Managed Narratives

This picture was sourced from AbsolutVision on Unsplash

Earlier this week I read an article titled The Narrative Matrix by Peter Cecchini, published in Epsilon Theory (an outlet I highly recommend you follow for a macro view of the financial markets). The piece explores narrative through the lens of The Matrix, a film that depicts the world as nothing more than a computer simulation. He states: “The Matrix might be the ultimate narrative – one so pervasive and enveloping that it transforms participants’ reality. It presents an extreme and fictional case study that may be informative of the narratives we see in today’s world – particularly in politics and financial markets.” Cecchini makes the case, appropriately in my opinion, that we are all subject to carefully crafted narratives, and these narratives serve as the foundation for a matrix of sorts.

The Machine

This picture was sourced from Redd on Unsplash

The Narrative Matrix expands on some of the notions posited by Ben Hunt, the founder of Epsilon Theory. Ben Hunt is a former political science professor and hedge fund manager – needless to say, he offers a unique perspective. Much of the work he has published with Epsilon theory focuses on the impact of narrative in the financial markets and Cecchini does an excellent job of distilling Hunt’s arguments in relation to market forces.

The thesis here is that reality and perception inevitably merge within narratives. Put another way, reality becomes diluted by sentiment. The consequence of this dilution is that it becomes increasingly difficult to evaluate situations objectively, rather we act in accordance with shared perceptions about reality.

One of the most interesting takeaways from this article is the notion of “fiat narratives” – narratives crafted in response to a particular event by authoritative institutions, as we’ve seen with the coronavirus. The primary purpose of such narratives is to normalize extremes (such as excessive rate cuts). As Cecchini puts it “I might suggest that fiat news is particularly well understood within a strong form narrative framework because the forces behind the narrative are powerful enough to create a virtual reality.”

The key here is that these narratives are distributed to everyone through mainstream television, radio, and social media outlets. Since narratives can be shared en masse by public and private sector institutions, they can shape perceptions rapidly. Once perceptions have been shaped, we are subject to a new reality and we often act accordingly.

It is important to note, however, that narratives can be broken. When a popular narrative becomes so far removed from reality that it can no longer be justified. Inevitably, people wake up to the fact that the chasm between what they’ve been told to perceive and what they’re experiencing, in reality, becomes too wide. This can be devastating, as evidenced by the market’s reaction to the coronavirus over the course of this week.

The importance of understanding narratives and the role they play in our society is essential to orient yourself in a world that is often obfuscated. This is particularly true in the realm of financial markets, where perception is a major driver of market activity. Markets are incapable of processing information in an absolute sense, rather, information is perceived within the context of a narrative. How these narratives are perceived by participants in the market may vary significantly and these perceptions will ultimately guide action.