..I often said markets are about prevailing narratives, because they define behaviours and behaviours are reflected in prices.
..Right now, since the start of COVID and the fake news legacy, logic does not define behaviour.
So who really knows where this takes us from here, and how long irrationality can persist.
That said, either we stay sidelined to preserve past gains and wait or if we must wade in , we do so measuredly in those that have prospects of positive supernormal gains that would likely still happen regardless of what the market does.
From John Mauldin mce-anchorNarrative Water
I put John Hussman and Ben Hunt as a panel of two because they’re both fascinating yet misunderstood. Neither mind saying controversial things, and eagerly engage their doubters. Personally, I found their session to be one of the most enjoyable and enlightening of the conference. Putting two great thinkers together draws out important insights.
John Hussman, for instance, has taken a lot of heat for being labeled a permabear. Which lately turned out not to be the case. He held to classic standards of valuations which have simply not been useful the past few years. In his defense, he is not the only person to hold such views
Yet faced with undeniable error, John adapted. I liked the way at SIC he segued from his own history to Ben Hunt’s idea of “narrative” as a market driver.
John Hussman: Finally in late 2017, after a number of incremental adaptations that were not sufficient, I finally threw my hands up and said, "There's not a limit. We can't rely on [historical] limits to speculation. There is something in people's heads that is different here that is not based on fundamentals. That is not based, not even constrained by historically reliable limits." That doesn't mean that valuations will persist forever to go up. What it does mean is that we have to constrain any bearishness we might have to periods where market internals are also negative. In other words, where people's mentality has shifted toward risk aversion, and we can talk about why that's important, Ben and I, but it has a lot to do with narrative.
With that, Ben, I think probably what I'll do is pull you in this way—you've talked about this David Foster Wallace story of these two young fish swimming, and then there's an older fish that comes by and says, "How's the water, boys?" and swims away. After a while, the two younger fish look at each other, one of them says, "What the hell is water?" You talk about that water being a narrative. It's swimming without even knowing that we're swimming in it. Talk about that. Then what I want to do is wind that back to what happened with quantitative easing and zero interest rates, because I think it's enormously related and it's something that investors should really think about.
Ben Hunt: I think that's right, John. The water in which we swim is the water of narrative. Look, we all know this. By narrative I mean it's the articles that we read, it's conferences like this, the speakers that we hear at a conference like this, it's what we hear on CNBC, it's what a politician says to us, is what Uncle Warren tells us at the Omaha conference. It's all of that.
We know, I think in our hearts, that we are impacted by this. We're human beings, we're a human animal, and we've evolved over millions of years to respond to these messages. That's what it means to be a social animal, a truly social animal like human beings are.
We know it's part of us, but I think the problem or the difficulty has always been, I'll say, recognizing how pervasive and how impactful it is on us. Because I’ve got to tell you, John, I had a very similar, John, call it an epiphany, but it's a very similar process for me as well, I think a little bit earlier than yours. For me it really happened in the summer of 2012 with Draghi's “Whatever it takes,” with these words around an OMB program. It was just words and it was so impactful to me that that's all it took, the words. The words were enough.
John Hussman: Yeah. In Buddhism, it's interesting, there's a distinction between reality, what you would call truth with a capital T, and what are sometimes called objects of mind. Objects of mind are mental formations that we use to construct our own reality of the world.
This is, I think, really important. If you read, for example, Soros, he talks about reflexivity. I did my doctorate in, basically, asymmetric information and equilibrium and that sort of thing, inference from other people's information through prices and so forth. If you think about markets, markets are basically places where people have beliefs, they turn them into behaviors, they produce market behavior, and then that market behavior comes back around and informs their beliefs.
Read John’s last sentence again, and then again. Mental beliefs become individual behaviors, which become market activity, which then affects beliefs. Knowing where you are in that cycle is critical to investing success. It’s also incredibly difficult.
That self-fulfilling process creates the water that we swim in, what Ben calls the narrative, the massive amount of information that inundates us daily. In the early part of my career, we had The Wall Street Journal and a few other publications. Certainly no financial TV. Now we “swim” in an ocean of information (to which Mauldin Economics and I contribute our own few gallons). If we’re not careful, we absorb information from sources that simply reinforces our beliefs rather than challenging them.
We especially see this in political information, but I think we tend to consume economic and investment information in the same way, without realizing it. Behavioral economists call this “confirmation bias.”
