No, I don’t want no FUD.
Vol#40 - May 28th, 2021
FUD is an acronym for “Fear, Uncertainty, and Doubt”. It describes the intentional or malevolent sowing of false pretenses for ulterior motives.
While the casting of suspicion on others is at least as old as Shakespeare, the specific framing of “FUD” gained traction during the 70s amongst PR and marketing executives. The tactic was quickly adopted by the software industry during the early competitive days amongst IBM, Microsoft, and their various smaller rivals.
(Iago from Othello is the iconic manipulator and spreader of FUD)
IBM was accused of sowing FUD against their former employees who attempted to form competitive startups. Software development icon Eric S. Raymond describes the time:
“The idea, of course, was to persuade buyers to go with safe IBM gear rather than with competitors' equipment. This implicit coercion was traditionally accomplished by promising that Good Things would happen to people who stuck with IBM, but Dark Shadows loomed over the future of competitors' equipment or software. “
IBM was then one-upped at their own game by Microsoft.
Long after everyone had already switched to MS-DOS, Gates and company settled a $280m lawsuit for placing false bugs in Windows 3.1 that implied the program wouldn’t run effectively on a IBM’s version of DOS. Intentionally undermining confidence in the competition let Microsoft establish a decades long dominance in personal computing.
It’s then no surprise that the concept of FUD has been picked up by crypto enthusiasts over the years. Cries of “FUD” are everywhere when criticism hits the industry. Lately it has been particularly focused on the ESG impact of digital assets. Bitcoin uses a lot of energy. Spin ad nauseum.
Theories quickly crop up about manipulated price action and orchestrated narratives. It’s certainly plausible that interested parties could promote a campaign to drive prices in their favor. But it never rings as loud during a bull market run.
When I was a market maker, we sat at the center of orderflow. You saw big and small orders come in, and attempted to decipher what the counterparty was doing so you could appropriately hedge your risks. Sometimes suspicious orderflow came through (e.g. buying upside calls before a deal gets announced), and we had a mechanism to file an “Unusual Activity Report” with exchange regulators. “Bad Things” did happen, but requests to file these were strongly correlated with ex-post PnL of the trade.
FUD and price action go hand in hand. When assets are making new highs every day, bad news bounces off an invisible armor of euphoria. As the market stumbles around, every dip that causes your screens to bleed comes with malicious intent.
Just like you don’t want your parole hearing right before the judge has lunch, bad news hitting an unsteady asset can have a significantly different impact.
This isn’t purely a psychological (or physiological) question though, the timing and pace of information matters. Last week we talked about how volatility clusters. Information in the market place also has a different impact at different times.
Price and news can be reflexive, dependent variables, or they can be independent and immune to one another.
How markets absorb news is the baseline for the Efficient Market Hypothesis. If all investors knew all things, the prices of securities would be efficient - i.e. an accurate representation of the expectations of future cash flows. In its strongest form, EMH suggests that all public and private information is included in current prices.
When new information hits the market, it is the job of buyers and sellers to synthesize the implications for future value and appropriately price the securities. Despite the billions of dollars Wall Street spends on technology every year, this is a fundamentally human process that takes a non-atomic amount of time.
There’s not necessarily an independently correct answer, and the interplay of factors is dynamic. News to one party might mean buy, while to another it means sell. And more selling might mean more buying for a third party. We all have different horizons.
Who’s watching the ticks at any given time matters. A retail dominated market with highly levered and fickle positions will be more susceptible to rapid price movements. Calendar effects like end of month rebalancing will significantly change the composition of participants. Large price insensitive buyers will give support to prices no matter what the news says. Sometimes that just happens because the execution desk was on holiday Monday.
Price discovery is the process of buyers meeting sellers. Every print on the tape is not the Platonic ideal of price at that moment, it’s simply an artifact of the process. If you’re investing in assets for the years to come, the daily reverberations should just be noise.
Blaming FUD for price action is usually just a distraction. Sometimes the marginal seller just has more size than the marginal buyer. While it’s nice to have a straw-man as a steam valve for losses, investing for the long run demands we separate the signal from the noise.