacht.

But high stock prices are bad for the middle aged professional that’s still saving for the future. Buying high will more than likely suppress future returns. A market crash, or just a market with relatively low valuation multiples, offers much better buying opportunities for anyone who’s still building up their retirement fund.

So why does the media seem convinced that high stock prices are a good thing? Clearly, it depends who you are.

What about currencies? “The dollar gained 1% against the Japanese yen today.” Happy face. But why?

A stronger dollar is great news for importers of foreign goods. It means their purchase costs fall in dollar terms, meaning fatter profit margins or selling more for a lower dollar price. It’s also good for anyone who fancies a foreign holiday, as the price of Parisian hotels or Mexican beach resorts fall in dollar terms.

But exporters of goods and services will suffer. Their local production costs, such as wages, just went up relative to foreign competitors. Or how about the owner of the hotel that specialises in Chinese visitors to New York? Business will drop off as the US becomes a higher cost place for the Chinese to visit.

Currency moves create winners and losers. So why is a falling currency seen as a bad thing by the media? Why is a rising currency good?

Here’s another example of the media at work. “Megacorp International reported full year earnings of $10 billion today.” Grumpy face. And a big stress on the word “billion”, to emphasise that it’s a “big number”.

That’s because Megacorp is a bank, or an oil company, or a big food retailer. In media world, Megacorp is assumed to be ripping off customers at the branch, pump or supermarket.

Cue interview with representative of appropriate, single issue pressure group. After all, how else could Megacorp make billions of profit if it wasn’t conning its customers?

But so what? What if Megacorp has $200 billion of net assets? In which case it’s making a pretty pathetic return on capital of just 5%. If there’s any bad news it’s for the managers and shareholders, not the customers.

How about this one, which is topical in a certain island nation in the north west of Europe:

“The Brexit vote is the biggest single driver behind the worsening outlook for the public finances. The referendum vote will add £58.7 billion in additional borrowing over the next five years.”

So reported the Financial Times on 23rd November. The British Office for Budget Responsibility (OBR) had just published its latest forecasts for the country’s economic outlook. Projected borrowing was up when compared with the last incorrect forecast.

Most of the British media reported more or less the same thing – that the UK’s exit from the EU will “cost” around £60 billion. That makes for a good headline. It’s a “big number”. But it misses the point in several ways.

First of all these are forecasts, and even the OBR admits that they could be way off the mark. The actual bill could be much more or much less.

Second, it’s less than 4% of the current debt of £1.6 trillion. Or about one year’s worth of the current budget deficit. No biggie in the grand scheme of things.

Third, it actually doesn’t matter if the actual figure ends up a few billion – or even tens of billions – higher or lower. That’s because it takes no account of the future savings of not being in the EU.

If the UK remained a member of the EU, it (or any other net contributor) would have an annual cash payment to Brussels that grows over time. That increasing payment would continue from here to eternity. That’s known in financial jargon as a “growing perpetuity”.

Finance has a way to value that, if imprecisely. (For those who like formulae, see more here.) Like all valuations it relies on subjective assumptions. In other words it’s not perfect. But that’s not to say it has no use.

Reporting of how much the UK spends on the EU is highly politicised. But the number that counts is the UK’s net contribution. It was £8.5 billion last year, according to Full Fact. That’s all the money paid to Brussels less all the money paid back to the UK.

Using that figure, and some very conservative assumptions, I valued the UK’s growing future payments at £285 billion in today’s money (or 33.3 times the 2015 payment). In fact it’s most likely much more than that.

Surely borrowing £60 billion extra over the next few years to get out of a £285 billion liability (or much more) is a great deal?

The confidently reported “cost of Brexit” is not just in a different and smaller ballpark to the potential benefit. It’s playing a completely different sport. It’s like providing pages of coverage about the British baseball team (is there one?) and ignoring the cricket team.

Of course there’s still a lot missing before we get the full picture. No one yet knows whether Britain’s economy will suffer or prosper outside the EU. But leaving out such a huge benefit – not paying the EU – from the coverage, and the public debate, doesn’t help anyone.

Even the journos at the Financial Times – a paper that’s meant to cater to the financially literate – seem to have forgotten the benefit side of the ledger. One can only assume they have an agenda to push…

Don’t forget about the housing market

Then there are house prices – a perennial favourite of the media. Higher house prices are universally seen as great news. But again…why?

Mortgage-free pensioners, kicking around in now largely empty family homes, can benefit. They can sell up, downsize, and release capital for their retirement.

But young professionals, already burdened with student and other debts, will struggle to scrape together a big enough down payment on their first home. Or to buy a bigger one to house their expanding families.

If prices are high, their mortgage will be necessarily huge. They could be paying it off for 40 years, instead of the 25 year burden that their parents faced. High house prices are bad for such people.

The point of all this is not whether media reports on money and markets are good or bad news. It’s that the reporting often misses at least half the point. And what’s good for one person may be bad for another.

Remember this next time you see a TV anchor smiling or frowning about the latest economic and financial bulletins. You don’t have to share their mood. Instead you should question it.

The reporting of money and markets is often mangled by the media. It not so much fake news as flawed news. Successful investors need to remember that.

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com


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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.