In the long run markets are a weighting machine but in the short run they are a voting machine*
BENJAMIN GRAHAM
*although probably not a Dominion one.
Another way of putting this might be “In the long run, markets are driven by logic and fact, but in the short run they are driven by emotion”. The two most obvious emotions in markets of course being fear and greed, but there is more to it than this. In particular, we should also be aware that the ‘Narrative’, the facts that people believe they are acting upon, are, in fact, also largely driven by emotion.
This is not to say that they are irrational per se, rather that they reflect the emotional aspects of their participants. As we say on our ‘About’ page, Keynes once noted wryly that “markets can remain irrational longer than you can remain solvent”. We ignore sentiment and emotion at our peril and this is particularly true when we look at the short to medium term. This of course is the essence of Market Thinking, recognising the different behavioural drivers at work and deciding whether to participate or not. Neither side is ‘right’ , just as neither side is ‘wrong’, the issue is that both sides need to recognise the existence of the other.
Investors tend to be logical, data driven, people and, as we have discussed recently, they also tend to approach things from a sceptical mindset, preferring to do their own research and draw their own conclusions. Thus as investors this means we need to recognise the emotional drivers, not only as they appear, but also to assess how long they will last.
Using and Understanding the Emotional Toolkit
The other aspect of this is to use the toolkit with which we distinguish between logical and emotional arguments to also analyse how the narrative is being ‘shaped’. Take for example our Logical Fallacy Bingo Card.
Here we can see 25 of the most common logical fallacies used in public discourse. Politicians, who often develop debating skills as part of their ‘training’, frequently employ many or indeed all of these fallacies, despite knowing that they are false because they also know that they can be highly effective ways to ