Yesterday there were some rather worrying developments in the market for Euro area bonds, affecting even French and Dutch government stock. This caught the journalists on BBC Radio 4 off guard, including the famed Robert Peston. They quickly fell into the lazy habit of describing the markets as if they were thinking and breathing people, albeit in a plural form, like “Bond markets looked on the Italian government’s plans sceptically and yields rose over 7%”. This formula is usually used to link the movements in market prices to some new information or news event, regardless of whether any such link is actually significant. The idea of this mythical person or people breathing down the the necks of governments is clearly an attractive way to communicate a point. The trouble this morning was that there was no such easy link to make…which led at least one commentator to go a bit apocalyptic, that “the markets” had lost faith in the Euro completely and were expecting it to break up. This was more or less where Mr Peston ended up.
I have always hated this anthropomorphism of markets, which is by no means confined to journalists – market participants clearly enjoy the false sense of power it gives them. But markets are not people, they are mechanism by which buy and sell orders (in this case for securities) are resolved by striking a mutually acceptable price, often by computers these days. When nobody is buying or selling much, and market makers have to quote prices, then indeed human sentiment plays a major part in price movements. The market makers are usually part of a small and social group where collective sentiment can develop and they don’t mind telling outsiders. Journalists can find out what these sentiments are by talking to a couple of people. In this case the anthropomorphism does bear some resemblance to reality.
But as soon as the real money enters the market, then all this sentiment is mere chatter. And it often takes a bit of time for the real reasons for market price movements to emerge. People have to guess, and journalists usually go no further than to tap into the chatter. What moves the money? There are whole variety of things, many which economists would not recognise as rational – like a fund manager simply dumping shares to avoid an awkward situation with a client. Or, sometimes it can be plain errors. Then, of course, with so much automated trading it can simply be the unforeseen interaction of computer algorithms- as happened in the notorious “flash crash” in May 2010.
So what happened yesterday? I don’t know, of course. But the best explanation came to me via the Economist’s Buttonwood column, itself quoting one Michael Derks at a company called fxpro. In essence the Euro zone recapitalision of banks is having some malign effects. The idea was that banks should reserve more capital against their assets, so that they are better able to withstand losses. Reasonable enough (and vital to bring incentives at banks back into the real world, in my view), but banks can comply by dumping assets instead of increasing capital. That is what many banks are doing, and they are choosing relatively liquid government bonds to dump – including those of the French and Netherlands governments, as well as the usual suspects of Italy and Spain. It is a battle to prevent bank ownership being diluted, not a considered opinion on the future of the Euro.
Mr Peston should have known better, and helped his listeners try to understand what was going on, instead simply plugging this lazy and narcissistic drivel Shame on him!