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