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“I know one thing: that I know nothing”
Never before have these words been uttered by that of a high profile financial market ‘industry expert’. For good reason, of course. Imagine a Goldman Sachs or Deutsche Bank executive muttering these words. They would have their box of personal belongings packed on their behalf. However, the honest truth is that when it comes to predicting the next move in the financial markets or the outcome of various risk events, one knows nothing. One is merely guesstimating.
Financial Journalists Distort Facts
When it comes to reporting on financial markets, financial journalists know even less. The job of a financial journalist is to give background as to why events occur. Whilst many journalists have an array of expertise, they lack common understanding of some of the basic elements of the markets. This through no fault of their own.
Financial journalists are strong in the fundamental reasons as to what, how and why prices move. But, when it comes to the technical reasons, the ‘trend’ is clear: there is a sense of ‘resistance’ toward developing technical abilities. No doubt some publications do a better job than others, but even the paid for subscriptions have a knack for using bogus reasoning, due to insufficient understanding. The biggest fallacy is that prices move higher because of buyers.
Whilst this is factually correct, in essence, there is a number of reasons why people buy. They could be hedging, covering, spreading, etc. Whilst this is technical jargon it is of paramount importance to future price direction. If you wanted to have the perfect financial journalist, he would be a market trader whose job is to analyse and interpret what makes prices move up and down. Only then would one have a journalist who can decipher between a stock rally because of fundamental reasons or due to the technical landscape.
Financial journalists write as though there is always a justifiable reason a price went from A to B. Nearly all of the time, the reason given in the morning or afternoon paper will be some fundamental information that is the mainstream or that was used the previous day reason for moving the market. If you doubt this, take any financial publication and find articles on oil price movements over the past few days: according to them, oil has only gone higher over the past four sessions on an OPEC agreement. It actually even went down due to the OPEC agreement.
History repeats itself endlessly for those who are unwilling to learn from the past. With the advent of the Brexit decision, financial journalists factually stated the obvious such as the vote count and PM resignation but where they horribly miscalculated was the driver behind price movements. For example, the FSTE 100 (the UK equity index) which reflects share prices was meant to sell off and headlines spoke of billions wiped out. Yet, the FTSE rebounded almost instantly before soaring as a result of large-scale depreciation in the pound driving the predominantly export-heavy index. Brexit was both the reason for the sell-off and rally in prices, according to journalists.
The Real Reason
In fact, the sell-off was due to uncertainty surrounding the decision and human psychology as well as a lack of protective heading into the event, with the rally being a combination of resource stocks rallying aggressively on the 10%-15% drop in the value of the pound as well as speculative short positions being unwound. These are just some of the underlying reasons why prices moved lower and higher. There is a whole host of other reasons, but the underlying factor is mainstream financial journalists merely reported price moving up and down due to Brexit.
The question remains: what sort of reporting would you choose? Do you want merely the facts or do you want a better, more specialist form of understanding?
History again repeated itself with the unexpected Trump victory. It has been over a month and yet still the reason for US equity indices being at an all time high is Trump’s infrastructure spending programme. Oh, how complacent financial journalists have become. The Italian ‘No’ vote again casts doubt over financial journalists’ ability to understand the true reason why prices move. The euro currency sold off to 1.05 (new monthly lows) and rallied to 1.0750 and yet there was so little insight given as to why. This ‘why’ is what matters. This ‘why’ is what gives one the ability to learn. This ‘why’ is the reason financial publications need to change ultimately. But won’t.
Exuberant Headlines Sell
Over the decades, before the advent of social media and the digital age of marketing, the papers were huge marketing agencies, from the classifieds sections to the new product line that just hit the high street. To this day, they remain elaborate marketers because nobody reads a boring headline. The euro plummets to yearly lows on shock Italian vote as fears of a fresh European break-up rise. How misleading and misguided, but it attracts the interest of the masses. Whilst the articles are mostly factual, sadly they miss the underlying point most of the time.
This begs the question: what is the purpose of a newspaper? Is it to report facts-based information or is it to educate the masses? The former would imply financial journalists are failing at their jobs whilst the latter would imply a job well done. Maybe the average ‘Joe’ on the street does not want to understand more than the basic elements of why the price has fluctuated. Or maybe, just maybe, mainstream media has failed to grasp the idea that the Millennial generation has a thirst for knowledge and understanding.
Out With The Old Stream
The ‘Freemium’ concept is gaining traction from education, music to electronics industries. It is just a matter of time until it penetrates the financial media. The idea that specialists in their field can finally express their views through mainstream media bodes well not just for the industry but also for society.
Finally, consumers will be able to decide what they want from a financial publication. If they want a basic understanding, there will be the basic mainstream papers. But if they want more accurate depictions that too will be an available option. For now, however, one is stuck with a limited choice.
The conclusion is simple. Financial journalists are very good at fulfilling a job. To report. Their reasoning is what should always be very closely evaluated. As a general rule of thumb, always be sceptical and do not be afraid to question supposed facts and opinions.
The search for answers will ultimately drive thought and understanding. Follow a journalist who provides insight to you, who provokes your thinking, who stimulates your mental juices. After all, time is at a premium, and one should rather follow he who masters little than he who proclaims to know all.
