Beware Narratives, They Cannot Bend Reality

One of the features of a typical bear market is the propensity for commentators to create a narrative around why falling stock prices are all a big mistake. The market’s wrong they say, it’s all going to turn around if we just hang on. It is an exercise in denial. But like most emotional processes, this too comes to an end at some point with acceptance, but until it does, and that can take years for some, this creation of a belief that it’s all going to be fine is one of the cruellest psychological attributes of bear markets.

These narratives usually sound compelling, but they soon melt away because they are created out of hope rather than an honest appraisal of what is actually going on. Some recent examples would include the Federal Reserve’s assertion, just over a year ago, that ‘inflation is transitory’. This narrative fitted the bill because it allowed the Fed to remain stimulative despite the fact that the US economy was growing at 12% annualised, 4 -5 times the average growth rate. Another very strongly marketed narrative in recent months has been the idea of a ‘Fed pivot’; the imminent reversal of the rate raising environment and a return to the old days when making money was straightforward, because money was cheap, money was given away, and interest rates were permanently low. This story still has a lot of currency today, but it’s based on conditions of a bygone era. The world has changed, as the rate of inflation and interest rates attest, and the idea that a new bull market in Tech will be born once the Fed cuts rates is another story which is likely to disappoint investors. Whilst an easing Fed is usually bullish for stocks, it isn’t always. The Fed can print money, but it cannot print earnings and bear markets will run their course no matter what the Central Bank does.

Other recent narratives would include the ‘Red Wave’ that was going to turn the House and Senate Republican and sweep away the Democrats and this would be bullish for stocks. The Republicans barely took the House and didn’t get the Senate. The ‘China Re-Opening Trade’ is another story that has had many false dawns, and the reality has been a litany of continued Covid outbreaks and lockdowns.

But perhaps the worst and most culpable storytellers of the current crop have been the crypto merchants. The ultimate purveyors of ‘this time it’s different’. The bankruptcy of several crypto exchanges, personified by FTX, is eyewatering and although it doesn’t get a huge amount of press in the UK, it is a very big deal in America. Sam Bankman-Fried, the former CEO of FTX, has been exposed as a fraud and has stolen depositors’ money, to the tune of $10bn. This is akin to Enron or any other major corporate fraud of recent times. And yet, he was interviewed by CNBC to rapturous applause last week at the New York Times Deal Book Summit. He conducted the interview remotely from his hideout in the Bahamas, perhaps indicating that this story has still further to run.