WEBVTT - Stock Market Stories via the Narrative Machine 

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<v Speaker 1>Stock investors regularly consume all sorts of financial news opinion commentary,

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<v Speaker 1>but they hardly ever consider who's driving those narratives and

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<v Speaker 1>whether they're helpful to their portfolios. I'm Barry Ridheltson on

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<v Speaker 1>today's edition of At the Money. We're going to discuss

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<v Speaker 1>the narrative machine to help us unpack all of this

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<v Speaker 1>and what it means for your portfolio. Let's bring in

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<v Speaker 1>Ben Hunt of Percient. Ben's firm uses linguistic pattern recognition

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<v Speaker 1>and media network mapping to identify narrative clusters that might

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<v Speaker 1>create investment opportunities. So, Ben, you've written about narrative constructions

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<v Speaker 1>and everything from politics, to markets, even public health. How

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<v Speaker 1>are narratives being weaponized in everyday practice?

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<v Speaker 2>Narratives have always been weaponized, meaning good politicians are effective.

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<v Speaker 2>Politicians have always understood the power of a good story

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<v Speaker 2>to answer the question why why should you vote for me?

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<v Speaker 2>Why should you favor this policy? That's what good politicians

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<v Speaker 2>are great at. They're great at presenting their vision of

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<v Speaker 2>what reality is. What's changed today is that everyone is

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<v Speaker 2>in on that act. Everyone is now trying to tell

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<v Speaker 2>a story about how to think about their company's earnings.

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<v Speaker 2>This central banks monetary policies. You really saw this change

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<v Speaker 2>with the Great Financial Crisis and the FED starting to

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<v Speaker 2>use use awkward guidance, starting to use their words to

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<v Speaker 2>impact markets. That's a great example of narrative construction. And

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<v Speaker 2>then you saw so many CEOs follow suit to tell

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<v Speaker 2>a good story to get a multiple on your stock

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<v Speaker 2>rather than tell something about operation leverage or anything like that.

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<v Speaker 2>It's all about telling a story. Today we can call

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<v Speaker 2>it weaponization, but to me, it's just a natural evolution

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<v Speaker 2>of how storytelling goes.

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<v Speaker 1>So if everybody is a storyteller, does that just create

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<v Speaker 1>a sea of noise? How can we identify which of

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<v Speaker 1>those stories are worth paying attention to and what's just

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<v Speaker 1>background noise and normal media discourse.

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<v Speaker 2>Well, I think you can tell the difference between storytelling

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<v Speaker 2>that is describing what happened, that just filling the airtime,

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<v Speaker 2>if you will, of giving you a reason why stocks

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<v Speaker 2>went up or financials went down. Today, I think what

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<v Speaker 2>you want to look at, though carefully, is the effort

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<v Speaker 2>that's made by Federal Reserve my CEOs hundits who are

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<v Speaker 2>trying to be rescriptive. They're trying to tell you a

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<v Speaker 2>story about what should happen in the future. It's an

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<v Speaker 2>indication of the effort that that company, that central bank,

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<v Speaker 2>that institution of that investor who's talking their book. They're

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<v Speaker 2>trying to give you an indicator. They're trying to convince

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<v Speaker 2>you of a certain course of action in the future,

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<v Speaker 2>and you should pay attention to it because if it's

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<v Speaker 2>a well told story and it gets traction, it works.

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<v Speaker 1>So I've heard you use the phrase missionaries to describe

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<v Speaker 1>the small set of actors that shape narratives. Everybody else

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<v Speaker 1>consumes who are these missionaries and where do they work,

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<v Speaker 1>what do they do well.

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<v Speaker 2>I use the word missionary because there's a famous thought

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<v Speaker 2>experiment around call the common knowledge game, and around how

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<v Speaker 2>narratives and stories spread through a crowd. And it really

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<v Speaker 2>goes back to old fashioned missionaries who go to some

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<v Speaker 2>other countries, some foreign country and stand up and start

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<v Speaker 2>preaching the word. That's what a missionary is, and that's

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<v Speaker 2>that's what spreads the word of a story. A missionary

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<v Speaker 2>is something who someone who people are paying attention to.

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<v Speaker 1>So that's anyone anyone from the chief economist of Goullman

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<v Speaker 1>Sachs or the Federal Reserve chair to roaring Kitty that

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<v Speaker 1>that defines missionaries.

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<v Speaker 2>That defines missionary. You got it.