South Korea Bitcoin Regulation on The Horizon
South Korea’s government held an emergency meeting to discuss the impact of cryptocurrency speculation last Wednesday. Banning minors from investing and introducing capital gains tax on cryptocurrency were suggested as means of protecting citizens, reports say.
The meeting was a response to talk of cryptocurrencies being in an asset bubble and the impact investing is having on younger generations. New measures to tackle this problem could be announced by the end of the week, according to Reuters.
Why It’s Important
South Korean exchange Bithumb – the worlds busiest – has hit it off with students. The ease of opening an account and the option to invest small amounts has caught the attention of many young people.
This group’s obsession with the digital assets prompted the emergency meeting. President Moon recently expressed his fear of students joining the trend and becoming obsessed with the rapid price changes of cryptocurrency prices. He labelled this a “serious pathological phenomenon.”
“Some even abandoned their studies and part-time jobs as they believed they could make much more money by investing in bitcoin,” said Reuter Correspondent Dahee Kim. The trend appears to be causing social problems in the country.
The country banned initial coin offerings back in September.
SALT – A Technology Bringing New Opportunities?
One goes to a bank, asks to take out a loan, but is denied – Bitcoin is not accepted as collateral. Given its price fluctuations, it seems natural that a bank declines such a request. Then comes SALT (Secure Automated Lending Technology) – the “first asset-backed lending platform to give blockchain asset holders access to liquidity without them having to sell their tokens”. Where the banks are not willing to get their hands dirty, cryptocurrencies seek to find an opportunity; lenders and borrowers are brought together with blockchain assets. Yet could this platform shake the foundations of a stable economy?
How SALT Works
A SALT coin is purchased for $25, which grants the user one-year access to a loan of up to $10,000. The more SALT coins one has, the larger the loan capacity. An amount of cryptocurrency is given as collateral, where the user pays periodic instalments for the loan. This framework creates a base demand for the coin, which can be defined as the underlying driver for its price.
This sounds very convenient for the blockchain asset holder, yet there is one catch: if the value of the crypto falls below the margin requirement, the borrower receives a margin call, and if not fulfilled, the asset is liquidated to cover the remaining part of the loan. If a payment is missed, a portion of the collateral is liquidated.
Everything appears to be in order. Yet when one considers that many investing in cryptocurrencies devote their entire savings – where they would also be inclined to leverage their position – SALT paints a scary picture.
No Credit Checks
Another attribute – or perhaps shortcoming – of SALT is that it requires no credit checks. So anyone can take out a loan; SALT has the collateral, where the lender can liquidate to cover its unpaid loan. The problem affecting society does not arise from a structural weakness of such a system, but from the borrower’s final state.
Stories of Past Misery
As it was observed in recent crises such as the housing market bubble, society fails to learn from its mistakes when it comes to leveraging and investing. This risk of a bubble is exacerbated when combined with a boom in credit.
As former Federal Reserve Chairman Alan Greenspan stated:
“All of us knew there was a bubble. But a bubble in and of itself doesn’t give you a crisis… It’s turning out to be bubbles with leverage”.
The Great Recession happened at the hands of the informed investors. Even though the financially innovative products used at the time were vague, they were created and traded by those informed investors, where the credit ratings of those products were given by well-respected organizations.
Today, when we gaze at the cryptocurrency peninsula, they are either lagging behind, declaring their lack of interest or outright calling everyone to avoid them. Wounds still fresh from the crisis, the average citizen is inclined to ignore their statements, if not completely stand against them. All of these factors brew the pot for a bubble enforced with leverage.
A Scary Tale
Although the market capitalization of all cryptocurrencies is a mere drop in the sea of investible assets, as the penetration of cryptocurrencies deepens, so will the risks along with it. As of now, no one knows how far the price of bitcoin or any other cryptocurrency can rise. But as long as they do, people will be attracted to the idea of depositing bitcoins for a loan to enable them to buy more, and to cover the loan along the way. As for when the bubble bursts, this is a tale with a well-known end.
UK Gas Prices Surge Following Deadly Austrian Explosion
Gas prices have soared to their highest level since 2013, following an explosion at a natural gas hub in Austria, which threatened supplies already affected by a closed North Sea pipeline.
UK natural gas prices jumped 23% – to 73.7p a therm – on ICE Futures Europe ($9.86 a million British thermal units).
The blast, at Austria’s Baumgarten import hub, happened at around 9 a.m. and left at least 18 people dead. This interrupted flows at one of the main points where Russian natural gas enters Europe. This follows two days of snow in London and cold temperatures elsewhere in Europe.
Arne Bergvik, chief analyst at Swedish utility Jamtkraft, has said that it is the “worst possible time” for a big gas hub to burn, as capacity is needed ahead of the winter and it changes the expectations of how much gas there will be available. He said:
“If weather turns colder and capacity is unavailable, it will absolutely drive up power prices.”
Both gas and oil prices were already affected this week, due to the shutdown of the Forties Pipeline System, which delivers around 40% of the commodities from the UK North Sea.
Rising energy costs are contributing to the UK’s high inflation rate, which increased at 3.1% In November, its fastest pace in five years.
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