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Friday, 20 October 2017

The risks of a post-truth world

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  • Jonathan Rogers

If facts no longer matter, investors are in for a whole new challenge, says Jonathan Rogers

PRECISELY HOW DOES one navigate through the “post-truth” world? Readers of this column are probably familiar with Oxford Dictionaries’ word of the year for 2016, defined by their selection committee as “relating to or denoting circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal belief”.

There will be a lot more post-truth in 2017, not least because the master of that medium, Donald Trump, has been sworn in as the 45th president of the United States.

What is perhaps more worrying for financial market participants is how this post-truth mentality is beginning to loom over business practices that have relied on “truth” for as long as I can remember.

For evidence, you need to look no further than Indonesia, where the government has formally cut ties with JP Morgan for publishing a report in which the US bank’s analysts were less than complimentary about that country’s equity market outlook.

Never mind that the underweight call was on equities, not bonds, and Jakarta stocks did indeed underperform other emerging markets, JPM has lost its primary bond dealing role in Indonesia as a result.

One assumes, perhaps erroneously, this will be a temporary freezing out, although Indonesia’s Ministry of Finance has given no indication when they might review the decision.

The modus operandi in the post-truth world is “if you can’t say anything good, don’t say anything at all”. Not only is this, to stick to the case of Indonesia’s divorce from JP Morgan, ominous, it is also utterly asinine.

We all know financial research reports vary greatly in quality and prognosis. That of course is the point. The truth of a country’s economic performance, or of a company’s stock or debt trajectory, might only emerge after the fact, but it behoves those engaged in analysis to do their best to grasp whatever the truth turns out to be, based on an objective reasoning of the available facts and data points.

Cease that practice in order to curry favour with the authorities and your research will have all the relevance of a state of the nation address from North Korea’s Supreme Leader.

The hope is Indonesia’s recent action was a one-off and not designed to be a shot over the bows for other banks engaged in researching its economy and financial markets. I suspect that is the case; there are some banks in that country that have deep roots within the Indonesian financial establishment thanks to their discreet staffing, which I doubt would ever get blacklisted in that country, but you never know.

THE DANGER COMES when a country is perceived to be engaging with the post-truth mentality and the knock-on effect this has on markets. I suspect that is the creeping process in Malaysia as the country’s authorities address the negative impact of the unfolding 1MDB financial scandal.

So far, nothing like the Indonesian action with JP Morgan has occurred for those banks that have dared to mention the scandal in their research. But one wonders as the noose tightens in the face of mounting international investigation and pending legal action whether that will eventually be the case.

Meanwhile, China’s national income statistics have long been disbelieved by a large swathe of market participants, in an early manifestation of post-truth. Economists have learned to think around those numbers, whether they rely on other data such as electricity usage to provide an indication of the health of the Chinese economy.

My worry would be when heads of state start suggesting their central bank’s or finance ministry’s data are erroneous, for whatever reason.

IT SEEMS TO me that post-truth, when established as an acceptable metaphysical reading or mode of behaviour, has a tendency to accelerate in steady iterations. I’m thinking of the brouhaha around President Trump’s supposed behaviour in a Moscow hotel room. Surreal as the entire episode may have been, it is indicative of the post-truth world. And all you have to do become a master of post-truth is simply to deny everything.

My worry would be when heads of state start suggesting their central bank’s or finance ministry’s data are erroneous, for whatever reason. I’m thinking of Trump undermining the Federal Reserve’s data because it doesn’t fit with the progress he imagines himself to be making in his efforts to make America great again. Such a scenario would have seemed unthinkable, something of the world of George Orwell’s 1984, before Trump’s electoral run.

But that’s post-truth. One has to hope Indonesia’s punishment of JP Morgan is not the start of a wider trend across the emerging markets.

If investors are required to believe six impossible things before breakfast every day – as was Alice in Wonderland – then the regression to a darker post-truth world will be firmly upon us.

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