"Des waerelds doen en doolen, is maar een mallemoolen,"

"Des waerelds doen en doolen, is maar een mallemoolen," engraving from Het Groote Tafereel der Dwaasheid, 1720.

"The actions and designs of the world go round as if in a mill." South Sea bubble financial crisis.

Wednesday, August 22, 2012

The increasing interdependence between financial media and market participants

The picture above is of Jim Cramer, a financial news anchor, host of Mad Money. The one beaten up by  John Stewart  there and there. The whole clash is a must-see and is about the transmission of information. On one side, the financial news industry in the US and probably to a lesser extent in Europe is simplifying the complicated intricacies of modern financial sectors. Because educating wouldn't be good for ratings. This is about the diffusion of financial news to the wider public with the mask of entertainment. But the relationship between media and finance at the beginning of the transmission belt is problematic too. Oberlechner and Hocking studied empirically the linkages between financial journalists and analysts: 

More than two thirds of journalists agree strongly or agree that market participants can influence news providers (87%), that news media and market participants have become more dependent on each other (75%), and that the immediate reporting of events has significantly gained in importance vis-a-vis background analyses (67%). Sixty three percent of financial journalists agree that they depend on market participants to interpret news. More than half of the journalists agree that new technology has brought along an increased risk to report unverified news (59%), and that speed has become more decisive than contents in financial news reporting (55%). [...] Foreign exchange traders and financial wire journalists mutually rate each other as the most important information source. The most important informa- tion sources of wire journalists, their personal contacts at commercial banks, are also the main customers of the financial wire services. Consequently, information of the news services often consists of trading participants' perceptions and interpretations of the market, which are fed back to the traders in the market. As a result, a highly circular cycle of collective information processing in the market emerges. The finding that for non-wire financial journalists, the wire services are the most important sources of information further enhances this circularity of information gathering and disseminating in the foreign exchange market
 More photos of Jim after the jump.

Sunday, August 12, 2012

Central banks and the media

A new study by the Swiss National Bank compares the two ways central banks have to reduce financial markets overreaction to their statements: "disclosing information to a fraction of market participants only (partial publicity) or by disclosing information to all participants but with ambiguity (partial transparency)". 

I would love to be able the comment on the mathematical formulas in it or, even better, refine it...but...

How to finance the missing middle

Debt or stocks ? Banks or equity markets ? As France fears for its petite et moyennes enterprises, whose access to bank loans is going to be more expensive, the chief executive of the London Stock Exchange Group insists that even small entreprises could be financed through equity. The biggest problem of financing SMEs is informational asymmetries, as the reason why they are financed by debt where the interest rate of the loan function as a risk management mechanisms. So Mr. Rollet seems to think simple disclosure would be enough:
The cost of satisfying disclosure requirements must be reduced, as well as the time required to bring an issue to market. A shelf registration system would allow companies greater flexibility, accessing the public funding markets while satisfying all applicable disclosure requirements. The recent US JOBS Act – Jump Start our Business Start-ups – is designed to reinvigorate access to equity funding for entrepreneurs. The UK needs its own JOBS Act.
He misses two points, to my opinion: 

1. He seems to equates information with knowledge. SMEs businesses are blurry and banks are reluctant to finance them if they do, the costs of capital - the interest rate - reflect the uncertainty inherent in any young business. But disclosing more accounting data or being more transparent will not reduce this uncertainty. The right equity investors for SMEs are the one capable of manufacturing knowledge with information. 

2. And that is why SMEs need finance accompanied with management and experience. So I don't think that the "hands off" approach to equity finance of SMEs through stock market that Mr. Rollet advocates is the right one. The "hands in" approach to private equity though, might be much more appropriate. New studies (NBER, University of Chicago) show that private equity contributes greatly to employment through SMEs growth.