Markets have been driven by the belief there is no such thing as bad news, as end users choose to focus on what suits them best, says Anthony Rayner, manager of Miton’s multi asset fund range
We’re not the first to observe the rise of post-truth populism and how public opinion is increasingly shaped by personal beliefs and appeals to emotion, rather than facts.
Donald Trump, Nigel Farage, Brazil’s Bolsonaro and our very own Boris Johnson are all examples of individuals who have done well by exploiting the post-truth world.
Populism isn’t new, but social media is, and this new world has been facilitated in no small part by the social media revolution where, in contrast to most initial assessments, abundant information has not led to cleaner and more transparent decision-making by politicians and electorates.
We’re not going to add to what has been written on this subject but we’re going to draw a parallel to the political dynamics outlined above and the dynamics in financial markets. Specifically, for “facts” think economic data, for “public opinion” think financial markets and for “social media” think QE (quantitative easing), in the sense that it’s also a new ‘technology’ that tends to distort data.
In short, facts are distorted as they pass through a transmission mechanism to the end user. In both cases, the facts are available but the end user chooses to focus on what suits them best.
To illustrate the point, for most of the post-GFC (Global Financial Crisis) period, bad economic news has not been seen as bad news but good news. Poor economic growth data has been received positively because financial markets assume it will lead to more market-friendly QE. For some time, markets have been driven by the belief that there is no such thing as bad news. In a very post-truth way, bad news has, effectively, been banned by central bank QE programmes.
Recently, we saw very poor economic data come out of Germany, with both the German PMI manufacturing and the German IFO business surveys worsening, even though they were previously at multi-year lows. This data adds to the woes for the region but, the same week, the ECB’s Mario Draghi signalled further easing for September. And the can gets kicked…
Without facts, or with the reduced importance of facts, credibility is everything. So far, be it with the recent populists or the central banks, moving to ever more extreme positions, has only added to their credibility and their power. Do facts win out in the end? Post-truth is unlikely to go into reverse anytime soon: parties are on an election footing in the UK, and US elections are next year, while in Hong Kong and Russia demonstrations are increasing in scale. Information is not power, power is how information is manipulated.
Drawing analogies between the way markets and electorates are responding to data is not to suggest they are completely different worlds, far from it. We have been drawing the link for some time now between QE and populism, the conduit being inequality. There might be other similarities too. Populist regimes tend to end in an inflationary spiral as politicians try to buy popularity but, eventually, bad news are seen as bad news. Similarly, many assume the QE experiment will also end in inflation, and well it might eventually, especially if the pressure for fiscal spending to team up with monetary expansion is realised.
In the shorter term, markets will be looking to September, when the Fed and the ECB next meet. Then, they will judge their actions and their communication skills, as without facts there is only the credibility of the manipulator.
