Latest / Masters in Business / Stock Market Stories via the Narrative Machine

Transcript

Stock Market Stories via the Narrative Machine · Masters in Business

• 0:08
  Speaker 1: Stock investors regularly consume all sorts of financial news opinion commentary,
• 0:22
  Speaker 1: but they hardly ever consider who's driving those narratives and
• 0:26
  Speaker 1: whether they're helpful to their portfolios. I'm Barry Ridheltson on
• 0:31
  Speaker 1: today's edition of At the Money. We're going to discuss
• 0:35
  Speaker 1: the narrative machine to help us unpack all of this
• 0:39
  Speaker 1: and what it means for your portfolio. Let's bring in
• 0:42
  Speaker 1: Ben Hunt of Percient. Ben's firm uses linguistic pattern recognition
• 0:48
  Speaker 1: and media network mapping to identify narrative clusters that might
• 0:54
  Speaker 1: create investment opportunities. So, Ben, you've written about narrative constructions
• 0:59
  Speaker 1: and everything from politics, to markets, even public health. How
• 1:05
  Speaker 1: are narratives being weaponized in everyday practice?
• 1:09
  Speaker 2: Narratives have always been weaponized, meaning good politicians are effective.
• 1:15
  Speaker 2: Politicians have always understood the power of a good story
• 1:21
  Speaker 2: to answer the question why why should you vote for me?
• 1:25
  Speaker 2: Why should you favor this policy? That's what good politicians
• 1:28
  Speaker 2: are great at. They're great at presenting their vision of
• 1:33
  Speaker 2: what reality is. What's changed today is that everyone is
• 1:39
  Speaker 2: in on that act. Everyone is now trying to tell
• 1:43
  Speaker 2: a story about how to think about their company's earnings.
• 1:49
  Speaker 2: This central banks monetary policies. You really saw this change
• 1:55
  Speaker 2: with the Great Financial Crisis and the FED starting to
• 1:59
  Speaker 2: use use awkward guidance, starting to use their words to
• 2:04
  Speaker 2: impact markets. That's a great example of narrative construction. And
• 2:09
  Speaker 2: then you saw so many CEOs follow suit to tell
• 2:13
  Speaker 2: a good story to get a multiple on your stock
• 2:16
  Speaker 2: rather than tell something about operation leverage or anything like that.
• 2:21
  Speaker 2: It's all about telling a story. Today we can call
• 2:24
  Speaker 2: it weaponization, but to me, it's just a natural evolution
• 2:27
  Speaker 2: of how storytelling goes.
• 2:30
  Speaker 1: So if everybody is a storyteller, does that just create
• 2:34
  Speaker 1: a sea of noise? How can we identify which of
• 2:37
  Speaker 1: those stories are worth paying attention to and what's just
• 2:41
  Speaker 1: background noise and normal media discourse.
• 2:45
  Speaker 2: Well, I think you can tell the difference between storytelling
• 2:49
  Speaker 2: that is describing what happened, that just filling the airtime,
• 2:54
  Speaker 2: if you will, of giving you a reason why stocks
• 2:58
  Speaker 2: went up or financials went down. Today, I think what
• 3:01
  Speaker 2: you want to look at, though carefully, is the effort
• 3:04
  Speaker 2: that's made by Federal Reserve my CEOs hundits who are
• 3:10
  Speaker 2: trying to be rescriptive. They're trying to tell you a
• 3:14
  Speaker 2: story about what should happen in the future. It's an
• 3:18
  Speaker 2: indication of the effort that that company, that central bank,
• 3:23
  Speaker 2: that institution of that investor who's talking their book. They're
• 3:28
  Speaker 2: trying to give you an indicator. They're trying to convince
• 3:30
  Speaker 2: you of a certain course of action in the future,
• 3:33
  Speaker 2: and you should pay attention to it because if it's
• 3:36
  Speaker 2: a well told story and it gets traction, it works.
• 3:40
  Speaker 1: So I've heard you use the phrase missionaries to describe
• 3:45
  Speaker 1: the small set of actors that shape narratives. Everybody else
• 3:49
  Speaker 1: consumes who are these missionaries and where do they work,
• 3:53
  Speaker 1: what do they do well.
