April 21, 2020 at 5:00 am ET
Last month, Pershing Square CEO Bill Ackman went on CNBC and warned that the coronavirus would be a nightmare. An emotional Ackman told millions of viewers that “hell is coming.” As he spoke, stocks tumbled and his series of bets against the market continued to turn extraordinarily profitable. When the dust settled Ackman’s hedge fund had netted over $2 billion.
Ackman maintains he meant what he said and circumstances have now changed. Whatever the motivations, the truth is he did the world a favor. He showed us how vulnerable our system is to economic disinformation: the intentional spread of false or misleading information for financial gain. COVID-19 has unleashed a wave of it. On a small scale, online influencers sell snake oil cures or write up false clickbait online for ad revenue. On a larger scale, disinformation can be aimed at deceiving the markets.
This is harder to do than it seems. In 2018, researchers from MIT and Yale showed large firms are usually not influenced by false news. The reason goes to the heart of the financial system. Markets are, by design, aggregators of data. One wrong report is unlikely to cause a significant swing, and even if it does, the effect will nearly always be temporary.
Coronavirus, however, presents the unique challenge of what the World Health Organization refers to as an infodemic: “an over-abundance of information — some accurate and some not — that makes it harder for people to find trustworthy sources and reliable guidance.” This applies to markets, as well.
Any information that can turn a profit in the short-term is valuable, regardless of whether it turns out true in the long term.
At this moment, thousands of news flashes are coming in from all over the globe and each one could have serious repercussions on a range of economic fronts — from commodity prices to travel restrictions to new vaccines. The flood of misleading or incomplete information about the pandemic creates potentially lucrative rapid market movements.
Take for example the Welt am Sonntag story of March 15, which alleged President Trump tried to secure exclusive rights to a coronavirus vaccine produced by Germany company CureVac. The story was later debunked, but missed in the aftermath was the impact on CureVac’s American rival, Moderna. The day after the story posted online, Moderna rushed to announce that the first dose of its COVID-19 vaccine had been tested on a patient. Its stock jumped on March 16, a day the rest of the market tumbled.
The reality is that Wall Street is hypersensitive to news and ill prepared to understand a public health crisis. For all the years of work on behavior and business cycles, there’s very little Wall Street has done to understand pandemics. This creates a huge vulnerability in the era of online disinformation and algorithm-fueled trading.
And because news and markets are global, we see similar examples from Italy and China to Singapore.
Countries with open media environments are especially susceptible.
In India, in the span of two weeks, two major financial firms had to step in and issue statements after widespread false social media reports drove away investors. In both cases, social media indicated the firms were scheduling emergency conference calls to address a surge of non-performing loans. But no such calls were ever on the books. That didn’t stop hours of costly selling. The similarity of the rumors and the repetition of the incident indicates this was more than just coincidence.
Of course, speculation is part of any crisis. Fear can drive investors and panic buying and selling is an impossible to regulate reality of markets. Any savvy investor will look for opportunity in a crisis and find undervalued equities or sectors poised to gain strength. But this pandemic is different.
So, what should investors do?
First, think critically beyond the short-term bottom line. It’s not enough to trust the wisdom of the markets. The most effective long-term response to the economic downturn caused by coronavirus is an effective public health response to coronavirus.
Second, don’t separate from the market. Much of the time, trading happens at a safe distance from investors’ day-to-day lives. What happens between the opening and closing bell may have an effect on entire industries — and the humans that drive them — but not usually the immediate world around you. That’s not true right now. Betting on incomplete information or half-truths in the market is also betting on people’s lives, especially during a pandemic.
Third, be more vigilant. Nasdaq recently took the unusual step of warning traders about an increase in suspicious activity. The SEC has made good progress on prosecuting information manipulation in recent years, but its rules should keep pace with the information wars playing out on trading screens across the world.
Trillions of dollars are at stake and the sooner we realize that our money is as vulnerable to disinformation as every other part of our lives, the sooner we can go about fixing the problem.
Right now, our lives and our livelihoods hang in the balance.
Graham Brookie is the director and managing editor of the Atlantic Council’s Digital Forensic Research Lab (DFRLab). Josh Lipsky is the director, policy and programs, global business and economics at the Atlantic Council.
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