By
creating phony crises, the media is falling into the hands
of those who profit from this volatilitythe speculators,
many of which are the big Brazilian banks. A free news
media is essential in any democracy, but much of
what the media produces is of little or no value.
by:
John Fitzpatrick
Mid-May,
President Luiz Inácio Lula da Silva was criticized by a section
of the local media for commenting on the exchange rate. One week later,
Vice-President José Alencar also came under fire, for commenting
on interest rates. While Lula expressed concern at the possibility of
Brazil’s currency, the real, falling against the U.S. dollarthereby
affecting Brazil’s export boomAlencar made a guarded criticism
of the Central Bank’s decision to keep the benchmark interest rate at
26.5 percent.
Both
leaders should ignore this media assault, and voice their views as openly
as the columnists who make a living publicizing their opinions. The
media is not only being naïve and hypocritical, but is playing
into the hands of vested interests by exaggerating the importance or
griping whenever Lulaand now Alencarsays anything which
the media feels might rock the boat. A president cannot be expected
to spend his term of office walking on eggs. Problems will not go away
by pretending they do not exist.
At
the moment, the country is split into those who believe interest rates
could be cut without leading to a resurgence of inflation, and those
who feel that inflation is still a threat. The former are probably a
majority. Despite this, much of the media recommends a softly, softly
approach. In their view, Lula must not open his mouth and say anything
that could upset the market and adversely affect the exchange rate,
the Brazil risk, the upturn in the stock market and other key indicators.
This
would be reasonable advice if it were proven to work, which hasn’t been
the case. Since the start of his administration, Lula and his cabinet
have shown discretion. While this approach may have prevented matters
from getting worse, it has not prevented volatility, which is as much
part of Brazilian life as Carnaval. It is like one of those never-ending
novela soap operas: on Monday, the market is euphoric, the real
has strengthened, the Brazil risk has fallen, the Bovespa (São
Paulo Stock Exchange) index is up; on Tuesday the market is disappointed,
the real has fallen back, the Brazil risk has risen, the Bovespa index
is down; on Wednesday, the market has recovered, the Real is up, the
Brazil risk is down ad nauseam
Media
Plays the Speculators’ Game
Journalists
and analysts always come up with explanations for this topsy-turvy madnesshousing
statistics in the U.S., the inflation outlook for São Paulo,
a successful debt issue made by a Brazilian bank abroad, a drop in oil
prices and so on. We, the readers, are expected to believe that the
Brazilian economy will rise or fall on such incidentals, and that if
Lula were to voice the sensible opinion that interest rates are too
high, then the whole economy will collapse like a pack of cards.
By
highlighting matters like these and creating phony crises, the media
is falling into the hands of those who profit from this volatilitythe
speculators, many of which are the big Brazilian banks we pass in the
street every day. A free news media is essential in any democracy, but
much of what the media produces is of little or no value. Most news
stories are as much of a commodity as an orange or a lump of iron ore.
Newspapers or magazines need to fill a certain number of pages and,
since there is often no real story around, journalists inflate the importance
of weak material.
In
the U.K., journalists refer to these quiet periods as the "silly
season". Let me give an example of how the system works. In the
early 1990s I worked as a correspondent for a financial news agency
in Zurich, and had to provide running stories throughout the day. An
item ahead of the opening of the stock market might have the headline
"All eyes on Nestlé’s quarterly results", implying
that when these results were revealed, the whole stock market would
somehow respond dramatically.
Where
did this information come from? Well, in the 10 hectic minutes I had
in which to meet a deadline, I had been unable to talk to more than
one trader. The one I finally got hold of had less than a minute and
said something like: "Oh yes, we’re waiting for the Nestlé
quarterly figures. Goodbye." Since I had no other material
I would write something like "The Swiss stock market is awaiting
Nestlé’s quarterly results, which are due to be announced at
11 a.m. The market closed down yesterday in light trading due to etc."
The rest of my story was a rehash of the previous day’s closing piece,
which, in turn, was based on similar quotes, grabbed from anyone who
had a spare moment to talk to me. For any serious investor, my stories
were of no value whatsoever.
Covering
the foreign exchange and bond markets was even worse in terms of getting
reliable information. When option expiry dates were close, no one knew
what was happening. People would spread rumors* to try and push up the
price of a share, while others were trying to push it down. In some
cases traders were betting either way. At other times, analysts would
release reports on companies that invariably had "buy" recommendations.
