Thursday, 10 November 2016

A Narrative narrative.

It’s been a week since I last posted,  a post provocative enough to even inspire the mighty Paul Krugman to comment upon it. As one kind soul suggested to me ‘Sir, that, I assume, is your first cited reference from a Nobel Laureate’. Indeed it was and will probably be my last and, though only featuring in his twitter stream, I will bear it with pride and add to my CV.

My flippant reference to the dire consequences of a panel of economists writing a letter of support being the kiss of death for the supported, was part of a similarity I was drawing between Brexit and the election and this is what Mr. Krugman disagreed with. His argument was that the US election was about personalities, not a rejection of authority. Whatever. Trump won and the parallels are now being drawn more than ever over the rejection of authority. Indeed most notably by those who lost as they can think of no other logic for them losing because, as with the basis of the economists' argument, there is no logical reason for anyone to act otherwise.  So this leads on to the greatest parallels between Brexit and the election - the demonstrations on the street rejecting the democratic outcome and the hand-wringing from the journalists, pollsters and economists who got it wrong. I mention economists in there because though they are totally and utterly useless at politics they were still out there making the calls.

What do economists, journalists, pollsters and fund managers have in common? The answer is ‘herding’. Not wanting to be seen to be out of line with their peer group is common amongst all. Fund managers don’t want to deviate too far from their benchmarks in case they are wrong and economists don’t want to make wild forecasts in case they are so wrong and deemed maverick and unreliable. Pollsters? I just haven’t a clue how they can be so wrong, but Rory Sutherland made an interesting observation I hadn’t thought of involving telephone polls - "Having caller ID (like carrying stamps in your wallet) correlates with conservatism". And if you have caller ID you are less likely to pick up the phone to an unrecognised polling company. However, amidst the grief thrown at the pollsters, I doff my cap to Nate Silver at FiveThirtyEight for steadfastly refusing to be browbeaten by everyone attacking him for his Trump leaning predictions. And then finally there are the liberal journalists who are paid by organisations with causes to back and also, as the career of a journalist is secured as much by peer-review as readership numbers, want to appear as one of the in-crowd.

Peer-review encourages herding. Whilst peer-review may be a worthy ideal, after a few generations of it, you have the equivalent of six-toed inbreds running the show as their self-selection weeds out new genetic material and we end up where we are. Elites, cabals, clubs, packs, societies, clans -  all happily reinforcing their own beliefs by only talking amongst themselves and not to the rest of the world. Indeed, as in many clans, conversing with others is to be discouraged as it may threaten the core beliefs. Here we can widen the example to include any religion.

So, in summary, it would appear that once again those who thought they knew better didn't. Too many smart people believed that stupid people wouldn't be stupid. Which was stupid. A basic distribution curve should tell you that if you think you are smarter than average then the volume below you will be greater. Insular thinking is not representational. You may be smart but if you don't understand those around you then you are going to be screwed by democracy. Of course, if you don't then want democracy you are welcome to open up that can of dictatorial worms.

So where do we go from here? As @StockCats tweeted "The sad thing is that the media is going to to ask the same people that got everything completely wrong what they think happens now”

This is probably just as apt in financial markets. At 4.55am London time on Wednesday morning things changed. The Dow futures were down around 700 or 800 points and then started to climb up 1200 points.

In that time we have swung from set of beliefs A

- It’s antiglobalisation - sell stuff
- It’s globally destabilising - sell stuff
- He’s barking mad - sell stuff
- US is screwed - sell the dollar
- He’s racist, sexist, deceitful, abusive uncontrollable and unpredictable - sell stuff
- The wall, Mexico - Sell Peso!
- It’s the end of the world as we know it - sell everything, but buy Yen, CHF and gold

To - (as the rest of the day saw prices scream higher) set of beliefs B

- Infrastructure spending - buy construction.
- It’s inflationary - sell bonds
- He’s going to have to borrow - sell bonds.
- He’ll go after the tech crowd who opposed him - Sell tech stocks.
- It’s deregulation for corporates, - Buy mainstream stocks ( dow)
- It’s eco-dirty, - Buy dirty stocks
- it’s anti-price control, - Buy pharma
- he’s going to bin Yellen so rates more likely to go up - Buy USD
- Europe is going to be hoisted upon its own protective petard - Sell Euros
- Other trade tariffs - Buy Manufacturing USA
- He likes the UK - Buy GBP
- Mexico , actually, nah, that won’t be great - keep selling Peso.

