Have you ever heard the phrase: “They are all talk and no action.” Nowhere is this more apt than in policymaking. The problem is that most people mistakenly believe that every word in the media from a policymaker is action. Your challenge as an investor is to distinguish between rhetoric and concrete action.
This is particularly a challenge in a distributed social media age when policymakers can connect directly with constituents and stakeholders without media intermediation.
“Actions speak louder than words.” This is true…..but you need to find the action in order to hear it.
The point is that action in policymaking can be found in many places beyond media, both published and social. The activity policymakers choose to highlight in social media and published media represents their priority. But it does not represent the totality of their action. Similarly, journalists serve a filtering function, reporting on the developments they believe are important.
The filtering function provided by journalists who cover individual beats is important. When implementing Rule 10, the idea is NOT to discount or minimize the importance of media coverage for specific issues. The idea is to place that coverage in context.
Context: More Talk Than Action
Consider today’s momentum measurements from our patented risk measurement process, particularly with respect to trade and Brexit policy issues.
There is far more talk than action regarding these two policy issues. But interestingly, people are talking marginally more about Brexit than about trade policy. This is particularly interesting given that yesterday the Chinese government released a significant white paper that aggressively pushes back on U.S. trade policy negotiating tactics.
A closer look at the results shows that the ONLY reaction function to the Chinese white paper so far today from the United States is rhetorical. Policymakers are reacting to the Chinese white paper with words and quotes to the media…..but they are not (yet) taking additional retaliatory action.
The words matter, of course. We will be blogging about the importance of word choice by policymakers in the coming weeks. But the point is that the context in which policymakers speak matters quite a bit. Words without corresponding action is just letting off steam.
Context: More Action Than Media Attention (Brexit Case Study)
In many respects, public notice of action with limited or no media attention is a trader’s nirvana….if the trader can find the information. When policymakers act but no media reports on the action, then people using out-moded mechanisms for monitoring public policy risk never “hear” it. They are too busy being distracted by a random word or phrase on social media that has zero legal weight.
Being able to see quickly and regularly the actions taken by policymakers beyond the glare of the media spotlight delivers significant informational advantages to investors seeking a strategic advantage. When algorithmic traders program their execution engines in relation to headlines, they use technology to deliver this informational advantage by accelerating the execution cycle.
The problem is that by targeting headlines from wire services and other major media outlets they are missing much of what policymakers say and do. In addition, by priming the execution cycle to operate instantly in response to the policymaking reaction function, they intensify policy dynamics and create the need for policymakers to respond again.
This is not entirely the media’s fault. Governments generate far more concrete facts than any human can reasonably absorb in any 24 hour period. Even the most dedicated journalist or investor cannot possibly read and understand everything that policymakers say and do during a policy cycle. But you CAN use advanced technology to automate the intake and initial analytical functions so that you can quickly distinguish between situations when policymakers are just talking their book and when they are taking strategic action.
One benefit of assessing rhetoric in the context of action is that it permits investors to do what clients want them to do: take a strategic view that de-couples the investment reaction function from the policymaking reaction function. If you can see the delta between rhetoric and action, you can identify faster and better when the words used by policymakers in the media represent strategic inflection points that require you to take action in the markets….and when those words are just letting off steam.
Take again the action vs. rhetoric results from today’s momentum measurement regarding Brexit.
The results show that European (not British) policymakers are taking strategic, concrete action to prepare for and minimize the impact of a no-deal Brexit in two crucial areas: transport at the port of Calais and financial services. Specifically:
- EuroTunnel Customs Procedures: EU Commissioner Moscovici is in Calais today to assess new customs procedures being implemented to prepare for Brexit. He will have a press conference with local officials later in the day on the topic.
- Share Trading Rules: The European Securities Markets Authority (ESMA) has taken two actions that directly impact the post-Brexit regulatory landscape. A technical potential conflict exists between EU and UK regulatory requirements regarding International Securities Identification Numbers (ISINs) which typically start with country identifiers. Brexit could require UK securities to use new codes since the UK will no longer be part of the EU. Today, ESMA announced that it will cease to publish lists of ISINs that meet EU regulatory requirements in an effort to minimize the potential for disruption. They also indicate that “ESMA has held regular discussions with the UK FCA to try to identify a way forward to avoid conflicting requirements, but at this stage it is unclear what would be the scope of the UK STO.” The ESMA action opens the door for UK authorities to “grandfather existing UK securities in order to permit them to use existing country codes.
- Commodity Derivatives Trading: ESMA separately released regulatory guidance for pre-trade transparency requirements in the commodity derivatives sector, making clear that it expects firms subject to ESMA jurisdiction to verify that all relevant trading venues either comply with EU pre-trade transparency rules or have obtained an official waiver regarding those rules by the end of 2019. The implication is clear: If UK policymakers have not obtained a waiver or other accommodation from EU authorities by the end of 2019, the EU commodity derivatives firms will not be permitted to execute trades with UK-based trading venues or related firms. Brexit was never mentioned in the document itself, but our system correctly flagged it this morning as being relevant to the Brexit preparations in Europe.
These developments are technical but strategically significant. They signal that EU officials being the week of June 3 continuing to play hardball regarding Brexit policy at a point in time when the UK continues to drift without a new Prime Minister. Preoccupied by the leadership vacuum in England, the media has not reported these developments as of this writing (at 11 am EST).
Investors focused on the delta between rhetoric and action and armed with sophisticated processes to find action, as well as rhetoric, are thus well-prepared for headlines that may be generated in the next 24 hours by Commissioner Moscovici’s press conference in Calais. Investors using this system will also be well prepared for potential policy volatility regarding both share trading and commodity derivatives trading as the next Brexit inflection points approach throughout the summer.
Why Comparing Rhetoric With Action Enables Accurate Policy Anticipation
Those of us that have operated within the policy formation process understand a profound and simple point. Today’s policy actions generate tomorrow’s headlines. The smart money therefore follows like a laser and prioritizes the action taken by policymakers. The smart money that follows this approach is also able to spot faster and better when the media has missed a technical but strategically significant policy shift. This is the alpha generation moment.
Investors seeking to generate alpha from the news cycle must take a much more targeted approach to assessing the information value of the news cycle. Accurate and comprehensive assessments that compare the current news cycle and official sector action equip investors to make better strategic decisions faster. It also frees investors from reaction functions triggered by headlines, facilitating more strategic portfolio allocation decisions.
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