Can Stories Destroy An Economy?

Good Morning,

U.S. equities rallied on Friday, with financials rising around 2 percent, following a stronger-than-expected employment report.


The Dow Jones industrial average jumped around 180 points — posting its best trading day of the year — signalling that the Trump rally may still be intact. 


The U.S. economy added 227,000 jobs in January, while the unemployment rate ticked higher to 4.8 percent, the Bureau of Labor Statistics said Friday. Economists polled by Reuters expected payrolls to grow by 175,000 with the unemployment rate holding steady.


Another factor improving investor sentiment was the move on Friday by Trump to sign executive orders aimed at watering down financial regulations in the U.S. This move lifted the Financial Select Sector SPDR Fund (XLF) by 2 percent.


Our Take


Remember when people used to talk about the Federal Reserve? No longer. What we are looking at is a structural shift in the market from a Fed-driven market to a policy driven market. 


Do humans for the most part act rationally, or are they for the most part driven by emotion? To what extent can our decisions and judgements be tainted by emotion? Can stories and rumours throw an entire economy off course? 


I read a fascinating piece this week by Mark Buchanan a physicist and science writer which took up a theme I alluded to in a previous letter that rhetoric can become reality. Sentiment can cause outcomes. 


In his piece, Buchanan fleshes out this concept by demonstrating how narratives can spread economic uncertainty, discouraging consumer spending and business investment. 


In a recent speech Yale University Economist Robert Shiller made arguments about the Great Depression and the 2008 financial crisis. 


In the 2000s people passed around stories about getting rich flipping homes and this contributed to a belief that home prices would always rise. The real estate industry as well as the financial industry played into this but the key is that most appeared to buy into this narrative. Dissenting voices were few and far between. (Sound like the familiar narrative you hear in Toronto with home prices jumping 22%?)


Schiller has written extensively on these topics yet his new work has coined the term “narrative economics” - the idea that stories more more like infectious agents, with some being much more contagious than others, and that an epidemiological approach might help to better understand their movement. This is becoming more of a reality as we are able to perform more complete analyses of news feeds and social media. 


If moods, feelings and emotions drive decision making to what extent to they drive markets and economies? 


As Buchanan states: 


“It is perhaps appropriate that the power of stories is gaining greater recognition during the age of Donald Trump, who rose to the presidency thanks in large part to an utter disregard for objective reality. As Shiller acknowledges, Trump is a “master of narrative." Let's hope this one doesn’t prove to be disastrous.” 


Pay attention to the prevailing mood. Take the temperature of the stories and narratives that dominate the hearts and minds of those that surround you. You may find that causality can be turned on its head…

Thought of the Week


"Words are but symbols for the relations of things to one another and to us; nowhere do they touch upon the absolute truth.” -Friedrich Nietzsche

Stories and Ideas of Interest


  • Since the election, your personal filter bubble has been a big topic of conversation. To solve this bias problem, Wired magazine suggests using tech to re-engineer your media diet. You can try an app called Discors or the Chrome browser extension EscapeYourBubble to help you better understand and accept others. Barry Ritholtz suggests that these are good places to start but that they miss the mark as bias is but one cognitive error we make. He offers a few additional steps here


  • The multinational company is in trouble. Mr Trump is unusual in his aggressively protectionist tone. But in many ways he is behind the times. Multinational companies, the agents behind global integration, were already in retreat well before the populist revolts of 2016. Their financial performance has slipped so that they are no longer outstripping local firms. Many seem to have exhausted their ability to cut costs and taxes and to out-think their local competitors. Mr Trump’s broadsides are aimed at companies that are surprisingly vulnerable and, in many cases, are already heading home. The impact on global commerce will be profound.


  • Inside the mind of a Snapchat streaker. Bloomberg dives into the life of an avid user demonstrating that the photo sharing app is dangerously addicting by design. This is a depressing account but a must for those who are not users. Timing is right given that this week Snapchat filed for an IPO stating in its filing that: "We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.” Will the app’s addictiveness be enough to convince investors to overlook the company’s net loss: $514.64 million in 2016, wider than $372.89 million in 2015? 


  • People wouldn’t care if three quarters of brands disappeared: Survey showed. Havas Group's "Meaningful Brands" report shows that people wouldn't care if 74 percent of brands they use vanished. They also say that 60 percent of the content produced by companies is poor, irrelevant or failing to deliver. This is a clear sign that over communication is diluting brand value and thus making it more difficult for brands to grow. The fight for consumer attention has perhaps never been more difficult. 

    What is a meaningful brand? Delport defined a meaningful brand as one which functionally works, offers value for money and makes someone's life easier, as well as considering the impact it has on a community. 


All the best for a productive week,