Mar­ket nar­ra­tives spread like epi­demics and can turn on a dime

Some are even true

The Sun Times (Owen Sound) - - BUSINESS - TOM BRADLEY

In a mar­ket­ing class dur­ing my un­der­grad, the pro­fes­sor put two words on the board — at­ti­tude and be­hav­ior — and asked us to draw an ar­row be­tween them. Vir­tu­ally ev­ery­one, in­clud­ing me, had it point­ing from at­ti­tude to be­hav­ior. It seemed ob­vi­ous, but our prof pro­ceeded to show us why we were wrong. Ex­pe­ri­ences and be­hav­iour shape at­ti­tudes, not the other way around.

I was re­minded of that class re­cently when I saw an­other pro­fes­sor speak on a re­lated topic. Robert Shiller of Yale Univer­sity, one of the lead­ing eco­nomic thinkers of our time, told the au­di­ence that his cur­rent re­search is on how nar­ra­tives in­flu­ence eco­nomic and mar­ket be­hav­iour.

I be­lieve he was re­fer­ring to well worn sto­ry­lines such as “the world is run­ning out of (or is awash with) oil” or “China’s de­mand for com­modi­ties is in­sa­tiable (or peak­ing).” Nar­ra­tives that spread like epi­demics, whether they’re true or not.

A u-turn: A lot of es­tab­lished trends re­versed in the fourth quar­ter of 2018. At least the nar­ra­tives around them changed. Just a few months ago, the FAANG stocks were un­stop­pable but now their growth prospects and com­pet­i­tive po­si­tions are be­ing ques­tioned.

At this time last year, we were ex­pe­ri­enc­ing broad-based eco­nomic growth. Now there are con­cerns about the length of the cy­cle and flare-ups in the trade wars. China and Europe are show­ing signs of slow­ing down.

The mar­ket now re­flects what in­vestors per­ceive the new re­al­ity to be around these and other fac­tors. The in­ter­est­ing thing about chang­ing nar­ra­tives, how­ever, is that often the un­der­ly­ing facts haven’t changed. The is­sue or con­cern has just been out of the spot­light.

News but not new in­deed: Some of the cur­rent hot but­tons are not new. They just have a new head­line and a few ad­di­tional data points.

Debt: Eco­nomic growth over the past two decades has been juiced by in­creased bor­row­ing. The ex­panded use of, or should I say de­pen­dence on, gov­ern­ment and pri­vate debt has been an un­re­lent­ing trend. There’s noth­ing new here, but in­vestors have wo­ken up to the fact that debt lev­els are ex­treme.

China: There’s al­ways a mar­ket nar­ra­tive about China. It’s usu­ally about growth. What’s less often high­lighted is how trade re­la­tion­ships are tilted in China’s favour. The western world buys Chi­ne­se­made goods in size, but the door into their econ­omy is barely open. Com­pa­nies that do get in find that gov­ern­ment pol­icy can turn on a dime and their in­tel­lec­tual prop­erty is not pro­tected. With Mr. Trump in the White House, these is­sues have taken cen­tre stage.

Hu­man rights: In the western world, we do busi­ness with coun­tries, in­clud­ing China, whose ethics run counter to ours. We over­look cor­rup­tion, how women and mi­nori­ties are treated, lim­i­ta­tions on free speech and po­lit­i­cal in­ter­fer­ence in the jus­tice sys­tem. These are deeply prob­lem­atic, yet only fig­ure into in­vestors’ risk equa­tion af­ter a tragic event oc­curs, like a jour­nal­ist be­ing jailed or killed.

Lurk­ing in the shad­ows: While the neg­a­tive nar­ra­tives have been win­ning the day in re­cent months, we shouldn’t for­get some pos­i­tive ones that have been shunted to the shad­ows.

Grow­ing mid­dle class: One of the world’s big­gest eco­nomic forces is the ex­pand­ing mid­dle class in Asia. This trend is un­even from year to year and coun­try to coun­try but isn’t go­ing away.

Con­sol­i­da­tion: Most in­dus­tries to­day have fewer, more dom­i­nant play­ers, which has a pos­i­tive im­pact on prof­its.

Liq­uid­ity: The tril­lion dol­lars sit­ting with pri­vate eq­uity man­agers (plus $3-4 tril­lion of as­so­ci­ated debt) is search­ing for some­thing to buy. A good por­tion will go to buy­ing pub­lic com­pa­nies at pre­mium prices.

What’s im­por­tant: If we did my pro­fes­sor’s ex­er­cise us­ing “stock mar­ket” and “dom­i­nant nar­ra­tive,” which way would the ar­row go?

Like my class, you might think that mar­kets move with changes in nar­ra­tive, but I’m in­clined to think the op­po­site it true. In the short term, mar­kets rise and fall for a myr­iad of rea­sons. It’s hu­man na­ture, how­ever, to look for a spe­cific cause. The ex­pla­na­tions are rarely the cause al­though some turn into what Pro­fes­sor Shiller calls a nar­ra­tive. At that point, they can cer­tainly re­in­force a trend.

The chal­lenge for in­vestors is to wade through the wave of in­for­ma­tion, dis­card­ing the in­valid and unim­por­tant, and not los­ing track of the pow­er­ful and en­dur­ing.


A lot of es­tab­lished trends re­versed in the fourth quar­ter of 2018.

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