 In the space of 36 hours the markets have swung from “Trump will destroy stock markets” to “Trump will be great for stock markets”. Yet nothing has changed apart from narrative and there is no better growth hormone for narrative than price. Prices have rallied so the narrative is proven.

If you want a visual representation of financial market participants you can't do much better than this

So I am left here looking at the trading psychology of it all. The move from A to B has been dramatic and though I am not saying that I disagree with the belief B (I don’t, hence fading the sell off) I do think that it has become too easy. We are 36 hours into the selection of the President elect and the financial world believes the script is written and there to follow. The Trump story has trumped all other concerns, faded are the headlines for GBP which is now trading at 1.2550 and 0.8680, Brexit has been out Brexited ten-fold by Trump. All the other gnat bites in the market have had their itches eclipsed by the comparative pain of having your leg eaten by a lion. Even Deutsche bank shares have managed to sneak off under the cover of Trump to rally over 14 Euros and copper looks as if it is really breaking out to the upside. The only asset that hasn’t moved, having been frozen in the headlights, is oil.

I am therefore awaiting the markets to realise that we are only reading the preface of the narrative at the moment and whilst we may think the work is factual, there is nothing to say that we haven’t embarked upon a work of fiction where guessing whether there will be a happy ending is far too premature.

This isn’t a Disney story, it’s Game of Thrones.


Hotairmail said...

Great post Polemic after some good calls.

Have to say, I don't think I've made as much money as on post Brexit and post Trump election rallies.

The herding you mention provides clear opportunities to an agnostic, nay psycopathic trader. The secret you've developed is not to get sucked in to the arguments and the emotions of it all and to stay steadfastly independent of thought. (Contrarian) traders like yourself have trained themselves to think in this way and are often incredibly incisive and interesting writers - psychology overlaps philosophy and self help manuals, topped with not a little smidgeon of technical markets knowledge. Always destined not to get carried away at the party though and may miss out on the fun.

After so many beatings down the years, I now have to tell myself after making money that I'm not a genius - that is the quick route to quickly losing my money. No, the opportunity was spotted and the over reaction was just that. I had no idea who or what would win, merely that the races were close and that the market (and everyone else influential) was dangerously to one side and complacent, if not celebrating victory early.....opportunity. The fact that it did turn out to be an over reaction as thought, is where the good fortune comes in. Not a genius. No, Sir. Get back to work.

Anonymous said...

Wonderful to see the left-wing, liberal, "democrats" RIOTING about the outcome of a democratic election (because they lost), and having spewed their diatribe about Trump causing divisions in society, these left-wingers proceeded to: murder a few innocent people, attack and cause GBH to many others, attacked the pets of bystanders, stole cars, wrecked and looted businesses and are now calling for the assassination of the President-Elect.

On this Remembrance Day, remember that the Nazi movement arose out of socialism and left-wingers.

Unknown said...

northshore said...

Good stuff Pol. Somewhat tone-lowering but to paraphrase Eminem:

"Paul, I think you were a little wrong on the twitter
So was the Economist, FT and other tippers
These guys keep screamin', they're paranoid!
Quick, someone get their ass another steroid!
"Blahbity bloo blah blah blahbity bloo blah!"
Most ain't heard a word they said, "hipidy hooblah!"
Is that a nobel, or a slack jaw?
Look, herders just got an ugly lube job!
Didn't you listen to the last round, meat heads?
Pay attention, you're sayin' the same things that they said!
Matter fact, dogs, try a pencil
Go home, write some words, make it respectful,
And don't come back until something dope hits you
Social media? You can take the likes home with you!
Lookin' like a cyclone hit you,
Forecasts screamin', "Egos, I don't fit you!"
You see how far those expert claims get you
Boy's like "How's authority gonna diss you?"
My motto: Too hollow!
Learn the lessons, bin the bluffing, or there's more tomorrow."

Polemic said...

Thanks Hotair,

Unknown.. that is complete genius - Unknown's link is to a paper on Cow Synchronicity ( herding). I started reading it thinking it was a spoof.

Polemic said...

Northshore - Hope you've posted that somewhere else too needs a bigger audience .It's fantastic!

I d been thinking what I was hearing from the usual talking heads was Vicky Pollard from Little Britain - No but yeah but no.

Thorium238 said...

Where have all the Starlings gone a murmuration like that used to a regular evening event in London when i was a kid. I know the Badgers have eaten nearly all the hedgehogs. But what happen to the Starlings? Was it Red Ken etal, with his vain attempt to kill all the Pigeons in London that did for the Starlings instead?

As for Trump - to echo another great source "Politics is the new Macro" good luck!