• 3:54
  Speaker 2: I use the word missionary because there's a famous thought
• 3:58
  Speaker 2: experiment around call the common knowledge game, and around how
• 4:03
  Speaker 2: narratives and stories spread through a crowd. And it really
• 4:07
  Speaker 2: goes back to old fashioned missionaries who go to some
• 4:11
  Speaker 2: other countries, some foreign country and stand up and start
• 4:15
  Speaker 2: preaching the word. That's what a missionary is, and that's
• 4:19
  Speaker 2: that's what spreads the word of a story. A missionary
• 4:23
  Speaker 2: is something who someone who people are paying attention to.
• 4:26
  Speaker 1: So that's anyone anyone from the chief economist of Goullman
• 4:29
  Speaker 1: Sachs or the Federal Reserve chair to roaring Kitty that
• 4:34
  Speaker 1: that defines missionaries.
• 4:35
  Speaker 2: That defines missionary. You got it.
• 4:38
  Speaker 1: Huh. So who are the most influential missionaries in today's
• 4:43
  Speaker 1: markets and how has that list changed over time? I
• 4:47
  Speaker 1: mentioned Roaring Kitty, I kind of you know, people talk
• 4:51
  Speaker 1: about Reddit like it's new. I kind of remember the
• 4:55
  Speaker 1: Yahoo message boards in the nineteen nineties. They move stocks,
• 4:59
  Speaker 1: even though was a different era and so long ago.
• 5:02
  Speaker 2: They absolutely moved stocks. And it's the same principle today.
• 5:06
  Speaker 2: So I would tell you the most impactful missionary since
• 5:10
  Speaker 2: I've really been looking at this, you know, over the
• 5:12
  Speaker 2: last sixteen years, is the US FED chair. That's number one,
• 5:17
  Speaker 2: Number two, A two B are going to be other
• 5:21
  Speaker 2: central bank heads ECB had BJ head, They're they're a
• 5:26
  Speaker 2: distant number two. What's interesting to me about our new
• 5:31
  Speaker 2: era of i'll call it fiscal dominance, where the role
• 5:36
  Speaker 2: of the Federal Reserve has been diminished or subsumed to
• 5:40
  Speaker 2: some degree, intentionally so by Treasury, by the White House,
• 5:46
  Speaker 2: is that the missionary power of Powell today is a
• 5:51
  Speaker 2: fraction of the missionary power of Powell four years ago.
• 5:57
  Speaker 1: I'm so glad you said that, because ever since Knes
• 6:01
  Speaker 1: we understand the playback. You have a financial crisis or recession,
• 6:05
  Speaker 1: the federal government stimulates with fiscal stimulus. That really did
• 6:11
  Speaker 1: not happen to any substantial degree following the financial crisis.
• 6:17
  Speaker 1: How much did the sort of abdication of fiscal authority
• 6:22
  Speaker 1: by Congress allow the Federal Reserve chair person to become
• 6:28
  Speaker 1: missionary number one?
• 6:30
  Speaker 2: That was an enormous part of it. It was also
• 6:33
  Speaker 2: desired by the White House. It was actually desired by
• 6:37
  Speaker 2: the White.
• 6:37
  Speaker 1: House because the Obama White House.
• 6:40
  Speaker 2: Hundred percent because the Federal Reserve has a Again, this
• 6:45
  Speaker 2: is the presentation. The presentation is that they are largely
• 6:49
  Speaker 2: an apolitical entity. So something coming from the FED, whether
• 6:54
  Speaker 2: it's a narrative, whether it's actual policy, doesn't get the
• 6:57
  Speaker 2: same sort of immediate, raw partisan pushback the policy from
• 7:04
  Speaker 2: the White House they'llbellma White House received. So it was
• 7:07
  Speaker 2: entirely desired that the FED take the lead and Burnanki
• 7:15
  Speaker 2: yelling now Powell after that, they certainly rose to that challenge.
