Ideas Farm: Should you bet against the business press?

A fortnight ago, The Economist ran a cover story under the headline ‘Crypto’s Downfall’.

To many onlookers, the timing and rationale for the provocatively titled piece made perfect sense. With the implosion of the FTX exchange in full swing, the world’s eyes were again drawn to the chaotic spectacle that is decentralised finance. Was this episode the industry’s Enron moment? Would it herald the edifice’s collapse? Would criminal links be revealed? Read on to find out.

For others, the headline’s boldness offered an excellent contrarian trading indicator. Not, it should be noted, in the Warren Buffett sense of being greedy when others are fearful. But simply because it was The Economist that said it.

This signal, treated with varying degrees of seriousness by financial analysts and traders, is known as the ‘magazine cover indicator’. It works on the theory that by the time an idea makes its way onto the front pages of the financial press, it is so past its sell-by-date that it is worth betting against.

The most famous example of the indicator was a 1979 issue of Businessweek in which the title announced ‘The Death of Equities’ on the eve of a spectacular 40-year bull run in US shares. Recent cases also abound. Anyone who shorted Tesla (US:TSLA) stock when Time made Elon Musk their 2021 person of the year last December would have be up 42 per cent in dollar terms.

Speaking as a journalist, the indicator makes intuitive sense. No one in a financial newsroom, from writers to editors to publishers, likes to be wildly wrong or esoteric in their coverage of markets. But because journalism relies on a combination of drama and familiarity for it to sell, editorial lines habitually cluster around established trends, rather than speculations about variable and often unforeseeable possibilities ahead.

What comes next will be familiar to any investor who suffers from the fear of missing out: the trend is extrapolated into the future, creating a deterministic view of an uncertain world. It looks like there are no limits for the visionary chief executive, or that equity returns will never again beat inflation.

Because journalists often point at what is most visible, they can forget that it’s darkest before the dawn (and brightest just before dusk).

One person who has tracked the magazine cover indicator assiduously is the New York-based investor and former investment banker Brent Donnelly, who maintains a portfolio dedicated to contrarian positions taken against the most optimistic or pessimistic Economist and Time front pages.    

His recent calls – which are closed out after a year – make for fascinating reading. Aside from his Time/Musk short, a contrarian bet against The Economist’s ‘Big tech’s supersized ambitions’ cover from January is well up, as is a short on wheat futures. His response to ‘crypto’s downfall’? Buy bitcoin. And following last week’s front page, Donnelly is now somewhat reluctantly long the iShares MSCI Germany ETF (US:EWG).

All of which begs the question, asked in the best traditions of self-criticism: should you bet against this magazine’s front covers?

In any issue of the Investors’ Chronicle, you will find multiple calls to wager against. Hubris has taught us not to be too bombastic in the pronouncements that make it to our front covers. But even then, our ideas will never be fully detached from the hype-cycle of markets.

To pick on a few of this year’s more overt cover suggestions, the IC indicator has seen mixed success (see table). In January, we took a different tack to The Economist by highlighting the regulatory threats facing big tech shares. That proved timely, albeit for the wrong reasons. Less fortunate was our cover on 18 February (‘Europe’s new leaf’), just before the first major ground war on the continent in eight decades. Since then, the MSCI Europe ex UK Index (EUXS) is off 5 per cent.

According to Donnelly, neither Barron’s nor Businessweek can be considered empirically contrarian, as their covers are too random. The same might be true of the IC. Or maybe it’s hard to distil our preference for circumspection and long-term thinking into an eye-catching cover statement.