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<v Speaker 1>Huh. So who are the most influential missionaries in today's

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<v Speaker 1>markets and how has that list changed over time? I

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<v Speaker 1>mentioned Roaring Kitty, I kind of you know, people talk

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<v Speaker 1>about Reddit like it's new. I kind of remember the

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<v Speaker 1>Yahoo message boards in the nineteen nineties. They move stocks,

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<v Speaker 1>even though was a different era and so long ago.

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<v Speaker 2>They absolutely moved stocks. And it's the same principle today.

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<v Speaker 2>So I would tell you the most impactful missionary since

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<v Speaker 2>I've really been looking at this, you know, over the

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<v Speaker 2>last sixteen years, is the US FED chair. That's number one,

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<v Speaker 2>Number two, A two B are going to be other

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<v Speaker 2>central bank heads ECB had BJ head, They're they're a

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<v Speaker 2>distant number two. What's interesting to me about our new

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<v Speaker 2>era of i'll call it fiscal dominance, where the role

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<v Speaker 2>of the Federal Reserve has been diminished or subsumed to

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<v Speaker 2>some degree, intentionally so by Treasury, by the White House,

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<v Speaker 2>is that the missionary power of Powell today is a

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<v Speaker 2>fraction of the missionary power of Powell four years ago.

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<v Speaker 1>I'm so glad you said that, because ever since Knes

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<v Speaker 1>we understand the playback. You have a financial crisis or recession,

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<v Speaker 1>the federal government stimulates with fiscal stimulus. That really did

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<v Speaker 1>not happen to any substantial degree following the financial crisis.

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<v Speaker 1>How much did the sort of abdication of fiscal authority

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<v Speaker 1>by Congress allow the Federal Reserve chair person to become

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<v Speaker 1>missionary number one?

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<v Speaker 2>That was an enormous part of it. It was also

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<v Speaker 2>desired by the White House. It was actually desired by

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<v Speaker 2>the White.

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<v Speaker 1>House because the Obama White House.

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<v Speaker 2>Hundred percent because the Federal Reserve has a Again, this

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<v Speaker 2>is the presentation. The presentation is that they are largely

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<v Speaker 2>an apolitical entity. So something coming from the FED, whether

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<v Speaker 2>it's a narrative, whether it's actual policy, doesn't get the

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<v Speaker 2>same sort of immediate, raw partisan pushback the policy from

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<v Speaker 2>the White House they'llbellma White House received. So it was

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<v Speaker 2>entirely desired that the FED take the lead and Burnanki

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<v Speaker 2>yelling now Powell after that, they certainly rose to that challenge.

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<v Speaker 2>What's changed today is that this White House has very

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<v Speaker 2>intentionally tried to bring the FED to heal. So if

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<v Speaker 2>you're looking at who are the dominant missionaries today, I'd

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<v Speaker 2>put Vessant over Powell by a significant margin today.

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<v Speaker 1>So let's roll back to twenty twenty during the first

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<v Speaker 1>Trump presidency and into twenty one during the first year

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<v Speaker 1>or two of the Biden presidency. That seemed to be

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<v Speaker 1>a massive regime change, where if Congress previously had sort

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<v Speaker 1>of abdicated the fiscal stimulus that boomerang with vengeance and

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<v Speaker 1>Cares Act one and two under President then first term

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<v Speaker 1>President Trump was the single largest fiscal stimulus at least

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<v Speaker 1>as a percentage of GDP since World War Two. And

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<v Speaker 1>then Biden comes in and you have CARES Act three

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<v Speaker 1>and the Infrastructure Bill and the Semiconductor Bill. It seemed

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<v Speaker 1>like giant regime change from monetary stimulus to fiscal stimulus.

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<v Speaker 1>Is that simply because we had a once a century

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<v Speaker 1>pandemic and the government was scared out of its mind?

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<v Speaker 1>Or are there other forces driving that shift? Be it

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<v Speaker 1>narrative or otherwise.

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<v Speaker 2>Oh, I think it's it's it's all true, you know,

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<v Speaker 2>that's what that's what uh him away, he said about religions.

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<v Speaker 2>We said, you know what trait? You said, They're all true.

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<v Speaker 2>So these things are always overdetermined, Garry. So what what

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<v Speaker 2>the mix is between you know, response to the plague,

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<v Speaker 2>what was driven by partisan politics, trying to stay in office,

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<v Speaker 2>stimulus for stimulus sake. It's all of a piece. I

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<v Speaker 2>think what's impactful here, though, Barry, is that the Fed's

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<v Speaker 2>job was to avoid inflation, and it was the fiscal

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<v Speaker 2>side that drove the inflation, the helicopter money. But that

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<v Speaker 2>that veneer of impartiality, of a politicalness, I think was

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<v Speaker 2>really damaged during that Biden administration, and so gave the

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<v Speaker 2>opening for Trump to come in and say, they're all

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<v Speaker 2>just political anyway, so I want my political guys to

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<v Speaker 2>call the shots. It's all true, Barry.

