The last few weeks of market jitters have been a bonanza for financial journalists – and not just because it’s given us something more exciting to write about than the usual diet of bids and deals. But also because the financial press has been so institutionally bearish for so long that any hint of imminent financial Armageddon raises the tantalising prospect of being able to utter the four most satisfying words in the English language: “I told you so”. For many commentators, the last few years have been hugely frustrating, as the markets have refused to do as expected. Never has a correction – if that’s what this is (we’re still a long way from the conventional definition of a 10% fall in the market) – been so eagerly anticipated by so many for so long. Perversely, that is one of the main reasons I’m still optimistic.
That’s not because I don’t recognise the concerns of these bears. Many of the most thoughtful and perceptive of these commentators are esteemed friends and colleagues. Merryn Somerset Webb and Bill Bonner at MoneyWeek have been warning about the dangers of the huge build-up of debt in the US and UK for some time and, with the current turbulence, perhaps their time has come. My distinguished Breakingviews colleagues, Edward Hadas and Edward Chancellor, have long shared their view. The newspapers have been filled with panicky headlines, warning just a little too enthusiastically that the sell-off in US subprime will spill over into the mortgage-backed securities market, triggering an implosion in the credit derivatives, leading to an end of the yen carry trade and life as we know it. Meanwhile, investors, who had never heard of any of these things, shake their heads and wonder where it will all end.
But it would be much more worrying if the financial press wasn’t bearish.
It’s when journalists turn bullish that you want to start stockpiling baked beans. Journalists are paid to be sceptical, to be always questioning the conventional wisdom. No journalist should see a consensus without wishing to smash it. And there has been no greater consensus in the financial markets over the last few years than that the global economy is in robust health, inflation is under control and that interest rates will stay low. The City is full of highly paid salesmen, analysts and other boosters, who will tell you the good news. It is up to journalists to seek out the other side of the story.
To see what I mean, look what happens when journalists cast aside their scepticism. During the dotcom bubble you couldn’t open a newspaper without reading credulous profiles of the latest schoolboy billionaire. The press happily reported the latest nonsense from analysts about land-grabs and price-per-eyeballs. The word ‘IPO’ briefly entered the vernacular. The result? The other side of the story went untold, stupid risks were taken, and many people got badly hurt as a consequence. This principle doesn’t just apply to the markets. If the UK and US press had shown a little more scepticism over the Iraq war, we might have avoided
that disaster.
In fact, a bearish press may be one of the most bullish signals around. So long as the bear case is being heard, there is a chance risk is being priced correctly. But that leaves me with an existential dilemma. Does my optimism make me temperamentally unsuited to my trade? I like to think not. Perhaps it makes me a natural contrarian.
Why the City should thank the free press
Of course, press scepticism can really get up the noses of a lot of people in the City. Last week, I had an angry phone call from one of the most powerful figures in the City, objecting to my coverage of a recent deal his bank had led. Never mind that the market proved me right and him wrong over the attractions of this deal. He clearly objected to my refusal to be spoon-fed by his bankers with their customary optimistic view of their client’s prospects. No doubt he believes a compliant press – or better still, no press at all – would better suit his firm’s interest. That’s a view clearly held by many hedge funds and private-equity firms in the City, most of whom are reluctant to engage with the press at all.
But they could not be more wrong. London’s financial press is one of the reasons the City is so successful – and these bankers can make so much money. With so many banks tied up in deals, often the press is the only source of independent comment. Remember, it was a journalist, not an analyst, who first exposed the fraud at Enron. In fact, the press provides a vital public service, essential to the proper functioning of the markets just as it is to a democracy. People in the City often point to London’s light-touch regulation as one of its chief competitive strengths. But London couldn’t have such light touch regulation without a free press. The press keeps the markets honest. Sure, the press occasionally gets it wrong, or can be intrusive, but that’s a small price to pay for those who benefit most from London’s remarkable success.
Simon Nixon is executive editor of Breakingviews.com