The Changing Narrative

Why the advantage is information asymmetry

In a world where data moves freely, it makes it much easier to get to the signal as long as you avoid the noise. Since the advent of the internet, it doesn’t take a lot of digging to be able to determine the amount of truth in a trigger-laced headline. More often than not, the narrative doesn’t match reality.

Especially when it comes to Wall Street and economic stories. There’s always a twist or skew.

Recently while listening to Jeff Snider’s podcast Making Sense (EP 5-Modern Myths), Jeff brought up this point. It’s a great point and it’s something that’s irked me and I’ve always been surprised by how little it’s discussed.

The Myth

For decades Wall Street, the FED, and the greater economic community have made up narratives that sound good and seem to make sense, but underneath, there’s a scant amount of supporting details.

In many cases, it appears more like lazy reporting or an attempt to make flawed economic data look better than it really is. Shockingly, it more often than not works.

Specifically, Jeff said,

“It’s myth versus reality right here in the same survey. Sentiment gets really stoked up about whatever a Central Bank is doing in monetary policy regardless of whether it has any effect on the current situation. In fact what we see time and again, it doesn’t.“

I can’t tell you how many analyst calls I listened to or reports that I read that would say XYZ company missed numbers because people didn’t shop as much due to rain or crazy weather patterns that truly have almost nothing to do with the business. Not to mention, using weather, is an extremely subjective point when you boil it down.

I can tell you one thing for sure, GDP isn’t driven by the wind, sun, or rain regardless of what financial prognosticators say.

The interesting part of Jeff’s point was that he believes the same to be the case with major market-moving headlines, and we’ve seen our fair share since 2016. For the most part, the underlying data signals alarm well before a news headline or crisis is painted as the cause by media.

“The yield curve and all of these other financial indications and the fact that all of these curves have collapsed down to nothing… The financial media is trying to say that all of these things are happening because the FED is doing something… when in reality it’s the other way around and the Central Bank is being forced into these things..”

“The Greenspan Put is supposed to be about the stock market. Push comes to shove the FED will do whatever it takes to save the stock market. That has been adapted a little bit and transformed a little bit lately and the FED is explicitly stating they will support the bond market.

The myth is what’s important. In an expectations-based policy… If you believe in the myth… then we’ll act and there will never be a need for Central Bank action. It works because it works as long as everybody believes in it.“

Much like with analyst twisting of data, financial media does the same with economic data and FED commentary. In a sense, they are doing what was laid out in Netflix’s Social Dilemma, but on a much grander scale. The Movie lays out exactly how it’s done and yet it seems there are still many that tend to not care.

In recent years, time and again, narratives have become big drivers. They create a buzz and usually divide, but few really check under the hood to find out the real truths. When you do, it’s not uncommon to find that the data doesn’t support the narrative.

The Asymmetric Advantage

If you’re willing to take some time to really look into things in your area of interest, there can be some pretty low-hanging fruit advantages because of information asymmetry. This exists across many industries because of all the data available to confirm or deny the narratives being spun.

As we move forward in a world where costs to produce information drops I believe this will be more and more important because it will create areas of alpha.

Individuals can publish their thoughts and boots on the ground data for nothing. They can do so to large followings for almost free. In past decades to do this, it took large swaths of financial and human capital. Today, it takes an internet connection and interest.

Previously, only corporations could achieve this, but now information is freely available to everyone at little to no cost. It’s where the edge in Crypto comes from right now and it’s why some of the world’s brightest minds are investing heavily in this space. It’s why the FED and other Central Banks are scurrying to catch up… to protect their narratives and save their waning importance.

In a world of Google this or Google that, having the ability to recognize trend changes and underlying tones will be a great skill to have.

It will put you against the grain most of the time, but there will be a greater reward for as the newness of a narrative wears off people become disinterested and dismissive.

That’s when the advantage of knowing what the data says, pays off.

That is when it begins to become glaringly obvious. That is where data dictates a change in a manner that feels rapid but in reality, the change was there in plain sight all along.

You just have to be willing to look and DYOR.