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<v Speaker 1>It's kind of fascinating that the first year of the

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<v Speaker 1>Biden administration and the same thing with both this Trump

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<v Speaker 1>administration and the prior Trump administration. Essentially you had pretty

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<v Speaker 1>much single party rule. Might have been an exception because

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<v Speaker 1>it was panic was ruling. You roll back to nine

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<v Speaker 1>with Obama, you had a divided government, The crisis was

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<v Speaker 1>more or less over, and you just didn't see the

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<v Speaker 1>same level of fiscal stimulus that you saw in either

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<v Speaker 1>twenty or twenty one were arguably twenty seventeen as well.

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<v Speaker 1>How much does politics drive partisan politics drive narratives and

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<v Speaker 1>how significant is into the.

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<v Speaker 2>Market answering the question why why should you vote for

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<v Speaker 2>this policy, why should you support that policy? Those are

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<v Speaker 2>the narratives that really drive our whole world in society.

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<v Speaker 2>I would like to say that everything ultimately gets cashed

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<v Speaker 2>out in politics, the market narratives at a very high level,

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<v Speaker 2>at a maybe a low level, at that tectonic plate

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<v Speaker 2>level of fiscal dominant dominance or monetary policy dominance, stimulus

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<v Speaker 2>being you know, the policies that are trying to reverse

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<v Speaker 2>that hard money policies. These are always at their core

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<v Speaker 2>political arguments, political narratives, and they absolutely are I think,

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<v Speaker 2>ultimately responsible for the big shifts we see in markets.

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<v Speaker 1>Let's talk about something you've written about, recursive social loops.

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<v Speaker 1>Explain what that is and is the modern form of

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<v Speaker 1>let's call it social media or decentralized media making those

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<v Speaker 1>loops tighter and faster.

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<v Speaker 2>Without a doubt, the half life of stories is declining,

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<v Speaker 2>which makes actually kind of better for narrative analysis because

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<v Speaker 2>you can, if not ignore, you can safely assume that

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<v Speaker 2>the stories of today that are very specific to today,

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<v Speaker 2>a very specific political issue or the like, they're not

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<v Speaker 2>going to be around the issues that stick around Mary,

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<v Speaker 2>the ones that have a longer half life, that have

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<v Speaker 2>a more secular pattern right as opposed to you've just

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<v Speaker 2>got a recursive loop and you're just kind of done.

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<v Speaker 2>So a recursive social loop simply means that we tend

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<v Speaker 2>to all of these these stories tend to get into

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<v Speaker 2>their I like to call them. They get auto tuned

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<v Speaker 2>into a certain audience where your echo chamber, and they

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<v Speaker 2>just go back and forth. But in markets, the ones

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<v Speaker 2>that are the narratives that are longer lasting and hence

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<v Speaker 2>more investible, are the ones that don't get trapped into

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<v Speaker 2>I mean, they are obviously impacted by political auto tuning,

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<v Speaker 2>but they go beyond that.

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<v Speaker 1>So you've described the narrative machine as distinct from traditional

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<v Speaker 1>sentiment analysis. Explain the ways that that is the case.

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<v Speaker 2>So cinniment is I think a very weak read to

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<v Speaker 2>try to understand what changes people's minds. And this gets

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<v Speaker 2>back to the initial idea of well, how do you

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<v Speaker 2>measure information? And a narrative is information? A story is information.

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<v Speaker 2>The way you measure it is not by its truthfulness

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<v Speaker 2>or its accuracy. You measure its strength by how does

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<v Speaker 2>it does it change your mind? Does it does it

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<v Speaker 2>does it make you think something differently than you thought

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<v Speaker 2>before sentiment, Whether you use nice words or mean words

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<v Speaker 2>to talk about something, it never changes your mind. It

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<v Speaker 2>never changed your mind. The only thing that can change

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<v Speaker 2>your mind, Barry, is a better story. When somebody tells

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<v Speaker 2>you a story, they put it in that story arc

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<v Speaker 2>that has the truthiness. Does that have to be truth

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<v Speaker 2>It has to be the truthiness? And you go, huh,

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<v Speaker 2>that makes sense.

