Blame Twitter for the Death of Volatility?
Mark Mobius, the executive chairman of Templeton Emerging Markets Group, reckons he's identified a surprising culprit for the slump in volatility currently afflicting financial markets -- the rise of social media. Moreover, a survey of 2,800 millionaires in seven different countries by UBS Group AG's wealth management unit delivers at least some support to his contention that a glut of untrustworthy information is suppressing price moves.
Mobius told Bloomberg News in an interview last week that people's attention spans are getting shorter as the output from social media increases. As a result, he says investors end up sitting on their hands rather than reacting to new information:
Social media is having a huge impact. It’s creating confusion with a lot of false news. Ironically, it’s having a calming effect. If you have all this confusing information, and you don’t know which one is true and which one is false, you say, "OK, the heck with it, I won’t do anything."
The collapse in U.S. stock market volatility, with the VIX index dropping to the lowest level since 1993, has been widely reported. Somewhat less remarked upon are corresponding slumps in foreign exchange swings to the lowest since September 2014 (according to Deutsche Bank's currency volatility index), and in U.S. Treasury market volatility to levels not seen since the end of 2014 (according to Merrill Lynch's MOVE index).
The declines come as the number of active monthly users of Twitter Inc.'s 140-character messaging service surpasses the 320 million mark, a near-fivefold increase in the past six years. Twitter, though, has added users in a straight line that travels from the bottom left of the chart to the top right, while market volatility has ebbed and flowed during that period, which detracts somewhat from the prosecution's case against social media.
The UBS survey of what the wealth management industry calls high net worth individuals found that 82 percent of millionaires regard the current investment environment as the "most unpredictable" ever. That seems incompatible with the disappearance of volatility in financial markets.
Some 72 percent of the survey respondents, though, confess that short-term risks are a distraction from long-term financial planning, with the young -- who are presumably more reliant on newfangled social media for their news -- more affected than the old.
Moreover, only about half of the millionaires surveyed trust social media when deciding what to do with their money, compared with 70 percent who have faith in what they read in their newspapers.
Being distracted by information you mistrust feeds a cognitive decision-making bias known as the ambiguity affect. People tend to avoid making decisions where the outcome seems less certain, favoring instead choices that appear more predictable. In other words, subjecting investors to a firehose of potentially fake news is a recipe for suppressing activity and damping price moves.
The argument that it's getting harder to differentiate signal from noise as information flows ever faster and from more diverse sources probably isn't the whole story. The surge in passive as opposed to active investment strategies, for example, is a prime suspect, aided and abetted by the trillions of dollars of liquidity provided by the world's central banks through their various quantitative easing programs. But Mobius's assessment does seem intuitively to give at least a partial explanation for the current lack of price volatility.
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