hold the press…down

The welcome stabilising of the recent financial and economic crisis does not seem to have raised the level of economic awareness and literacy in our press and news media.

A recent press article that suggested that the ‘lower’ CDS of McDonalds ‘proved’ that McDonalds’ bonds were a better ‘bet’ as an investment than UK Government bonds has got so little going for it in terms of sensible analysis that letting it pass is almost a crime!

Where to start? How about the equivalence of ‘bet’ with investment? Despite the brave efforts of serious analysts over the years to show the value of long-term equity investing, there is a stubborn and widely held perception that the equity market is a casino designed for the ‘greater fool’. Interestingly it's not investment per se that is 'dodgy' (everyone knows that investing in property is a brilliant idea) rather it is anything that allows the news media to invoke the spectre of whizz-kid ‘traders’ (or ‘bankers’ to give them their proper name) separating the unwary and unwashed from their money. The bond market therefore falls unwittingly into this category. As an aside, I always appreciate any explanation of bonds as being ‘guaranteed’ to pay back the principal – a circular argument of the highest quality. A corker.

Let’s now move onto that great bête noire, the CDS market. The assertion that a market price ‘proves’ anything other than what price a buyer and seller are willing to do business at (especially in a properly opaque market as is the CDS one) is at best , a stretch and at worst, well, just tiresome. To be serious for a moment, the CDS market has only ever really told us about a buyer’s propensity to believe that the credit of the seller of the CDS has more value that that of the underlying debt being ‘insured’. For all those of you who thought it was proper insurance, the US Government would love to sell you a business called AIG! Let’s not even get into the differences in amounts, tenors, currencies, tax-raising powers or who owns what. Mind you, it might be true that McDonalds is a better credit than the UK Government – I wouldn’t trust the CDS market to confirm it though!

By Peter Matza