The Alchemy of Narrative
February 18, 2019·3 comments·In Brief
The Fed claims to respond to economic data and communicate objective reality about fundamentals. Market participants trade on the assumption they're receiving truth. But what if the relationship is inverted, and high-credibility institutions like the Fed deploy statements specifically designed to shape market behavior regardless of underlying truth? The entire price discovery mechanism depends on a fiction nobody openly acknowledges.
• When the Fed says "fundamentals are sound," the market doesn't evaluate truth. It anticipates what effect the statement will have and trades accordingly. The statement's power depends entirely on credibility and impact, not accuracy.
• The same statement can trigger opposite reactions. "Fundamentals are sound" might signal rate hikes or signal comfort with current conditions. The statement means whatever market participants believe it needs to mean based on what they think the Fed actually intends.
• The Fed knows this game is being played. It explicitly deploys forward guidance as a tool to shape expectations. It speaks through multiple channels and adjusts messaging based on how previous statements landed. The entire apparatus is built to engineer outcomes, not discover them.
• Fed watching isn't an attempt to discover truth. It's participation in a reflexive loop where your belief about what the Fed wants becomes part of what determines market prices. Everyone knows everyone knows this is happening, and the game continues anyway.
• If institutions with credibility can shape reality through statements rather than respond to it, what happens to markets, economies, and political systems built on the assumption that prices discover truth? Who actually benefits from this arrangement and who loses?
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Comments
Not as public and impactful but I’ve worked in corporate positions for more than a decade and I have seen the same process occur with respect to strategy and performance; changing of metrics to look at; seeing subtle “winds” changing in executive meetings because of what one senior person said or didn’t approve. Even the attendance of a higher executive at a run-of-the-mill operational meeting. I’ve also worked with a smaller brand within a larger context that didn’t manage the narrative about them at all, it had no missionary for a while and very weak and useless one for a while and it was such a super sad situation – as if in the negative feedback loop that Soros discusses; in “reality” this smaller division is insignificant, poor-performing, has no leadership, is a “dud”; it always struck me from the beginning why no one just picked up and changed the narrative, no one changed the metric from revenue to “new customers” or “brand awareness” or “product views” I mean hell pick anything!-- it seems easy with a small brand, just manage the higher ups and your teams to look at something else besides the bad sales figures but true you need a Missionary!
So true. It’s a fractal! This is (unsurprisingly) remarkably similar to what goes on in Investment Committee meetings. The decision making process has relatively little to do with the data and EVERYTHING to do with the personalities around the table and the politics of those relationships. Only a Missionary can effectively sponsor an idea. Incidentally, I think it’s kind of silly to put non-Missionaries on these types of committees in the first place. In practical terms their presence is meaningless. You can just wheel them in to run through slide decks as needed. It is interesting to consider, however, that the illusion of control/influence (a kind of theatre) might be essential to keep an organization functioning…
Never believe a rumor until it has been officially denied.
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