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The Big Story

There is a rhythm to economic reporting. More than just the seasonal adjustment that makes up most of the fudge in the economic reports, each story has a progress on its way to becoming something suitable for the mainstream media. The biggest stories often take a full year, passing several well defined milestones.

This delay has to do with several factors.  Conventional wisdom seems to rule, which is to say that old news affects the narrative long after it is not exactly true. But the cycles themselves suggest that the real problem is that many reporters really don’t understand what markets and market movers are telling them.

You've been warned

You’ve been warned

News stories which fundamentally change the narrative of public opinion do come along seemingly at random in this time of rapid change and high interconnectivity. Such stories are still unusual, and economic stories of this kind are usually ones that have had time to fully bloom and develop.

A major economic crisis never, and I mean never, happens overnight without warning. The cycles of these stories seem to take about a year before they hit the conventional, popular media. They progress usually runs something like this:

  • Stage 1: Initial warning – 1 year out – when the problem is noted as a potential risk by bond, ForEx, and other traders. Stories, or really musings, appear in their blogs and perhaps a few stories in trade journals.
  • Stage 2: First pickup – 10-12 months out – secondary blogs like Barataria start to write about the growing alarm as data comes in showing the market reaction to Stage 1.
  • Stage 3: Second warning – 7-10 months out – the market in question sends a clear signal that risk is getting out of hand or related, often out of the blue (ie, the stock market falls for what appears to most as no good reason)
  • Stage 4: Hand wringing – 4-7 months – the traders start to really fret about the situation and combs over every official pronouncement. Their blogs light up with the fear of the moment.
  • Stage 5: Big Pop – 2-4 months – The markets really move in reaction
  • Stage 6: The Story – 0-2 months – over a few months the story is finally written, starting with Bloomberg / Forbes / CNN Money / WSJ and then moving gradually into more mainstream outlets
Translating technical papers to identify the risk is the trick.

Translating technical papers to identify the risk is the trick.

You will note where Barataria often stands on this timeline, at Stage 2. This is a particularly bad place to be for two reasons. The first is that many excessive risks that show up in the Initial Warning stage are corrected before they fester into major crises. The second problem is that by writing about something up to a year before it becomes big news there’s little chance this early work will be remembered as the story develops. Part of the reason that Barataria has taken to repeating itself is to mark the progress of a story and attempt to gain credit for the early notification.

I am trying to get a regular, full time job of economic reporting, after all.

Want an example? Take this piece on the implosion of China’s “Shadow Banking System” done in June 2013. It was a year ago, right after China started moving quickly to regulate the most open part of their financial system before it fell apart on its own. The entire system seemed very fragile as two large banks failed. This Stage 2 piece used Stage 1 information as references.

The Stage 3 market response came in October, which is shown clearly on the SHCOMP index of Shanghai, which fell 7% in two weeks before recovering. There were even a few articles about the fears developing. Stage 4 hand wringing showed up this winter as everyone started watching both the banks and the Chinese manufacturing indexes. Stage 5 is due any moment, and there are some signs in the press that people are very worried about a big implosion in China.

Did you get our jobs?

Did you get our jobs?

Give it a month or two. If this does settle in the way many traders fear, our opinion of China may change from a nation to fear to a nation that is as unhealthy as their air.

This story is a bit warped because traders always watch China carefully. The fall of Lehman in October 2008 set off a general collapse of the financial system. Nearly every major press outlet said that “No one saw this coming,’ which was utter nonsense. It was a year in the making, as shown in this Barataria post from Stage 2 and this one from Stage 3 on the market response. This happened more or less like clockwork.

Stories on the upside aren’t much different. In 2013, the signs were all present for a solid foundation for recovery, and positive economic stories started to become all the rage only this year amid some prevaricating.

If big financial stories are this predictable, why don’t more reporters try to predict them? For one thing, the story isn’t finished until it makes its way to the end. You’ll note in both of the examples given that while Barataria was ahead of the curve, the stories changed a lot as they matured and more information came in.

In the end, however, the real problem is that financial and economic reporting is not up to rapid change. Stories that go against the narrative of conventional wisdom won’t  make it to the mainstream until they are very obvious. That doesn’t bode well for our economic future, especially our ability to stop big disasters before they happen.

But it’s good news for anyone who has mastered the cycle of economic reporting, as long as that person can find a way to brag about it.

11 thoughts on “The Big Story

    • Good piece. I don’t doubt this for a second, because credit is very hard to come by right now. My hunch is that it won’t come back until we hit something like “full employment”, however that is defined. Like so much of this it’s all chicken and egg – the economy won’t improve until there are jobs and easy credit, but we won’t have those until the economy improves.
      Look at Europe, though! Ug.

  1. Regarding your January article on the labor force participation rate, the discussion that arose on this in the Krugman blog seemed to support the view that the weak labor force participation rate was not because of retirement but because of older workers hanging onto their jobs in the face of hits on their retirement assets, while younger workers were not finding work and getting into the workforce. Look that up if you have time, both Krugman’s posts and the comments, and maybe see if your view needs revision. I’m almost 67 and plan on working until 70 before applying for SS, and then working some more to pile up some savings that I never could do with decades of low income.

    • There are some definite signs that younger people aren’t entering the workforce as quickly as in past generations – and most are staying in school longer. That was discussed in the Philadelphia Fed report on workforce participation, but apparently it’s very much debatable. The effect you describe would be a wash, since the older worker remains in the workforce at the expense of the younger. Both are definite trends, and I am willing to reconsider my stand if there is a good study showing that the young who are staying in school longer are doing so for economic reasons alone – ie, they would rather be working.
      No one has really studied this carefully before, so methodology is always questionable. I guess I have to concede that much.
      It’s worth pointing out that the unemployment rate for 20-24 year olds is dropping faster than the overall unemployment rate (U3) FINALLY, meaning that there are more jobs for young people. This is partly due to the retirement wave, but some of it is due to (slowly) improving economic conditions. Perhaps the retirement wave credited with the drop in workforce participation from 2012-2014 should be modified once we see if the kids still in school now start to enter the workforce in larger numbers later this year. I sure hope they can all find jobs if all they are doing is ducking into school to wait out the bad times.

  2. I think it takes a year for these to come up because so many stories about the economy have a political purpose & the MSM doesn’t want to get caught up in that. I know that they have reported some things that have a political bias but really only Fox has ever carried the declining worker participation rate and we all know they have their side to pump. So it may be that a story should develop to be sure it is a big one and not a tool.

  3. The news is all about reacting to things. What you’re talking about here is getting ahead of that which they are totally not set up to do/be at all.

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