Stock Market Stories via the Narrative Machine 

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1:01Investors regularly consume all sorts of financial news, opinion, commentary, but they hardly ever consider who's driving those narratives and whether they're helpful to their portfolios. I'm Barry Ritholtz, and on today's edition of At The Money, we're going to discuss the narrative machine. To help us unpack all of this and what it means for your portfolio, let's bring in Ben Hunt of Persean. Ben's firm uses linguistic pattern recognition and media network mapping to identify narrative clusters that might create investment opportunities. So Ben, you've written about narrative constructions and everything from politics to markets, even public health.

1:49How are narratives being weaponized in everyday practice? Narratives have always been weaponized, meaning good politicians or effective politicians have always understood the power of a good story. They answer the question, why? Why should you vote for me? Why should you favor this policy? That's what good politicians are great at. They're great at presenting their vision of what reality is. What's changed today is that everyone is in on that act. Everyone is now trying to tell a story about how to think about their company's earnings, this central bank's monetary policies. You really saw this change with the great financial crisis and the Fed starting to use forward guidance, starting to use their words to impact markets.

2:51That's a great example of narrative construction. And then you saw so many CEOs follow suit to tell a good story, to get a multiple on your stock, rather than tell something about operation leverage or anything like that. It's all about telling a story today. We can call it weaponization, but to me, it's just a natural evolution of how storytelling goes. So if everybody is a storyteller, doesn't that just create a sea of noise? How can we identify which of those stories are worth paying attention to and what's just background noise and normal media discourse? Well, I think you can tell the difference between storytelling that is describing what happened, this just filling the airtime, if you will, of giving you a reason why stocks went up or financials went down today.

3:45I think what you want to look at, though, carefully is the effort that's made by Federal Reserve, by CEOs, pundits who are trying to be prescriptive. They're trying to tell you a story about what should happen in the future. It's an indication of the effort that that company, that central bank, that institution, or that investor who's talking their book, they're trying to give you an indicator, they're trying to convince you of a certain course of action in the future. And you should pay attention to it because if it's a well-told story and it gets traction, it works. So I've heard you use the phrase missionaries to describe the small set of actors that shape narratives everybody else consumes.

4:35Who are these missionaries and where do they work? What do they do? Well, I use the word missionary because there's a famous thought experiment around what we call the common knowledge game and around how narratives and stories spread through a crowd. And it really goes back to old fashioned missionaries who go to some other country, some foreign country and stand up and start preaching the word. That's what a missionary is. And that's what spreads the word of a story. A missionary is someone who people are paying attention to. So anyone from the chief economist at Goldman Sachs or the Federal Reserve chair to Roaring Kitty, that defines missionaries?

5:20That defines missionary. You got it. So who are the most influential missionaries in today's markets? And how has that list changed over time? I mentioned Roaring Kitty. People talk about Reddit like it's new. I kind of remember the Yahoo message boards in the 1990s. They moved stocks, even though it was a different era and so long ago. They absolutely move stocks, and it's the same principle today. So I would tell you the most impactful missionary since I've really been looking at this over the last 16 years is the U.S. Fed chair. That's number one. Number 2A, 2B are going to be other central bank heads.

6:08ECB head, BOJ head, they're a distant number two. What's interesting to me about our new era of, I'll call it fiscal dominance, where the role of the Federal Reserve has been diminished or subsumed to some degree, intentionally so, by Treasury, by the White House, is that the missionary power of Powell today is a fraction of the missionary power of Powell four years ago. I'm so glad you said that because ever since Keynes, we understand the playback. You have a financial crisis or recession. The federal government stimulates with fiscal stimulus. That really did not happen to any substantial degree following the financial crisis.

7:01How much did the sort of abdication of fiscal authority by Congress allow the Federal Reserve chairperson to become missionary number one? That was an enormous part of it. It was also desired by the White House. It was absolutely desired by the White House. By the Obama White House? 100 percent because the federal reserve has a again this is the presentation the presentation is that they are largely an apolitical entity so something coming from the fed whether it's a narrative whether it's actual policy doesn't get the same sort of immediate raw partisan pushback that policy from the White House, the Obama White House received.

7:51So it was entirely desired that the Fed take the lead, and Bernanke, Yellen, Powell after that, they certainly rose to that challenge. What's changed today is that this White House has very intentionally tried to bring the Fed to heel. So if you're looking at who are the dominant missionaries today, I'd put Besant over Powell by a significant margin today. So let's roll back to 2020 during the first Trump presidency and into 21 during the first year or two of the Biden presidency. That seemed to be a massive regime change where if Congress previously had sort of abdicated the fiscal stimulus, that boomeranged with a vengeance.

8:46And CARES Act I and II under then first-term President Trump was the single largest fiscal stimulus, at least as a percentage of GDP, since World War II. And then Biden comes in and you have CARES Act III and the infrastructure bill and the semiconductor bill. It seemed like giant regime change from monetary stimulus to fiscal stimulus, is that simply because we had a once a century pandemic and the government was scared out of its mind? Or are there other forces driving that shift, be it narrative or otherwise? Oh, I think it's all true. That's what Hemingway said about religions. He said, they're all true.

9:33So these things are always overdetermined, Barry. So what the mix is between response to the plague, what was driven by partisan politics trying to stay in office, stimulus for stimulus sake. It's all of a piece. I think what's impactful here though, Barry, is that the Fed's job was to avoid inflation. And it was the fiscal side that drove the inflation, the helicopter money. But that veneer of impartiality, of apoliticalness, I think was really damaged during that Biden administration. And so gave the opening for Trump to come in and say, they're all just political anyway. So I want my political guys to call the shots.

