Sunday, 24 March 2013

Brevity is the soul of wit - how Twitter changes research

140 characters are enough to make a point, but only if you avoid wasting words. The age of the tweet has arrived and I welcome it with open arms. Social media commentary is already having a profound impact on journalism, and I suspect its impact will be felt increasingly in investment bank research too. In my life, that is already the case.

The internet and social media accelerate the speed at which information and views are transmitted, running the risk that facts aren't checked, gossip is spread and the quality of reporting deteriorates. At the same time, we have seen the emergence of a thought-leading 'commentariat' whom everyone respects, or at least listens to and who now have a far wider audience than before.

London coffee shops  used to be where news and opinion spread. By the time I started work, opinion-sharing and forming, at least in financial markets,  had moved to the bars around Cheapside. And the press were meeting in bars off Fleet Street. But the City spread to Broadgate and Canary Wharf, the journalists were scattered to the four winds and licensing laws and commuting encouraged us all to go home instead of the pub, anyway.

At the same time the financial exchanges we worked in closed and dealing rooms became quieter as more trades were undertaken electronically. With the increased 'sophistication' of the instruments we trade, we surround ourselves with great banks of screens that cut out conversation with all but our closest neighbours. The modern-day Master of the Universe is an increasingly solitary soul, working long hours, doing deals, and returning home.

Social media are filling the void that was left as we abandoned social intercourse. On Twitter, we engage in debate about the world, much as one would in a bar after work, but without collateral damage to livers. The risks are clear: When someone tweets something, it can be accepted as being true even if it isn't. Malicious gossip spreads like wildfire and the only form of quality control is peer pressure. High quality factual journalism is no longer valued (or at least no longer paid for). 'Opinion' may or may not be objective. If you rely on social media for news and don't check facts, you're a fool. But as well as allowing us to be  immediately notified of the latest thoughts of the intellectual great and good, Twitter brings us any number of very clever people offering 150 character analysis of the events which shape our world.  Better still , many of them are writing thought-provoking and detailed analysis on websites and blogs, to which they kindly attach links. How cool is that?

The press has been quick to respond, largely embracing Twitter and other social media.Financial markets too, are increasingly embracing the new media. What we rather pompously call 'sell-side research' is grappling with the issues and  lagging behind. But it certainly can't ignore what is happening.

When I first started writing, I produced a weekly telex comment for clients, progressing  to a printed piece which was sent in the post. Then there was email, then there were websites and then there was Elliott Spitzer and large-scale tightening up of the rules surrounding how "research"could be distributed.

The tightening up of standards and rules surrounding research published by investment banks, has left a gap which social media are filling enthusiastically. A traditional research note on the impact of events in Cyprus this weekend can't clear compliance much before 9 a.m on Monday morning, too late for markets in search of instant gratification. But then, what market participants want isn't a traditional research note, with 'buy' and 'sell' recommendations carefully vetted and caveats strewn around like confetti. "What has happened, and what does it mean?" is the first question, followed by a deluge of follow-ups "yes, but what if...." and so on.

Whether you are  a trader, a salesperson, a fund manager, a Master of the Universe or indeed an interested by-stander,  what you want is information, opinion and debate and Twitter gives it to you. For the traditional common-or-garden sell-side analyst, this demands a change of approach. The public dissemination of non market-moving information and broad macro-economic views should not be subject to restraint by regulatory authorities. At the same time, the analyst does not necessarily know for sure how markets will react to news. In the instance of Cyprus' woes, we have all known for a long time that a bailout was needed as a result of losses incurred by over-leveraged banks as the Greek crisis deepened. Whether the terms of a bailout will cause further risk aversion and contagion is a matter of opinion, and the best way to establish how the mood in financial markets will evolve, is to express an opinion and open it up to a wider debate.

So 300 years ago, I would have headed for Covent Garden this morning, with my top hat and my cane, in order to sound out the mood of those I respect. Today,  I am more likely to go to Starbucks in Crouch End before returning home, coffee in hand to shoot the breeze on-line. I'll be doing so in a personal capacity, and I'll be wary of the need to comply with regulations surrounding the publication of research that were written long before the social media revolution happened, but just because my business card says 'Strategist' rather than "Middle-aged bald bloke trying to figure it out" doesn't mean I can do without the debate.

Sunday, 17 March 2013

Cypriot precedents

The news that Cyprus, in return for an EU-led bailout, will impose a debt for equity swap 'haircut' on bank depositors, is  reverberating around the blogosphere and press. There is plenty of outrage on offer, though in fairness viable alternative proposals were thin on the ground.

This is the first time in this crisis that a large proportion of the cost falls on depositors, rather than tax-payers. That creates a precedent or two, though whether it is 'fairer' for a country's taxpayers to foot the whole bill, than for some to be borne by bank depositors, isn't completely obvious. 

The problem, as many people understand, is that Cyprus' banks invested too much  in Greek Government debt and lent too much money in Greece.   Since the value of all Greek  debt fell dramatically, the Cypriot banks lost sums that were too big to be covered through their own reserves, or those of their Government. 

Investment by Europe's banks in European government bonds was once thought to be a 'safe'  thing to do with savers' and shareholders' funds. But the term "European Government Bonds" was and still is misleading. Europe doesn't issue government debt. European Union member countries do. And they are not necessarily backed by the rest of the EU. Greece's debt certainly wasn't.

In the short term, I suspect that the most exaggerated  fears surrounding events in Cyprus will not materialise. There may be queues at cash machines this weekend but the Euro won't collapse and   we probably won't see all that much contagion across Europe's banking system. One of the reasons Europe is in recession is an excess of savings, and most of that excess will remain in the banking system.

Major change is however already under way as a result of this crisis. Cross-border investment and cross-border banking have been hit within Europe.  A French or German saver is already more likely now to keep his/her savings in a large domestic institution. And that institution is more likely to invest that money at home.  In financial terms, Europe is de-unifying from the bottom up.

There has always been a solution to this problem, and it has always seemed unpalatable to much of Europe - jointly issued and guaranteed Euro-bonds. If Europe wants to avoid gradual splintering of its financial system (which would leave a loose but inefficient  structure of regulation and bureaucracy surrounding one-size-fits-all currency) it is going to have to move closer to a Federal structure with a Federal central bank to control the creation of money and a Federal debt issuer to raise money for its members. Europhiles who don't want to go that far need to work out where they want Europe to go.