Bears and bulls: and yet, it turns…
At a time when trillions of dollars have evaporated on the stock market, the culprits are being pointed out. Hedge funds, some say. The rating agencies, say the others.
But analysts are also in the dock. Revered in the 90s, hated after the bursting of the internet bubble, they are paradoxically returning to the forefront with the current crisis. In recent years, access to information has become more regulated, due to barriers erected between the different divisions of banks. The information provided to investors is subject to rules. They are diluted drop by drop during meetings between bosses, investors and analysts, outside of results publications. They thus gain more value. As a result, changing a recommendation by an analyst can cause a reduction in market capitalization of several billion in one day. This happened recently with ABB.
Endowed with immense power, analysts find themselves at the center of different contradictory interests. First of all, they must meet customer demand. They sometimes have excessive demands in terms of performance. Next, the analysts themselves must accurately predict the future of companies. This then allows brokers to generate high commissions, synonymous with bonuses for both. Finally, these specialists must also maintain good contact with the management of the companies they cover to obtain the information that matters for their forecasts.
However, these were mostly false. Formulas to support it, the vast majority of analysts have been blinded by a few good years of stock market growth. Forecasts have been regularly revised upwards, as if growth were a faucet that never stops flowing. (Le Temps, 11/18/2008)
Behavioral finance sheds light. Analysts, like investors, have mental difficulty anticipating crisis scenarios. A Citigroup study shows that they have particular difficulty predicting trend reversals. They are wrong on average by 15% on the results in normal times. During crises, errors reach 40%, or almost three times more. Narrow intellectual models, based on the extrapolation of variables whose behavior is presumed to be stable?
In their defense, we note that when they issue negative recommendations on companies, it is not uncommon for their managers to react by calling bank officials to exert pressure. It follows that a tiny portion of analysts are “bearish” (bears, in French, or bearish), unlike the majority of “bullish” (bullish). And even if an analyst is not wrong, but gives a negative opinion contrary to all his peers, he risks being fired. This is what happened in July 2000. More than a year before the grounding of Swissair, Christopher Chandiramani, an analyst at Credit Suisse, anticipated an annual loss of one billion francs for the airline.
We could cite examples of intellectual paralysis in other environments (research and university in particular), which, however, should normally present a reasonable mix of reason and creativity. But it seems that in these circles Pharisaism prevails: instead of giving voice to independent and original minds, we will create a conservative clique paid for their following. Beware of anyone who strays from the accepted standard, who says the opposite of what the establishment wants to hear. We arrive at the following result: conclusions and predictions are dictated by social pressure, more than by an objective analysis of the facts. Even if the latter were carried out, it would have to be watered down.
Today we see the results of such an operation. This crisis is also, and perhaps first and foremost, a crisis of innovation.
