#27. Collective Illusion and Resilience
May 22, 2023
I attended the Semafor World Summit in DC a few weeks ago. Impressive people packed the agenda for the day. It was fun to be in the same room as the CEOs of Verizon and GE, the President of Microsoft, Carlyle co-founder David Rubinstein, etc. But the person who I, admittedly unexpectedly, cannot stop thinking about is the Jordanian Finance Minister, H.E. Mohamad Al-Issis (pronounced, as he jovially and quickly clarified, “definitely not ISIS. Iss-iss”). Much of the conference took place in the aura of popular existential worries: inflation is out of control, US-China relations are deteriorating, citizens don’t trust institutions, AI will replace us and then kill us. For his part, Al-Issis articulated something that, once said out loud, reverberated throughout the remainder of the Summit: the best strategy for macro and microeconomic progress is stories of hope. You can watch the clip here.
“Hope is not a strategy.” The pinnacle of accepted business mantra. In any meeting, let the word “hope” slip past your lips and the hungry ladder-climber in the room cannot help but explode “HOPE IS NOT A STRATEGY!” The risk-free phrase will immediately paint you as an idiot. The rest of the room will nod “hmm, indeed indeed. Very good input ladder-climber, thank you” as they chortle at your whimsical, childlike hope.
Yes. Thank you, ladder-climber.
And hope isn’t a strategy, really. Hoping doesn’t *do* anything. Hope is anathema to the penultimate business mantra - “hope for the best, prepare for the worst.” Prepare. Act. Don’t just “hope,” you hippie.
But as has been made crystal clear over the last four months, human psychology and expectations have significant impacts on markets. Narrative has a profound influence in shaping our economy. Last year, Kyla Scanlon penned The Vibecession: The Self-Fulfilling Prophecy, in which she defines a Vibecession as “marginal difference between expectations, theory, and reality feeds into our narrative/model for how we see the world.” She was spot on. Macroeconomic cycles and shocks are often driven by prevailing narratives. Recessions, bank runs, stock drops, and hyperinflation are all self-fulfilling prophecies spurred by narrative.
In today's interconnected and information-driven world, narratives are a vital currency in the financial landscape. Stories have the power to sway market sentiments, influence investment decisions, and shape economic outcomes. The collective beliefs, emotions, and expectations embedded within narratives can drive market cycles, determine investor behavior, and even impact policy decisions.
🏦 Hope and…monetary strategy (A case study on The Fed)
The Fed holds significant responsibility in managing the economy. While monetary policy tools like interest rates and money supply are crucial, the Fed's main job goes beyond policy. It revolves around narrative management. The Fed strives to shape and control the narrative surrounding economic stability, growth, and confidence. By carefully crafting and communicating messages, the Fed aims to influence market participants, instill trust, and guide economic behavior.
At the beginning of the month, Fed Chair Jay Powell announced during another carefully crafted statement that the Fed was prepared to lift rates higher if needed and that cuts were unlikely to happen this year. But the market continues to not believe that story. The Fed’s prevailing narrative is not winning the markets. Instead of raising rates and not cutting this year, the market says rate cuts will begin this year, as early as the next meeting. Instead of ending 2023 with a rate of 5.25%, we’ll end it at 4.3%. Far cry from “no rate cuts until 2024.” Through this entire rate-hike cycle, Powell has wresled with a market that’s hopeful for better days. The biggest lever Powell and the Fed have are on people believing their guidance. Without that, they lose control. Believable stories are the weapons in the Fed’s arsenal to keep markets stable.
What more are stories of hope than a version of narrative? Hope is a very real strategy.
🏠 Hope and…stability
Positive narratives inspire hope - of economic growth, job security, and rising home values inspire confidence. They encourage families to step into home ownership or individuals to leap into entrepreneurship. Conversely, negative narratives breed hopelessness. Renters choose to (and then must) remain renters. Would-be entrepreneurs see more risk than opportunity.
Back to Al-Issis. He discussed hope in the context of, obviously, Jordan. But his message should resonate with just about every country at the moment: “What story are you telling your youth? Get the right education, work hard, and then what? And then you're going to see all your mortgages are going to higher interest rates and you're going to be unemployed…I think we need to start investing in stories of hope.”
What Al-Issis is identifying is the importance of hope and trust in institutions, economic stability, economic growth, and the idea that there is a “there” there - that work, sacrifice, and service are worth something. “It hurts me every day to redirect financing from education and health and to debt service” Al-Issis said. And it should hurt. Most directly because there’s less money for necessary societal functions but, at a more fundamental level, because it erodes trust. Individuals see growing taxes, big spending, and big promises, but at the same time minimal or diminishing improvements to hospitals, schools, and infrastructure.
Beyond economic stability, hopelessness erodes international stability. He goes on:
"I like to remind everybody every time I come to this town [DC]. Taliban did not come out of Afghanistan, it came out of the hopelessness of refugee camps in Pakistan. A hopeless refugee is the biggest danger." According to Al-Issis, this is why Jordan chose to host 1.3m refugees during the Syrian refugee crisis in the early ‘10s. Jordan provided education, health, etc. at no cost to the refugees. Jordan’s population ballooned 20% in two years (2012-2014). That’s like the UK housing 13m or US housing 70m refugees.
