Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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July 31, 2023

Mindsets & Narratives


We all think we know how the world works. But we’ve all only experienced a tiny sliver of it. Morgan Housel, The Psychology of Money

The Lorax’ book was intended to be propaganda. Dr Seuss


We all have views about how the world works and the way the world should be, and we have a multitude of psychological dispositions. Morgan Housel pointed out that investing is as much about knowing yourself as anything else. Indeed, you are probably the best investor to study to understand how to make money. Are you a value investor seeking a margin of safety to protect your downside or a VC investor dependent on power law returns for whom valuation is irrelevant in the search for the next Alibaba? Are you Warren Buffett or Masayoshi Son? Usually, we are a mix of both with many other personality traits and quirks besides. But understanding ourselves is vital to understanding the investment risks we should take and how we can develop a style to suit our mindset.

Narratives heavily influence the world we try to understand. Knowing these narratives, what drives them, and how they change helps investors to position themselves. Some of these narratives are persistent, others transitory. But being human, investors individually and collectively respond emotionally to narratives in varying ways. Sometimes we marvel at the collective wisdom of crowds, and other times at their madness. Deciding which is which depends on our mindset and positioning.

Over the last twenty years, a collection of narratives bucketed into a trinity of corporate social responsibility guidelines, known in shorthand as ESG, has become an increasingly important investment narrative. Fueled by an acceptance that the world is undergoing anthropomorphic climate change and capitalism was the prime cause of the Global Financial Crisis,  ESG has reshaped corporate strategies and has become fundamental to capital allocation decisions.

Recent evidence suggests that this narrative is under pressure and could decline in importance. Last week’s furore over Coutts / Nat West “debanking” Nigel Farage, the backsliding on ULEZ in London following the Uxbridge by-election, the Labour Party dropping its £28bn pa commitment to the green economy, and large companies such as Shell, BP and Unilever focusing more on shareholder returns than social purpose in recent statements, all stand as evidence. Regardless of our view, the ESG agenda (and its ability to defy a generally accepted definition is part of the problem), a significant narrative shift away from it would have profound implications for markets.

For Milton Friedman, the only and highest responsibility for a company was to pursue its commercial purpose within the confines of the law. The rest, as far as he was concerned, was up to the political process. A tough, uncompromising and, today, unpopular view. At its heart is the idea that perceived higher purposes are political ambitions that politicians should articulate and taxation should fund. Friedman,  the father of modern liberal economics and a hate figure for progressives rose to fame during the Vietnam era inflation and the failure of Breton Woods Keynesian mixed-economy demand management. Friedman’s policy prescription included a simpler sense of corporate purpose.

Thomas Sowell, a contemporary of Friedman at Chicago, pointed out that pursuing social policy via the corporate sector assumed that solutions could be achieved without trade-offs. However noble, the absolutist pursuit of corporate social objectives entails the adoption of collectivism, meaning, as Orwell portrayed in Animal Farmthat some become more equal than others. It is hoped that the Board of Nat West has learnt this lesson.

Over the last 24 months, a new inflation narrative has evolved. At first, we were told it was transitory. The central banks had seen it all before, and their models told them it would soon pass. But by March last year, the narrative changed. Rather than being confined to the everyday essentials of energy and food, inflation had become embedded in the stubborn core areas of economic activity: wages and shelter. The only solution was to increase interest rates so consumers and employers would reign things in. The policy requirement became, if not a recession, at least the fear of one.

The resulting drawdown in risk asset prices meant that markets entered 2023 convinced the world was heading for recession, maybe a big one. Investors had positioned accordingly. Fast forward seven months, and despite several of the most significant banking failures in US history, still no US recession and, so far, only a slowdown elsewhere. Little wonder that as each week goes by without anything terrible happening, the shorts get squeezed, and the AI FOMO trade kicks in. (If you have watched the film, Oppenheimer, we might have seen the Trinity Test explosion but haven’t felt the force field yet).

There are three broad scenarios for inflation’s next chapter. It could be the immaculate disinflation that lands us softly into a new Goldilocks economic plateau, a deflationary recession leading to depression, or a sharp snap back to a 1970s-style inflationary twin peak. Policymakers’ soft-landing narrative, which investors are now daring to believe, is probably also the least likely.

The on-and-off economy of the COVID pandemic lockdowns fibrillated our normal economic cycle. The world stopped buying services and brought forward goods expenditures. At the same time, we built up so-called “excess savings” (I don’t know anyone who thought this term applied to their savings, but nonetheless, we did). We are now overcompensating on service purchases. (See the airlines, travel companies and Taylor Swift ticket sales for details). But our excess savings are depleting, and the inflation narrative will soon need to reflect core inflation continuing to fall while the headline numbers rise again. (Witness the rise in oil and grain prices in recent weeks). It will be interesting to see how policymakers’ narratives adapt to this dilemma.

Our understanding of the world and ability to assume risks about its accepted and changing narratives are critical to investment success. As generative AI eclipses social media as a novel means of narrative creation, the world will become more complex and challenging to comprehend. We must look into ourselves to understand who we are and what type of investor we want to be as we try to keep up with its increased speed and complexity.


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