Macro Wrap – We All Love a Good Story

“Don’t tell fish stories where the people know you; but particularly, don’t tell them where they know the fish.”  - Mark Twain

Finance seems like a numbers-oriented business, but it’s an industry driven by stories.  Businesses are financed because of an appealing, heroic story, not because of the numbers, tables, and charts in a powerpoint presentation.  The most successful explorers 500 years ago were oftentimes the best storytellers, not necessarily the best navigators.  Because at the end of the day, the project is only on paper if you can’t convince someone to finance it.  One visit to Silicon Valley should be enough to see that.

When I first read Random Walk on Wall Street 15 years ago, I developed an immediate bias in favor of fundamental analysis vs. technical analysis.  Here were professors telling me that what mattered for a stock were the income, balance sheet, and cash flow statements, and the rest of it was all hogwash.  I devoured financial statements, compared companies, and started investing, confident in the knowledge that all that work would pay off.

But all the analysts’ research seemed to become irrelevant when animal spirits either became too hot or too cold.  Technology valuations soared, and I got caught up in the new paradigm, when everyone was shouting from the treetops that old valuation methods didn’t matter.  Then they crashed, and everyone was shouting from the treetops that the internet was only a fad, and the durable and the physical, houses and cars, were what mattered.  Then they crashed, and everyone was shouting from the treetops that the U.S. consumer was too stretched, and the emerging markets, the BRICs, with their voracious appetites for commodities and trade, were the new leaders of a new world.  Then they crashed, and everyone was shouting from the treetops that central banks were the saviors, and their money printing, and only their money printing, mattered in a new, changed world…

I’m tired of hearing about central banks, whatever the argument.  Throughout history, much more drastic instances of market manipulation have been experienced (history is a VERY long time), and I don’t hear our ancestors complaining.  Complaining about manipulation, or conversely, blindly following a story (even one as “unprecedented” as QE) – these are not investment or trading processes.  And ignoring history, simply because it’s a “new” paradigm, is the ultimate foolishness.

As a trader, I’ve learned to enjoy the stories, but at a distance, like admiring the mermaids without submitting to their siren call.  It’s part of the psychology of markets, and being aware but not enamored is what I aspire to in my approach.  So please let me know if I’m about to fall in to the mermaids’ pool, even if I’m absolutely convinced that it really is Ariel.