This Is the End


Markets, Risk and Human Interaction

November 30, 2010


This reflects my personal opinion, not the views of the SEC or its staff.
Sarah Palin's "Being There" ascendancy may strike some as absurd, but it provides a case study for what now counts as news. Today, going viral matters more than the information itself. The object lesson that Palin brings to politics is something we should fear for the financial markets, where going viral can transform information from being the bedrock of market efficiency to a source of irrationality, even crisis.

For example, the most important lesson to come out of robo-signing is not the fiasco itself. The incomplete and flawed documentation for foreclosures has been well known for over a year, as have the practices of “endorsing in blank”, inaccurate reporting of remittances, inflating appraisals and applicant earnings, to name a few. The robo-signing revelation is just one more shoe to drop. The important lesson is that it is a shoe that gained legs, so to speak; that went viral, topping the list for news, blog repackaging, and possible Congressional hearings. As a result, robo-signing is the item that had an impact on financial stocks which could have occurred based on any number of problems that were already known.
More broadly, the lesson from Palin and robo-signing is that we are entering a new age for the way information affects the markets, an age when going viral matters more than the information itself. Information has gone from being illuminating to being a source of risk, and not because of content, but because of the vagaries of what might gain traction.
To put this into perspective, follow the path of the role of information in the markets.
The age of private information. There was a time when information gave an advantage, when there was an edge to getting information ahead of others. Rothschild famously received early news of the British victory at Waterloo; commodities traders hired teams to wander the cocoa fields on Ghana counting pods; equity managers used their influence to get a jump on earnings announcements.
The age of too much information. The push toward transparency eroded this advantage. But the requirements for transparency throw out so much information that it is difficult to find what is relevant. Information can hide in plain sight; if every drug may cause nausea, insomnia and drowsiness, then we get to the point of, “I have to list everything I can think of, but you know the game. Just ignore it and try the stuff out”. The echo chamber of reposting adds noise to any news that is worth repeating, and much that is not.
The age of viral information. Information is moving from being the bedrock of market efficiency to a source of crisis. The risk for the market is not the news itself, but what news gets drilled home through so many channels that people act on it; we cannot anticipate when information might go viral and sweep the markets.. For retail markets – the municipal bond market and money market immediately come to mind – it is easy to envision a “USA Today effect”, to use an anachronistic expression, causing a run on the bank.
The greatest concern lies in information going viral that is inconsequential. For those in the market who are on top of the news and its implications, the question no longer is simply one of when others will finally get around to looking at the information and see that it is important. It is also a question of whether something irrelevant will catch the fancy of the cloud. Look at Sarah Palin and see the logical end to the inane You Tube videos that capture the imagination of the nation, or the ranks of the “famous for being nothing” reality show celebrities that Palin has elected to join.
The new, viral world means more surprises and more volatility; and not because of market shocks precipitated by content, but because of the randomness in what might happen to catch on and reverberate through the internet.