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When Meta-Analysis Goes Meta

Summary:
Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it. But for whatever reason these are articles that are representative of some chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form. To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be

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Every morning, we run the Narrative Machine on the past 24 hours worth of financial media to find the most on-narrative (i.e. interconnected and central) stories in financial media. It’s not a list of best articles or articles we think are most interesting … often far from it. But for whatever reason these are articles that are representative of some chord that has been struck in Narrative-world. And whenever we think there’s a story behind the narrative connectivity of an article … we write about it. That’s The Zeitgeist. Our narrative analysis of the day’s financial media in bite-size form.

To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


When Meta-Analysis Goes Meta

I don’t think it is really a secret to anyone who spends much of their day monitoring financial markets that President Trump’s social media habits have a, well, habit of creating bouts of volatility. So when JPMorgan created their Volfefe Index (cute, guys), I don’t think anyone was really surprised at what they discovered.

As a result, JPMorgan said: “A broad swath of assets from single-name stocks to macro products have found their price dynamics increasingly beholden to a handful of tweets from the commander in chief.

It also shouldn’t be surprising to anyone – especially anyone who has been reading our ET Pro monitors that have been making this point since December 2018 – that no narrative has captured the market’s attention quite like the ping-ponging of China and trade war narratives.

JPMorgan also noted that his “market-moving” tweets were less popular in terms of likes or retweets, but also they tended to contain the same keywords: China, billions, dollar, tariffs and trade. The bank also said that tweets containing Mueller were categorized as market moving.  

What is surprising to me – or at least interesting – is the fact that this analysis is at the top of the Zeitgeist. It isn’t that China, or trade, or even Trump tweeting about these things is connected to everything else being written about in financial media. It is that the analysis of the influence of missionary behaviors is itself part of the Zeitgeist.

Welcome to the party, folks.

There’ll be a lot of introductions to make now that you’re all here, but first, I want to warn you about those guys in the corner. They’re the “it’s just short-term volatility – no one really takes any of this seriously” crew. After they tell you their names, they’ll let you know that these silly things don’t matter to their process because they’re very long term, and have absolutely done enough education with their clients to keep them from hitting the eject button after a historically minuscule drawdown, you see. You could tell them et in Arcadia ego, but I’m not sure it would do any good.

This group is also prone to seeing the emergence of this kind of analysis into the foreground as a destructive force to its influence, like pulling the curtain on the Wizard of Oz, or shining a bright light into a dark room. Once everyone knows that everyone else, along with a bogeyman we call ‘The Algos’, are establishing their positions based on how they think everyone else will respond to Trump tweets, that should break the illusion and make people realize that it’s time to focus on things that matter again, like their five-year drop-down model and commodity price scenario analysis for that sweet MLP GP. Right?

Unfortunately, the effect is usually the opposite. If you’re playing the Keynesian Beauty Contest or Dick Thaler’s Dinner Party Game, common knowledge about the game itself affects the winning strategy. Our collective awareness of second- and third-degree gameplay by other participants accelerates our perception of the need to shift to deeper levels ourselves. As I wrote back in 2008:

Playing a third-degree game is too daunting a task to consider for most, and so curiously, even in the mathematically deterministic version of the game that has a Nash equilibrial ‘correct’ answer, the takeaway is the same as in the beauty contest: you usually win by guessing that others are playing a mix of one to two degrees of the Common Knowledge Game. Some people buy and sell on fundamentals, and some on how they think people will react to them.

But as Ben discussed in The Three-Body Problem, we think that this is changing. We think it has changed. We think that the violent expansion of communications policy by global central banks and the accompanying expansion of always-on media has meant more participants shifting to third-degree thinking. The reason we talk about Narrative so much is that we find it a useful meta-expression of and proxy for exactly the kind of mental model a third-degree participant must construct. When we refer to Narrative, we mean it as an expression of what everyone knows that everyone knows.

The Fundamentals are Sound (February 8, 2018)

Why does this matter? What should it mean to us that investing based on common knowledge is…common knowledge? I think it means that awareness of and sensitivity to narratives will necessarily be part of the professional investor’s playbook for the foreseeable future.

After all, that’s what we mean by the Zeitgeist.

Rusty Guinn
Executive Vice President of Asset Management, Salient. Rusty Guinn is the executive vice president of asset management at Salient. He oversees Salient’s retail and institutional asset management business, including investment teams, products, and strategy. Rusty shares his perspective and experience as an investor on the Epsilon Theory website.

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