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<v Speaker 1>I'm glad you use that phrase truthiness again. You you've

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<v Speaker 1>explained that narratives are not truth claims, but rather they're

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<v Speaker 1>coordination tools. Give us a little more details on what

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<v Speaker 1>a narrative as coordination tool looks like.

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<v Speaker 2>Yeah, a coordination tool simply means that the speaker, the

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<v Speaker 2>opinion giver, is trying to shape opinion and behavior to

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<v Speaker 2>a certain outcome. That's all. It means. A politician wants

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<v Speaker 2>to shape your behavior to vote a certain way. Central

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<v Speaker 2>bankers typically want to get you to go farther at

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<v Speaker 2>take more risk with your portfolio than you otherwise would.

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<v Speaker 2>A coordination tool simply means using your words for effect,

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<v Speaker 2>not as an accurate description of what you actually think,

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<v Speaker 2>but to use your words to change behavior. That's what

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<v Speaker 2>forward guidance is all about. That's what advertising is all about.

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<v Speaker 2>It's not to share with you the the actual workings,

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<v Speaker 2>inner workings of their mind. Is to try to change

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<v Speaker 2>your behavior. That's what a coordination tool is.

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<v Speaker 1>You've used the freight captured by a prevailing market story.

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<v Speaker 1>Some investors get captured and they get sucked into it.

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<v Speaker 1>Some of the more common themes have been bitcoins as

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<v Speaker 1>a inflation hedge, gold as a substitute for currency. How

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<v Speaker 1>can any investor detect when they've been either consciously or

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<v Speaker 1>unconsciously captured by a narrative.

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<v Speaker 2>It's difficult. Remember the X Files where Fox molders. You know,

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<v Speaker 2>I want to believe, and that's true for all of

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<v Speaker 2>us humans. We want to believe it. When somebody tells

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<v Speaker 2>us a believable story, and they're a believable source, then

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<v Speaker 2>our predilection is to say, oh huh, that's interesting. I believe.

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<v Speaker 2>What's crucial to do? Barry? And it's so hard. I mean,

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<v Speaker 2>I've been doing this professionally for thirty five years, and

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<v Speaker 2>I still We'll get wrapped up in a story. I'll

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<v Speaker 2>read a tweet, or it'll make me really mad. I'll

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<v Speaker 2>read a story and go, oh, that's really interesting. I

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<v Speaker 2>got to look up companies to invest in that theme.

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<v Speaker 2>The crucial thing, Barry, is not to think this stuff is, oh,

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<v Speaker 2>it's always a lie, or they're trying to fool you.

0:16:27.800 --> 0:16:31.480
<v Speaker 2>It's just to maintain some critical distance. The words are

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<v Speaker 2>being spoken to you to get you to change your behavior.

0:16:35.480 --> 0:16:37.720
<v Speaker 2>They're trying to change your mind. They're trying to convince

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<v Speaker 2>you of a story that's not bad. That's what we

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<v Speaker 2>humans do. And it may be a story that you

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<v Speaker 2>do end up believing. That's fine too. The crucial thing

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<v Speaker 2>is always, though, to step back and just ask yourself,

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<v Speaker 2>why am I reading this now? Why is this story

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<v Speaker 2>being presented to me? Now? Just do that, Just do

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<v Speaker 2>that simple step and it will give you just a

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<v Speaker 2>it'll give you a beat. It'll give you a beat,

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<v Speaker 2>just a step back, so you don't rush headlong into

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<v Speaker 2>believing a story because you want to believe it. That's

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<v Speaker 2>all you need to do. Why am I reading this now?

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<v Speaker 1>To say the very least, for sure, thank you, Ben.

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<v Speaker 1>To wrap up, the narrative machine is everywhere. It is

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<v Speaker 1>creating storylines for stocks, for asset classes, for markets, for politicians,

0:17:28.680 --> 0:17:32.439
<v Speaker 1>for individual companies. It takes a little bit of common

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<v Speaker 1>sense to step back, take a beat, give yourself a moment.

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<v Speaker 1>Ask yourself, is this a reliable storyteller? Do they have

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<v Speaker 1>a good track record? Are they the sort of storyteller

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<v Speaker 1>that is worth believing, Or perhaps they're selling something and

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<v Speaker 1>we should be a little more circumspect before we buy.

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<v Speaker 1>I'm Barry Ridults, you're listening to Bloomberg's at the Money

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<v Speaker 2>Back a band and rend themselfscl and tolded hand invented