Gravity Sucks
Rusty Guinn
February 22, 2019·6 comments·epsilon theory archive
Within the same weeks, financial headlines explained how markets rose on trade news and fell on trade news. Within the same days, they rose on it and fell on it. The contradiction isn't in the markets themselves. It's in the stories being told about what moves them. When a narrative becomes important enough that everyone knows everyone knows it matters, every market movement gets pulled into its orbit, regardless of whether the movement actually resulted from that narrative.
- Markets moved in opposite directions on identical trade developments. Over 2.5 months, 5,328 articles tracked how financial media attributed gains and losses to the same topic with nearly equal frequency, sometimes within a week of each other.
- The causation being reported doesn't hold up under scrutiny. When a narrative has enough gravitational pull, it doesn't matter whether the evidence supports the story. Every market outcome becomes evidence for the story's direction.
- The illusion of edge is most seductive when everyone knows something is important. Because trade and tariffs clearly matter, the temptation to find advantage in daily updates and probability scenarios becomes almost irresistible.
- This dynamic creates a system where bias confirmation becomes inevitable. Whatever you already believed about trade outcomes will find supporting narratives in the daily noise, making you feel like you have an informed perspective when you're actually just following the gravity.
- The trap is the assumption that paying attention to something important gives you information advantage. What if the opposite is true: that the more gravitationally important a narrative becomes, the more it distorts the actual signal underneath it?
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Comments
No doubt that “trade” and “tariffs” have been moving markets lately. But does anyone really expect truly meaningful outcome on this topic. Personally I expect that the US and China will eventually settle on some grand soundings, but ultimately toothless/empty resolution so that they can both claim a “win” on this issue. Longer term, I think the damage on trade! and tariffs! (no italics available in the comments apparently) has already been done. A suspicion of Chinese links in supply chains has seeped into the American psyche (not just wackos, people that matter like politicians) and businesses no longer trust either the US or Chinese government to put commerce ahead of their respective political agendas.
See this article from AP earlier this week for an example of the alarming language used to describe the risks of working with Huawei https://www.apnews.com/f373e15671884f35bbe085a131c59262.
On the other side of the world, no matter what the outcome of Brexit is, the damage has been done. Economies have begun disintermediating at an accelerating rate. The world is no longer flat. To me that spells higher prices and competition for resources. I’m curious to what extent de-globalization plays into the inflation risk narrative.
Is there anything to the fact that the positive words “surged on,” “rose on,” “hope,” “optimism” generated more responses than the negative words? Does that indicate the market is leaning toward a perceived favorable outcome or (as I have a feeling I am) am I not really understanding the meaning of those charts?
Yeah, it MAY mean that, to some extent. It may also mean that the financial media is generally a bit rah-rah about this kind of thing. It may also mean that the words (selected for ubiquity and for simultaneous opposite comparisons) are an incomplete representation of overall sentiment, which wasn’t really where this article was going. Probably a mix of all of these.
Thank you sir.
Two data points were recently brought to my attention and I’m curious how much the trade narrative has played a role. The first is the Baltic Dry Index (BDI) that measures the cost of moving dry bulk goods around the world. BDI “plunged” in January and is down 51% since the beginning of the year. The second is the Small Business Optimum Index. One of the index components is Plans to Increase Inventory, which came in a net gain of 1%. Meaning just 1% of respondents intended to increase inventories in the months to come. If raw materials are not moving around the world and if business are not building out inventory it’s only a matter of time until GPDI is contracting.
My concern is the trade and tariff narrative pulled forward activity last year and companies plan to sell through their inventory this year.
Or am I wasting my time because as long as money is loose and fast none of this matters?
Not wasting time. It matters. But trade and tariff narratives are in many ways abstracted from the realities of trade. Here the realities you’re observing just happen to coincide with some of the fears attached to the narrative. What you saw in Jan is consistent with trends Ben had written about concerning global trade for a couple years now, even if the Baltic isn’t the top tier indicator it used to be. I’m not sure what to make of the Plans to Increase Inventory, but there’s no question that the Zeitgeist is a general slowdown in global trade activity.
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