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The economics of tweeting policy

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

The economic outlook remains good. People have jobs. Prices are not rising too much. That is what matters to the economy. The basic story is good global growth, with some noise in the data.

Investors do have things to worry about. Political risks have risen. Stories about Syria and North Korea are not markets' focus. Markets do not react to extreme political "tail risks". Instead, markets have reacted to tweets about less extreme issues. The US hokey-pokey dance on TPP (in, out, in, out) and political comments about specific firms matter to markets. Investors reacted for three broad reasons:

There is direct risk. A shift in trade policy matters to firms that trade. An investigation of a firm's business matters to that firm. The risk to the asset (or market) price is bigger than the risk to the economy.

There is uncertainty risk. Leaders are not using normal policy channels. Investors prefer the certainty of policy pursuing a known path.

There is signalling risk. Rapid changes in policy may signal a muddled policy process. If one policy is muddled, other policies may become muddled.

Over time, economics should drive markets. The economic story remains positive. But Twitter has added political risk.