• 7:20
  Speaker 2: What's changed today is that this White House has very
• 7:25
  Speaker 2: intentionally tried to bring the FED to heal. So if
• 7:29
  Speaker 2: you're looking at who are the dominant missionaries today, I'd
• 7:32
  Speaker 2: put Vessant over Powell by a significant margin today.
• 7:37
  Speaker 1: So let's roll back to twenty twenty during the first
• 7:42
  Speaker 1: Trump presidency and into twenty one during the first year
• 7:46
  Speaker 1: or two of the Biden presidency. That seemed to be
• 7:49
  Speaker 1: a massive regime change, where if Congress previously had sort
• 7:56
  Speaker 1: of abdicated the fiscal stimulus that boomerang with vengeance and
• 8:02
  Speaker 1: Cares Act one and two under President then first term
• 8:06
  Speaker 1: President Trump was the single largest fiscal stimulus at least
• 8:10
  Speaker 1: as a percentage of GDP since World War Two. And
• 8:13
  Speaker 1: then Biden comes in and you have CARES Act three
• 8:16
  Speaker 1: and the Infrastructure Bill and the Semiconductor Bill. It seemed
• 8:20
  Speaker 1: like giant regime change from monetary stimulus to fiscal stimulus.
• 8:26
  Speaker 1: Is that simply because we had a once a century
• 8:29
  Speaker 1: pandemic and the government was scared out of its mind?
• 8:33
  Speaker 1: Or are there other forces driving that shift? Be it
• 8:37
  Speaker 1: narrative or otherwise.
• 8:38
  Speaker 2: Oh, I think it's it's it's all true, you know,
• 8:41
  Speaker 2: that's what that's what uh him away, he said about religions.
• 8:45
  Speaker 2: We said, you know what trait? You said, They're all true.
• 8:48
  Speaker 2: So these things are always overdetermined, Garry. So what what
• 8:52
  Speaker 2: the mix is between you know, response to the plague,
• 8:56
  Speaker 2: what was driven by partisan politics, trying to stay in office,
• 9:01
  Speaker 2: stimulus for stimulus sake. It's all of a piece. I
• 9:05
  Speaker 2: think what's impactful here, though, Barry, is that the Fed's
• 9:10
  Speaker 2: job was to avoid inflation, and it was the fiscal
• 9:14
  Speaker 2: side that drove the inflation, the helicopter money. But that
• 9:20
  Speaker 2: that veneer of impartiality, of a politicalness, I think was
• 9:26
  Speaker 2: really damaged during that Biden administration, and so gave the
• 9:32
  Speaker 2: opening for Trump to come in and say, they're all
• 9:35
  Speaker 2: just political anyway, so I want my political guys to
• 9:39
  Speaker 2: call the shots. It's all true, Barry.
• 9:42
  Speaker 1: It's kind of fascinating that the first year of the
• 9:45
  Speaker 1: Biden administration and the same thing with both this Trump
• 9:51
  Speaker 1: administration and the prior Trump administration. Essentially you had pretty
• 9:56
  Speaker 1: much single party rule. Might have been an exception because
• 10:02
  Speaker 1: it was panic was ruling. You roll back to nine
• 10:05
  Speaker 1: with Obama, you had a divided government, The crisis was
• 10:09
  Speaker 1: more or less over, and you just didn't see the
• 10:11
  Speaker 1: same level of fiscal stimulus that you saw in either
• 10:15
  Speaker 1: twenty or twenty one were arguably twenty seventeen as well.
• 10:22
  Speaker 1: How much does politics drive partisan politics drive narratives and
• 10:28
  Speaker 1: how significant is into the.
• 10:30
  Speaker 2: Market answering the question why why should you vote for
• 10:34
  Speaker 2: this policy, why should you support that policy? Those are
• 10:39
  Speaker 2: the narratives that really drive our whole world in society.
• 10:44
  Speaker 2: I would like to say that everything ultimately gets cashed
• 10:47
  Speaker 2: out in politics, the market narratives at a very high level,
• 10:52
  Speaker 2: at a maybe a low level, at that tectonic plate
• 10:56
  Speaker 2: level of fiscal dominant dominance or monetary policy dominance, stimulus
• 11:02
  Speaker 2: being you know, the policies that are trying to reverse
• 11:06
  Speaker 2: that hard money policies. These are always at their core
• 11:10
  Speaker 2: political arguments, political narratives, and they absolutely are I think,
• 11:18
  Speaker 2: ultimately responsible for the big shifts we see in markets.
