Facts or Conjecture?

The social media epidemic detracts from the real facts and figures of world banking, as Roger Williams discovers

According to surveys of behaviour, people younger than me, particularly those in their teens, twenties and early thirties, do not simply watch television. OfCom studies show the rapid rise in social media activity opening the door to texting, posting and viewing TV simultaneously.

News on social media is written differently from that which appears in newspapers and on websites. On Facebook, news is a teaser. It is structured to grab your attention and make you click on it in a dozen words or less, directing you to a website where a new barrage of advertisements can assault you.

This means that the first paragraph of a story posted on Facebook will tend to the generic rather than specific; you may get the who, but you won’t get the where or when or what. The headlines for a Facebook story will invariably link to other parts of social media.

The viewers’ attention to news and the way it is presented is feeding back into the media itself. Pieces are shorter. Often misleading headlines refer to subjects known to be of high interest rather than what the article’s principal subject matter.

This pervasive infection has spread to the BBC. Some say that the BBC are merely reacting to what audeinces want, but I don’t believe it. A typical 6 o’clock news story might run: “The UK economy is faltering due to the uncertainties surrounding Brexit. Let us go to our economics editor Andy Another…” At this point, the reporter comes on and confirms that, “there is real concern that with the decline of the economy, growth is likely to fall.”

The words here are key: “growth is likely to fall.” Recently, correspondents, reporters and editors have all been wringing their hands about the UK’s slower growth. I’m sure if you do a little poll as I did, you’ll find that most people share these commentators’ concerns. Perhaps you do too.

Be honest when you read this: when you think back to November last year, do you recall that the entire media was reporting was a change in estimates of future growth? These were not actual figures, but they were presented as facts. They came in various forms from the Treasury, the Bank of England and the office of Budget Responsibility.

They all said similar things: that their estimates were wrong and they wanted to change them. In general, the changes were 25 per cent or more.

They weren’t changing them because the actuals had proved different – these were for the future. What no commentator said was that the estimates are always wrong and generally by a large percentage.

Kirsty Allen wrote in the Guardian in January last year: “The Bank of England has painted a brighter outlook for the UK economy this year, with faster growth, lower unemployment and a more modest rise in inflation.

“After further signs that consumers and businesses have shrugged off the Brexit vote, the Bank revised its earlier gloomy forecasts to predict the economy would grow 2 per cent this year – matching its 2016 performance.

“That forecast was above the 1.4 per cent figure that policymakers had pencilled in for 2017 in November. It was also in stark contrast to the sharp slowdown predicted by the Bank and others in the immediate aftermath of the vote to leave the EU.”

The Bank thought 1.4 per cent was wrong, so it increased it to 2 per cent and in November reduced back to the original. The Treasury is even worse; the OBR (Office of Budget Responsibility) is the worst of all. Like everyone else, they are unable to predict the future with any accuracy.

The media, however, does not care that these numbers do not measure anything that has actually happened. It gives its audience no hint that its sources are often inaccurate and poor at making such estimates. I have some sympathy for this decision because, when one reports the news, details like an institution’s long history of making inaccurate forecasts are hard to fit in alongside headlines like: “Bank of England says growth is down” or worse still “A central bank says UK growth is down due to Brexit.”

This is exacerbated by the current situation, whereby the BBC no longer differentiates reporting from editorial. Their correspondents, award-winners like my countryman Jeremy Bowen, no longer report at all. They begin and end their pieces with their opinion.

In some ways, such procedure stops you being mixed up with facts; there are none to be had. Social media adds to the problem too, with its generic headlines, simplistic language, and distain for facts.

As far as markets are concerned, this trend in reporting is very important. Markets move because of broad sentiment and the information consumers take on board to form their opinions. This effect does not take account of the veracity of the information in circulation.

If everyone is misled and forms a similar opinion to their peers, the market responds just the same as if that opinion were based on sound evidence. This can mean that if you understand both the real story and what consumers think about it, you have an advantage.

To gain this advantage and make decisions, you need to try to weed out the estimates, forecasts and predictions and have a base of knowledge so you can assess things.

So remembering that the news is both incomplete and often bias towards what can attract viewers, listener and readers. Brexit can provide a good example. Let’s look at Germany. A powerhouse of industrial production and exports. Compared to the UK, its manufacturing volume is twice the proportion of its GDP. It is the EU’s largest exporter both internally and externally. It is the biggest economy in Europe and it has ‘control’ of the EU.

It also has one of the world’s biggest banks, Deutsche Bank with derivative contracts worth an estimated €$46trn. You have a base of numbers to evaluate just how much this is. It is approximately 12 times Germany’s GDP.

So if you are to be concerned as I am about a breakdown of the world financial system, consider my number one risk, derivative instruments. These are obligations to buy or sell assets.

When Lehman Brothers crashed, it did so because of the derivative instruments created on the back of poor mortgage lending. Many of the derivative contracts that Deutsche Bank has, are Collateralised Debt Obligations. These are securities that repackage individual fixed-income assets into pieces that are re-sold on the secondary market i.e. not by the original creator of the loans. They are called ‘collateralised’ because the assets are being repackaged. They could be mortgages, car loans, credit card loans or corporate debt.

As you can see from your base of knowledge, it is not possible that such a huge sum invested in derivatives can be domestic. Indeed, they come from all around the world.

To make matters worse, they rest inside a bank that has failed its stress test; it has insufficient capital to withstand a shock.  Worse still, the banks in Germany are highly interdependent. Should Deutsche Bank have a problem, Commerzbank, a bank that is already troubled, would also have a problem.

This is the country that wants to move the City and its financial expertise to Frankfurt. Do you, with your base of knowledge, think there is any chance of the City moving there? What will happen to EU banking if they lose the wealth of knowledge of the City of London? It’s certainly worth staying glued to the news to find out

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