Advice to leaders of all sorts is abundant, from coaching programs to graduate courses in organizational management. Some of it is good, much of it is repetitive. Truly effective leadership is found in the doing more than the knowing. Character, long a leadership trait valued by those under the authority of others, is earned through practice far more than study. This is not to dismiss the value of leadership training, but to highlight the startling tack taken by the particularly boorish admonition to leaders below:

Bring with you, then, as the principal thing, ignorance; secondly recklessness, and thereto effrontery and shamelessness. Modesty, respectability, self-restraint, and blushes may be left at home, for they are useless and somewhat of a hindrance to the matter in hand … If you commit a solecism or a barbarism, let shamelessness be your only remedy.

The text is clearly ancient, but, oddly, still relevant. Shamelessness has taken hold as a favored offensive tactic of various political leaders today. Ignorance and recklessness, alas, seem the foundations of the Twitter-length news cycle.

Lucian, author of our excerpt, was a second-century Greek philosopher known for his sarcasm and satire. Interpretation is admittedly difficult, as the line between prescription and critical description is ill-defined. Regardless of Lucian’s real opinion as to how leaders should behave, his counsel is lamentably apropos in 2019. Contexts abound in which deception, disinformation, and obfuscation in the service of a shameless leader demonstrate an effective utility.

Until, that is, they don’t.

The Narrative Basis of Economics

Robert Shiller, the Nobel Prize-winning economist who conceived the cyclically adjusted price earnings ratio (CAPE) that was a key element of our 2018 annual report, has just published a new book: Narrative Economics: How Stories Go Viral and Drive Major Economic Events. We have written before on crowd psychology and the madness of crowds. Quoting 19th-century Frenchman Gustave Bon, the subject of one of our first blog posts,

The crowd puts [individuals] in the possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from [how] each would feel, think, and act were he [sic] in a state of isolation.

Shiller takes this sociological observation, analyzes the systematic nature of that “collective mind,” and accesses the economic implications of the dynamic.

The Story Behind the Collective Mind

Shiller’s track record piques our interest in his argument. His seminal work, Irrational Exuberance, was published in three editions at propitious intervals, March 2000, May 2006, and, most recently, January 2015. The first two editions warned of exactly the events that came to haunt financial markets following the last two bull peaks. In our 2017 Q3 letter we noted that the 2015 edition may have been early by the quarterly deadlines that judge performance in the industry, but if Shiller’s reasoning is again representative of how the current economic episode plays out, his caution would have been well worth heeding.

That Shiller has moved toward accessing the “collective mind” is only a deepening of his analysis. He was studying a bubble in housing years before the market showed any concern for the inflation of home prices. Shiller was right, but he realized that the irrational growth of home valuations did not trigger a recession in and of itself. It was not until the public narrative of housing changed that the market felt the consequences.

The reason that markets can stay irrational longer than pessimistic investors can remain solvent is because narrative thrives not on fundamentals but on good fiction. As long as the public believes the story, the status quo will continue unimpeded.

Shiller’s narrative economics, though, goes a good deal deeper than this dynamic. The storylines he traces are markedly larger—macro in the most literal sense—than the predominant public opinion. He identifies a number of “perennial” narrative spectrums from which that public opinion has often drawn throughout modern economic history.

  • Panic vs. confidence
  • Frugality vs. conspicuous consumption
  • Currency: gold vs. bimetalism
  • Labor-saving machines vs. jobs
  • Automation and artificial intelligence vs. jobs
  • Booms and busts: real estate and equity markets
  • Capital vs. workers

Not all of these categories are novel. They have, however, largely been treated as forces within economics that construe this social science as a sort of quasi-physics. Instead, Shiller argues that these and other unique or newer narratives are economic forces themselves rather than descriptions of economic forces.

Forbes magazine calls Shiller’s work a “blow to a core assumption of economics … that people are not consistent optimizers of a sensible utility function using all available information, with rational expectations.”[1] In essence, individuals don’t always behave in their best interests. Indeed, sometimes they determine that their best interests lie outside of economically rational behavior.

We have long maintained this insight in our investment work. If humans were perfectly rational, markets also would be perfectly rational, and all would gravitate toward equilibrium. Evidence to the contrary, though, is legion.

The Shifting Sands

The changing narratives we see today are not so much shifts in the ground beneath our feet but the nearly imperceptible movements of dunes gradually moving across a desert landscape. They shift back and forth like Shiller’s spectrums, but several seem to be slowly drifting in a new direction.

The most significant is the growing comfort on the left with relatively more socialist policies. This seems largely due to the outcry against growing wealth disparity that has waxed and waned since the 2008 crash and the nascent critiques of the Occupy Wall Street movement. Generally speaking, the interests of workers are gaining a greater hearing of late in public discourse than that of capital.

The implications that legislated regulations would have on business are of special interest to investors, but those mechanics are too specific for the picture we’re sketching at present. Rather, it is the slate of worker-centric policies that the political left has proposed that interest us most. They would require significant government expenditures, and such spending demands either enormous deficits or direct money creation.

On Monetary and Fiscal Policy

The serious consideration of these policies represents a pivot from monetary to fiscal policy as the primary governmental means of economic intervention. Since the maestro years of Alan Greenspan and the Great Moderation, which culminated in the Great Recession, the market has held the U.S. central bank in consistently high regard. It was the promise of its unconventional and untried monetary intervention in the financial crisis a decade ago that sent the equity market on its longest bull run in history. Despite bloated valuations and disturbingly weak economic fundamentals, faith in the underlying power of the Fed’s monetary policy has proven durable.

The often irrational prices paid today for equities have made a mockery of rational behavior by moving ever higher, causing all manner of investors to abandon prudence.

The suppression of interest rates and the corresponding inflation of asset prices, however, seems to finally have fostered a suspicion that the Fed’s monetary policy may have rendered itself impotent and stopgap measures such as last week’s emergency repo facility appear as increasingly desperate measures. On the most basic level, serious considerations of recession are no longer confined to the reports of macroeconomic analysts. They are making major headlines across the swath of popular news media that are now investigating with a depth not seen in nearly a decade. Thus, Shiller’s September New York Times editorial, “What People Say About the Economy Can Set Off a Recession.”[2]

Moreover, a larger cadre of investors are wondering if the Fed’s actions after the 2009 recession (QE II and III) were not actually exercises in deception, disinformation, and obfuscation. The true consequences of the malinvestment over the last decade have yet to be reckoned.

A loss of confidence in monetary policy could have dire consequences for an economy built upon it (highly indebted businesses that have binged on low-interest rate debt, for instance) and for the pricing of financial assets (as investors have seemingly lost fear of the Fed ever allowing equity prices to go down). A newfound faith in fiscal policy would be equally threatening. Truth be told, governments have not necessarily been the wisest stewards of the public purse.

Accessory Stories

There are other storylines that worry us as well, though they currently fall short of true narrative shifts, with the exception of the now general acceptance of climate science. These slightly lesser narratives would include resurgent nationalism, skepticism of globalization, growing international criticism of the role the U.S. dollar plays in international finance, a new Cold War with Chinese communism-capitalism, the continuing revelations regarding the executive branch, and the general decline of civility in our country.

Any one of them could occasion economic consequences. The emergence of all simultaneously could, with minimal imagination, occasion a convergence that would stir the winds necessary to shift the economic sands in a most unsettling way, thereby spelling trouble for the current speculative epidemic.



Leave a Reply