• 11:22
  Speaker 1: Let's talk about something you've written about, recursive social loops.
• 11:27
  Speaker 1: Explain what that is and is the modern form of
• 11:31
  Speaker 1: let's call it social media or decentralized media making those
• 11:36
  Speaker 1: loops tighter and faster.
• 11:38
  Speaker 2: Without a doubt, the half life of stories is declining,
• 11:44
  Speaker 2: which makes actually kind of better for narrative analysis because
• 11:49
  Speaker 2: you can, if not ignore, you can safely assume that
• 11:53
  Speaker 2: the stories of today that are very specific to today,
• 11:58
  Speaker 2: a very specific political issue or the like, they're not
• 12:03
  Speaker 2: going to be around the issues that stick around Mary,
• 12:06
  Speaker 2: the ones that have a longer half life, that have
• 12:09
  Speaker 2: a more secular pattern right as opposed to you've just
• 12:14
  Speaker 2: got a recursive loop and you're just kind of done.
• 12:16
  Speaker 2: So a recursive social loop simply means that we tend
• 12:19
  Speaker 2: to all of these these stories tend to get into
• 12:23
  Speaker 2: their I like to call them. They get auto tuned
• 12:26
  Speaker 2: into a certain audience where your echo chamber, and they
• 12:31
  Speaker 2: just go back and forth. But in markets, the ones
• 12:34
  Speaker 2: that are the narratives that are longer lasting and hence
• 12:37
  Speaker 2: more investible, are the ones that don't get trapped into
• 12:42
  Speaker 2: I mean, they are obviously impacted by political auto tuning,
• 12:46
  Speaker 2: but they go beyond that.
• 12:48
  Speaker 1: So you've described the narrative machine as distinct from traditional
• 12:54
  Speaker 1: sentiment analysis. Explain the ways that that is the case.
• 12:58
  Speaker 2: So cinniment is I think a very weak read to
• 13:02
  Speaker 2: try to understand what changes people's minds. And this gets
• 13:06
  Speaker 2: back to the initial idea of well, how do you
• 13:09
  Speaker 2: measure information? And a narrative is information? A story is information.
• 13:15
  Speaker 2: The way you measure it is not by its truthfulness
• 13:19
  Speaker 2: or its accuracy. You measure its strength by how does
• 13:23
  Speaker 2: it does it change your mind? Does it does it
• 13:25
  Speaker 2: does it make you think something differently than you thought
• 13:29
  Speaker 2: before sentiment, Whether you use nice words or mean words
• 13:34
  Speaker 2: to talk about something, it never changes your mind. It
• 13:37
  Speaker 2: never changed your mind. The only thing that can change
• 13:39
  Speaker 2: your mind, Barry, is a better story. When somebody tells
• 13:44
  Speaker 2: you a story, they put it in that story arc
• 13:47
  Speaker 2: that has the truthiness. Does that have to be truth
• 13:50
  Speaker 2: It has to be the truthiness? And you go, huh,
• 13:53
  Speaker 2: that makes sense.
• 13:56
  Speaker 1: I'm glad you use that phrase truthiness again. You you've
• 14:00
  Speaker 1: explained that narratives are not truth claims, but rather they're
• 14:05
  Speaker 1: coordination tools. Give us a little more details on what
• 14:10
  Speaker 1: a narrative as coordination tool looks like.
• 14:13
  Speaker 2: Yeah, a coordination tool simply means that the speaker, the
• 14:17
  Speaker 2: opinion giver, is trying to shape opinion and behavior to
• 14:22
  Speaker 2: a certain outcome. That's all. It means. A politician wants
• 14:26
  Speaker 2: to shape your behavior to vote a certain way. Central
• 14:30
  Speaker 2: bankers typically want to get you to go farther at
• 14:33
  Speaker 2: take more risk with your portfolio than you otherwise would.