These would be followed by road shows and presentations, in which glowing
reports would be made of companies or sectors.
The
press dutifully printed this because it had to print something. Last
year, the CEO of the Financial Times criticized journalists for
failing to foresee the Enron crisis. She lamented the lack of specialized
knowledge which, she claimed, meant the journalists had not been able
to interpret balance sheets. The lack of time, rather than specialized
reporters is, I think, a more likely explanation.
"Fing
bond salesmen on Wall Street"
When
Bill Clinton started his first term of office, economic advisers told
him that the most important indicator was the market price of 30-year
U.S. treasury bonds. He was advised to bear this in mind, and be careful
of saying anything that could adversely affect market prices. Clinton
was reportedly astonished and said something like: "You mean I
have to govern the country thinking of what is good for a bunch of fing
bond salesmen on Wall Street?" "Yes, Mr. President,"
replied the talking heads**.
Clinton
got round this issue by appointing as his treasury secretary, Robert
Rubin*** who, as Co-Chairman of Goldman Sachs, could presumably handle
the "bunch of fing bond salesmen on Wall Street." After
that, Clinton, the Democrat, could sit back and let Rubin handle all
the crises that came his way in a way that, ironically, Bush, the Republican,
has failed to do so far.
The
point I am trying to make here is that comments by Lula or Alencar make
no difference, as long as the economy is in "safe" hands,
meaning hands the market trusts. These "safe" hands currently
belong to Finance Minister Antonio Palocci, who has Lula’s complete
confidence. Palocci has been playing the Wall Street bond salesmen’s
game, as did his predecessor, Pedro Malan. Central Bank President, Henrique
Meirelles, is doing likewise, as did his predecessor, Arminio Fraga.
In a globalized economy, in which capitalism has no rival, Brazil has
no other choice.
The
decision by the Central Bank to maintain the basic interest rates at
26.5 percent was applauded by the market. Why? Because, according to
the Brazilian media, the decision showed that the Central Bank would
not give in to political pressure to cut rates. If you believe that,
then you believe anything
A week
before the decision, during a visit to Spain, Meirelles made it quite
clear that rates would not be cut. This led to a hyped build-up to this
week’s meeting of the monetary policy committee, known as COPOM. One
member was quoted as saying the committee was coming under tremendous
political pressure to lower the rate. Conventional wisdom had it that
any backtracking by the COPOM would put the Central Bank’s credibility
in question, and hold back the prospect of it gaining greater autonomy.
It
is now clear that the whole episode was exaggerated, if not prefabricated
to give the impression of an independent-minded body taking the right
decision for the long-term good of the country, rather than caving in
under pressure. However, the press does not seem to realize this and,
at the time of writing, the saga is continuing.
AlencarVice
President with a Face
As
for Alencar, he has been consistently critical of Brazil’s interest
rates, which are among the highest in the world. The base rate of 26.5
percent rises to around 60 percent when other elements, such as bank
profits, administration charges and taxes are added.
Alencar
is a successful businessman and has hands-on experience of the problems
of investing when credit is so costly and scarce. Since Alencar is also
only a heartbeat away from the presidency should anything happen to
Lula, then it is good to know his opinions and style. He is certainly
an enormous contrast to his faceless predecessor, the skeletal Marco
Maciel, who looked like a Harry Potter villain and was virtually unknown
to the public.
*
"A rumor’s just a premature fact" says one of the characters
in the film version of the book Barbarians at the Gate: The Fall
of RJR Nabisco. Oh, no, it’s not
**
I cannot remember exactly where I read this, but it may have been
in the book by Clinton’s press spokesman, George Stephanopoulos, All
Too Human: A Political Education, released in 1999. I would be
grateful if any reader could confirm this, or provide me with the
source.
***
Robert Rubin is currently Chairman of the Executive Committee of the
Board of Directors at Citigroup.
John
Fitzpatrick is a Scottish journalist who first visited Brazil in
1987 and has lived in São Paulo since 1995. He writes on
politics and finance and runs his own company, Celtic Comunicações
www.celt.com.br,
which specializes in editorial and translation services for Brazilian
and foreign clients. You can reach him at jf@celt.com.br
©
John Fitzpatrick 2003
This
article appeared originally in Infobrazil, at www.infobrazil.com