🏋️ Hope and…economic resilience
Al-Issis’ comments echoed throughout the remainder of the Summit. When speaking about resilience, Singaporean Senior Minister Tharman Shanmugaratnam noted, “we’re not just of microeconomic cycles, of credit cycles, of inflation and growth cycles. We’re in the world of shocks. Shocks that are primarily non-economic. They stem from underlying shifts in the environment… The world in which central bankers and fiscal policy makers exist is not a world of the old traditional Keynesian cycles. It's now a world that's increasingly punctuated by major shocks.”
Resilience and trust are easy to build in a world of cycles. Events unfold more slowly. Trust can develop through point-in-time actions. In a world of shocks, trust must exist before the shock. Once the shock hits, there isn’t time to develop trust. Think about the fissures that have split open in the wake of lack of institutional trust with regards to the vaccine.
How do you build resilience in a world in which exogenous shocks continue to come. Build stories of hope; then deliver on those stories. Nuriel Roubini (Dr. Doom), whom I’ve written about before, urged the room to stabilize economic systems rather than economic structures. Put another way, use trust to build systems that can absorb and incorporate multiple exogenous shocks. Such a system cannot depend on any singular, rigid structure or way of thinking.
Roubini points out that, in the face of high inflation, the traditional defensive assets for investors (bonds) have not been defensive. When equity prices fell last year, so did bond prices. Traditional 60/40 stock/bond portfolio structures have failed. Professional allocators must have systems in place in which they can reassess their risk, absorb shocks, and adjust accordingly (these are investors playing infinite games). In a high-inflation world, real assets become more defensive. New defensive assets may be rare earth metals, real estate, or sustainable farmland. Even at endowments, some of the largest pools of capital in existence, everything down to fundamental portfolio construction is being questioned. The popular “Yale model” portfolio is making way for new models like Total Portfolio Approach.
A good example of taking advantage of exogenous shocks to inspire more hope is India. Nandan Nilekani, co-founder and Chairman of global IT behemoth Infosys, spoke at the Summit about how India is adopting ChatGPT. India has traditionally been a country of leapfrogs. In 2009, India implemented digital IDs, which has helped 1.3 billion previously unbanked people open bank accounts. Today it’s used 80 million times per day for authentication and 5-10 million times per day to open a bank account. In 2016, they launched the Unified Payments Interface to enable digital peer-to-peer payments across the country. Today 8.7 billion transactions per month happen across UPI. Both of those were spearheaded by Nilekani. Now, with ChatGPT, instead of the defensive perilous stance we typically read about, India has adopted it for social advancement. They’re using ChatGPT as an automated tutor for children, reducing dependence on an overburdened education system. Hope is the strategy, not fear.
The name of the game here is building a system that can withstanding and absorb exogenous shocks. And this system must fundamentally be underwritten by hope and trust. And for the policymakers, that hope and trust are underwritten by results.
🧐Hope and…sociology
Humans’ ability to imagine - grasp a concept or idea without physically seeing it play out - is a primary aspect of what makes us human. The stories we are able to tell are the concrete manifestation of that humanness. Concretely, it’s the belief that the systems in which we live are worth following. The last 5 years have brought many of these stories into question:
Why do I pay for social security if it will be insolvent for the generation before me, let alone me?
Why do I pay so much for healthcare while mother mortality rate increases, obesity runs completely unchecked, and the US life expectancy declines?
Why do I work at a job that makes me miserable?
Why should I get good grades, graduate, and save when I can’t afford anything anyway?
Questions are healthy. No system or story is sacred. The great resignation probably made a lot of people happier - either in spending time on what they love or in realizing their artisan dream really was a “grass is always greener” situation. Elon Musk was recently forced to eviscerate a reporter for perpetuating a popular, but unfounded, story about Twitter.
The power of stories of hope are in their potential to drive positive change both macroeconomically and at home. Stories that convey optimism, opportunity, and progress can inspire confidence, fuel investment, and drive economic growth, all underwritten by hope. By embracing stories of hope, we can foster resilience, innovation, and a brighter economic future.
📈Hope and…markets
Narratives are not mere stories; they have become a currency of their own, influencing market behavior and economic outcomes (I pray Elon creates a financial product off of Twitter - possibly the most powerful aggregator and creator of narratives). Negative Nancys do this quite well (SVB’s downfall, shortsellers like Hindenburg and Scorpion). It’s time to learn from them. By embracing narratives that inspire and empower, we can foster a more resilient economic landscape. We can unlock the transformative potential they hold for individuals, families, and economies alike.
For investors, the ability to weave non-traditional perspectives into investment theses will be fundamental to driving outperformance. From the Fed to short sellers to home purchases to portfolio structures, prevailing stories sway market sentiments and drive economic outcomes. Incorporating them is essential to successfully navigating modern complexities of the financial landscape.