• 14:37
  Speaker 2: A coordination tool simply means using your words for effect,
• 14:44
  Speaker 2: not as an accurate description of what you actually think,
• 14:49
  Speaker 2: but to use your words to change behavior. That's what
• 14:52
  Speaker 2: forward guidance is all about. That's what advertising is all about.
• 14:57
  Speaker 2: It's not to share with you the the actual workings,
• 15:01
  Speaker 2: inner workings of their mind. Is to try to change
• 15:04
  Speaker 2: your behavior. That's what a coordination tool is.
• 15:08
  Speaker 1: You've used the freight captured by a prevailing market story.
• 15:12
  Speaker 1: Some investors get captured and they get sucked into it.
• 15:16
  Speaker 1: Some of the more common themes have been bitcoins as
• 15:20
  Speaker 1: a inflation hedge, gold as a substitute for currency. How
• 15:27
  Speaker 1: can any investor detect when they've been either consciously or
• 15:31
  Speaker 1: unconsciously captured by a narrative.
• 15:35
  Speaker 2: It's difficult. Remember the X Files where Fox molders. You know,
• 15:40
  Speaker 2: I want to believe, and that's true for all of
• 15:44
  Speaker 2: us humans. We want to believe it. When somebody tells
• 15:48
  Speaker 2: us a believable story, and they're a believable source, then
• 15:54
  Speaker 2: our predilection is to say, oh huh, that's interesting. I believe.
• 16:00
  Speaker 2: What's crucial to do? Barry? And it's so hard. I mean,
• 16:03
  Speaker 2: I've been doing this professionally for thirty five years, and
• 16:06
  Speaker 2: I still We'll get wrapped up in a story. I'll
• 16:10
  Speaker 2: read a tweet, or it'll make me really mad. I'll
• 16:14
  Speaker 2: read a story and go, oh, that's really interesting. I
• 16:16
  Speaker 2: got to look up companies to invest in that theme.
• 16:20
  Speaker 2: The crucial thing, Barry, is not to think this stuff is, oh,
• 16:24
  Speaker 2: it's always a lie, or they're trying to fool you.
• 16:27
  Speaker 2: It's just to maintain some critical distance. The words are
• 16:31
  Speaker 2: being spoken to you to get you to change your behavior.
• 16:35
  Speaker 2: They're trying to change your mind. They're trying to convince
• 16:37
  Speaker 2: you of a story that's not bad. That's what we
• 16:40
  Speaker 2: humans do. And it may be a story that you
• 16:43
  Speaker 2: do end up believing. That's fine too. The crucial thing
• 16:47
  Speaker 2: is always, though, to step back and just ask yourself,
• 16:51
  Speaker 2: why am I reading this now? Why is this story
• 16:54
  Speaker 2: being presented to me? Now? Just do that, Just do
• 16:58
  Speaker 2: that simple step and it will give you just a
• 17:01
  Speaker 2: it'll give you a beat. It'll give you a beat,
• 17:03
  Speaker 2: just a step back, so you don't rush headlong into
• 17:07
  Speaker 2: believing a story because you want to believe it. That's
• 17:11
  Speaker 2: all you need to do. Why am I reading this now?
• 17:14
  Speaker 1: To say the very least, for sure, thank you, Ben.
• 17:17
  Speaker 1: To wrap up, the narrative machine is everywhere. It is
• 17:22
  Speaker 1: creating storylines for stocks, for asset classes, for markets, for politicians,
• 17:28
  Speaker 1: for individual companies. It takes a little bit of common
• 17:32
  Speaker 1: sense to step back, take a beat, give yourself a moment.
• 17:37
  Speaker 1: Ask yourself, is this a reliable storyteller? Do they have
• 17:40
  Speaker 1: a good track record? Are they the sort of storyteller
• 17:45
  Speaker 1: that is worth believing, Or perhaps they're selling something and
• 17:50
  Speaker 1: we should be a little more circumspect before we buy.
• 17:55
  Speaker 1: I'm Barry Ridults, you're listening to Bloomberg's at the Money
• 18:00
  Speaker 2: Back a band and rend themselfscl and tolded hand invented