FEEDBACK is sometimes good, sometimes bad.

Businesses always say they like feedback, but often get very defensive when you give it to them. They like the idea of being big enough to take negative feedback, but rarely live up to it.

Years ago I watched the band The Jesus and Mary Chain who used guitar feedback as their main musical instrument. On one level it was a right racket - but somehow their intentional creation of high-pitched wailing from their amps was more musical and exciting than just another dumb rock chord progression. As if to underline the point, few of their songs strayed beyond the classic 1950s three-chord song structure.

The most impressive use of feedback I ever saw was an ageing blues guitarist called Lefty Dizz. Halfway through his set he feigned exhaustion, took off his guitar and leaned it against his amp while he mopped his brow with a towel. Gradually, the amp started to produce feedback. It swelled and swelled while he pretended not to notice. It reached ear-splitting intensity and the crowd started gesticulating. Finally he ‘noticed’ the din, a look of annoyance on his face. But instead of picking up the guitar or turning off the amp, he took his towel and ‘whipped’ it at the guitar strings in much the same the way members of a sports team might try to ‘whip’ each other as they emerge from the showers. The guitar produced another chord and started feeding back again. Lefty Dizz then spent about 10 minutes playing his guitar’s feedback with a towel. It was a stunning example of comic musical virtuosity.

Feedback is good when it’s controlled. It’s when it’s uncontrolled that it becomes a problem.

Apologies for this long pre-amble, but it does have a point. I am starting to think that the Baltic economies are suffering from a severe case of uncontrolled feedback. Every week a new report is emerging that casts doubt on the mid-term prospects for the Baltics. In recent weeks we’ve had aspertions cast by the World Bank, among others, and this week we had ratings agency Fitch downgrading Lithuania’s outlook from ‘Stable’ to ‘Negative’.

NEW REPORTS FOR OLD 
The trouble is that these reports may not be as ‘new’ as they seem. They come from monolithic organizations and have often been months in the compiling in London, Washington, Paris or Frankfurt. They draw on myriad other reports that ante-date them even further, and while they are being stitched together, other, snappier reports appear to fuel the subsequent verdicts from the monoliths.

When the report is released, it has an immediate effect on the market. Because the name attached to the report is Fitch or Moody’s or the IMF, everyone takes them very seriously, almost as if they possess a sort of papal infallibility. But if economists should have learned one thing in the last 12 months it is that it is possible to take the verdicts of rating agencies with a pinch of salt, too.

I’m not saying that they are all wrong or that they are worthless. But I think it is worth remembering that they tend to be slow-born. Things can change a lot (for better or worse) by the time their summaries hit the headlines (and we journos don’t usually dip much deeper than the summary).

So a cycle of feedback tends to be created. The report is compiled using data from a few weeks or months ago. Then it is published, weeks later. We all read it as if it is commenting upon NOW rather than THEN. We (the media, investors, maybe some fund managers who should know better etc.) respond accordingly. We respond to a scenario that no longer exists. that can have the effect of talking/driving the market up or down needlessly. And when these reports start coinciding they exacerbate the upward/downward pressure, making it more likely that the next report will follow in the same direction.

At the moment, the Baltic economies are locked in a downward feedback spiral.

OUT OF TIME
This may account for a feeling of weird timelessness I’ve had reading some reports lately. They talk about the great potential for growth in the Baltic and the booming housing market. One US report even talked about the Baltic as an ‘undiscovered opportunity’. Those are the sort of things you would have expected to read several years ago.

A perfect example of this “When was it written?” effect came this week with Moody’s annual report on Latvia. It says: “It appears that Latvia is in a classic wage-price spiral. Such a cycle can be difficult to break, especially in an environment of rapid economic growth.”

“On the other hand, ERM2 participation paves the way for eventual membership in the European Monetary Union and provides some degree of comfort. The prospect of eventual entry into EMU is also a deterrent to destabilizing capital flows, even though euro adoption has moved into the distant future.”

I can’t quite work out who such statements of the obvious that have been knocking around for months are for. Anyone with an active interest in the Baltics will already know all that and anyone without an active interest is unlikely to bother reading the report in the first place.

Anyone close to the ground knows that the Baltic markets are simply small rather than unexploited and that the housing market peaked months ago. Because this information came from an unimpeachable source, we are inclined to believe that they must know something we don’t rather than thinking the unthinkable - that maybe this verdict is based on data that has taken a very long time to reach the desk of an author who may be new/non-specialist/in a hurry/convinced no-one in the US is very interested.
As a rule of thumb, the more narrow a report’s focus, the more accurate it tends to be. You will probably learn more from reading a month’s worth of weekly market bulletins than you will a monthly overview. And you will certainly learn more from reading a year’s worth of monthly overviews than you will an annual summary.

I’ve heard the opinion that local analysts are too close to the action, that they are too young and too wedded to their home countries to make unpopular calls. There may be a very small element of truth in that, but they are also much quicker-reacting and more finely attuned than the monoliths.

IT AIN’T NECESSARILY SO
So I can only cheer from the sidelines when someone like Gediminas Kirkilas stands up against the big bullies and says “It ain’t necessarily so.” He did it a few months ago when The Economist’s Intelligence Unit came out with some dire warnings about his imminent political demise, and he’s just done it again in response to the Fitch re-rating.

“The fact that the credit rating agency Fitch has changed the outlook on Lithuania’s rating from stable to negative is not pleasant to us, but we’ll make no tragedy out of it either,” said Kirkilas, before outlining various signs that Lithuania is doing okay such as its recent Eurobond issue.

“As we can see the first signs of a gradual and smooth slowdown, which in time will lead to a decline of inflation, it is crucial to ensure that the measures taken would not slow growth too much and the smooth slowdown, which is our target, would not turn into a slump,” he added.

The ratings agencies and global financial institutions are big and impressive, but they are not necessarily clever - or at least cleverer than someone who checks the news and the equity prices a couple of times a week.

Feel free to comment - but I’m not promising I’ll take any notice even if you do!

This entry was posted on Tuesday, December 11th, 2007 at 6:24 pm and is filed under Miscellaneous, Estonia, Latvia, Lithuania. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.