10:25It's all true, Barry. It's kind of fascinating that the first year of the Biden administration and the same thing with both this Trump administration and the prior Trump administration, essentially you had pretty much a single party rule. The pandemic might have been an exception because it was panic was ruling. You roll back to 09 with Obama, you had a divided government, the crisis was more or less over, and you just didn't see the same level of fiscal stimulus that you saw in either 20 or 21, or arguably 2017 as well. How much does politics drive, partisan politics drive narratives, and how significant is it to the market?

11:15Answering the question, why, why should you vote for this policy? Why should you support that policy, those are the narratives that really drive our whole world and society. I always like to say that everything ultimately gets cashed out in politics. The market narratives at a very high level, at a tectonic, maybe a low level, at that tectonic plate level of fiscal dominance or monetary policy dominance, stimulus, the policies that are trying to reverse that, hard money policies. These are always at their core political arguments, political narratives. And they absolutely are, I think, ultimately responsible for the big shifts we see in markets.

12:07Let's talk about something you've written about, recursive social loops. Explain what that is. And is the modern form of, let's call it social media or decentralized media, making those loops tighter and faster? Without a doubt, the half-life of stories is declining, which makes it actually kind of better for narrative analysis because you can, if not ignore, you can safely assume that the stories of today that are very specific to today, a very specific political issue or the like, they're not going to be around. The issues that stick around, Barry, the ones that have a longer half-life, that have a more secular pattern, right, as opposed to, oh, you've just got a recursive loop and you're just kind of done.

13:01So a recursive social loop simply means that we tend to, all of these stories tend to get into their, I like to call them, they get auto-tuned into a certain audience where you're echo chamber and they just go back and forth. But in markets, the ones that are the narratives that are longer lasting and hence more investable are the ones that don't get trapped into. I mean, they're obviously impacted by political auto tuning, but they go beyond that. So you've described the narrative machine as distinct from traditional sentiment analysis. Explain the ways that that is the case. So sentiment is, I think, a very weak read to try to understand what changes people's minds.

13:50And this gets back to the initial idea of, well, how do you measure information? And a narrative is information, a story is information. The way you measure it is not by its truthfulness or its accuracy. You measure its strength by, does it change your mind? Does it make you think something differently than you thought before? Sentiment, whether you use nice words or mean words to talk about something, it never changes your mind. It never changes your mind. The only thing that can change your mind, Barry, is a better story. When somebody tells you a story, they put it in that story arc that has the truthiness.

14:34It doesn't have to be truth. It has to be the truthiness. And you go, oh, that makes sense. I'm glad you used that phrase truthiness. Again, you've explained that narratives are not truth claims, but rather they're coordination tools. Give us a little more details on what a narrative as coordination tool looks like. Yeah, a coordination tool simply means that the speaker, the opinion giver, is trying to shape opinion and behavior to a certain outcome. That's all it means. A politician wants to shape your behavior to vote a certain way. Central bankers typically want to get you to go farther, take more risk with your portfolio than you otherwise would.

15:22A coordination tool simply means using your words for effect, not as an accurate description of what you actually think, but to use your words to change behavior. That's what forward guidance is all about. That's what advertising is all about. It's not to share with you the actual workings, inner workings of their mind. It's to try to change your behavior. year. That's what a coordination tool is. You've used the frayed captured by a prevailing market story. Some investors get captured and they get sucked into it. Some of the more common themes have been bitcoins as a inflation hedge, gold as a substitute for fiat currency.

16:11How can any investor detect when they've been either consciously or unconsciously captured by a narrative? It's difficult. You remember the X-Files? Sure. Where Fox Mulder would say, you know, I want to believe. And that's true for all of us humans. We want to believe. And so when somebody tells us a believable story and they're a believable source, then our predilection is to say, oh, huh, that's interesting. I believe. What's crucial to do, Barry, and it's so hard. I mean, I've been doing this professionally for 35 years, and I still will get wrapped up in a story. I'll read a tweet or it'll make me really mad.

16:58I'll read a story and go, oh, that's really interesting. I got to look up companies to invest in that theme. The crucial thing, Barry, is not to think this stuff is, oh, it's always a lie or they're trying to fool you. It's just to maintain some critical distance. The words are being spoken to you to get you to change your behavior. They're trying to change your mind. They're trying to convince you of a story. That's not bad. That's what we humans do. And it may be a story that you do end up believing. That's fine too. The crucial thing is always though to step back and just ask yourself, why am I reading this now?

17:38Why is this story being presented to me now? Just do that. Just do that simple step and it will give you just a, it'll give you a beat. It'll give you a beat just to step back so you don't rush headlong into believing a story because you want to believe it. That's all you need to do. Why am I reading this now? To say the very least, for sure. Thank you, Ben. To wrap up, the narrative machine is everywhere. It is creating storylines for stocks, for asset classes, for markets, for politicians, for individual companies. It takes a little bit of common sense to step back, take a beat, give yourself a moment, ask yourself, is this a reliable storyteller?

18:25Do they have a good track record? Are they the sort of storyteller that is worth believing? or perhaps they're selling something and we should be a little more circumspect before we buy. I'm Barry Ritholtz. You're listening to Bloomberg's At The Money.