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Little tweet, huge economic impact

Musk's run-in with the SEC just underlined the sway a few characters on Twitter has on the markets.

by Anne Gaviola
Oct 3 2018, 9:22pm

We may never know exactly what Elon Musk was thinking when he sent out a tweet in early August that ended up costing him, and his company Tesla, $40 million USD. In it, he suggested he had secured funding to be able to take Tesla, a publicly-traded company, private for $420 USD a share, which was significantly more than where Tesla stock was trading at the time. Enforcement officials told reporters Musk believed the “420” reference would impress his girlfriend Grimes. U.S. securities regulators cited “false and misleading statements” by Musk, disseminated globally on Twitter.

The Securities and Exchange Commission wasn’t amused by the nearly 9 percent jump in Tesla’s stock price, presumably caused by that one tweet. It’s difficult to attach an economic domino effect to a single catalyst, but there are rules about the kind of information heads of companies aren’t allowed to share in the public sphere. In a settlement reached this week, Musk must pay a $20 million fine and step down as Tesla’s chairman for three years, though he can stay on as CEO. Tesla, the company, must also pay a $20 million fine for failing to keep their commander-in-chief’s tweets from causing confusion and spreading lies (or jokes, depending on who you ask). Incidentally, Tesla stocks rebounded after the SEC ruling.

Tweets have gone from being benign musings about what you ate for breakfast, to small but powerful messages that influence stock price fluctuations, directly from the source. Those tweets are coming from power players around the world, from the highest ranks of business and politics, delivering policy and snippets of information that traders use to decide when and what to buy and sell. “As thoughtless and as trivial as Elon Musk may have felt the tweet was, it had extraordinary real-world impact on the market and he’s paying for it,” says Matt Fullbrook, who is an expert on governance as the manager of the Clarkson Centre for Board Effectiveness at the University of Toronto.

For a billionaire like Musk, the fine is a drop in the bucket. What might be more significant is the part of his punishment that constrains him from tweeting freely — going forward, all public statements by Musk must be approved by Tesla. That may be tough for Musk to abide by, and a big letdown for his more than 22 million Twitter followers. “He’s built part of his career on the fact that he’s a personality. He’s flexed that muscle in order to gain personal notoriety and to raise the profile of his company,” says Fullbrook.

There are plenty of examples of the weaponization of Twitter. U.S President Donald Trump goes after his political opponents via tweets, but it’s more than that. He regularly announces new government policies via Twitter (the tricky part is figuring out when it actually means something official) and has arguably had an economic impact.

Trump has taken aim at Amazon in several tweets, for example, and the stock has moved on the heels of his Twitter activity. On March 29, 2018 he called out Amazon for, as he put it, not paying enough taxes to state and local governments and putting rivals out of business. Investors were worried that signalled a tax increase or some sort of real-world retribution and they drove the stock down nearly 5 percent. Shares eventually rebounded when Trump didn’t follow up on his warning tweets with further action.

A tweet’s economic ripple effect can be felt on a much larger scale than trade blips affecting equities. The currency markets eclipse the size of the stock market and research suggests Trump’s tweets have made waves there too. A University of Ottawa study looked at Twitter musings from the U.S. President regarding Mexico, between June 16, 2015 and February 21, 2017 (long before NAFTA/USMCA negotiations). Researchers wanted to see if those tweets could create market uncertainty that showed up in a measurable way. The conclusion is “fluctuations between the Mexican peso/U.S. dollar exchange are not only influenced by past changes in the foreign exchange rate, but also by Donald Trump daily negative tweets.”

The fact that the U.S. President hasn’t been banned from Twitter, despite a litany of tweets that violate Twitter’s rules of conduct, speaks volumes. The company states, on its website that “We have one set of rules for the hundreds of millions of people who use Twitter,” and yet in a blog post from January, the company lays out its policy on important figureheads, which suggests that there are a different set of rules for VIPs than there are for everyday people. In that post, Twitter states: “blocking a world leader from Twitter or removing their controversial Tweets would hide important information people should be able to see and debate.”

Futurist and tech researcher Jesse Hirsh says Trump has helped Twitter evolve from being a social media platform that struggled to keep up with its peers like Facebook and Alphabet, to being part of the zeitgeist. He credits Trump’s previous experience as a reality TV star and his ability to entertain and distract the masses. “Trump gave Twitter legitimacy. It’s Twitter as the Parliament, the Commons, the place where public debate happens,” he says.

Sometimes public debate can be sparked unintentionally. Canada’s Foreign Affairs Minister Chrystia Freeland learned the hard way that a single tweet can start a diplomatic spat with major economic retaliation. Her August 2 Twitter post called on Saudi Arabia to release a couple of political prisoners. Those two sentences were translated into Arabic and shared globally via Twitter. That didn’t sit well with The Kingdom and it cut diplomatic and trade ties with Canada, which is significant when you consider that trade between the two countries was more than $3 billion last year.

Tweets are a kind of accelerated mini press release, or an official government statement reduced to 280 characters or less. With more than 336 million active users globally, Twitter is one of the biggest social media networks in the world. It’s changing the way we communicate, get trolled, debate, as well as the speed with which we do these things. “You can do due diligence faster, find out problems with a company’s financials faster or find problems with consumer sentiment faster,” says Hirsh.

“It’s that speed that appeals to people but I think it adds to volatility. It means you get bigger swings and bigger judgements that may not always be good or right,” he says. “You still need the critical distance, the night’s rest to figure out how you really feel and I think that gets lost.” Recent history shows that even though Twitter allows information to be disseminated more quickly, the real-life benefits of taking the time to digest a tweet rather than react to it immediately is where the real value lies.

Cover image of Tesla CEO Elon Musk in Adelaide, Australia, in July 2017. Photo by Ben McMahon/EPA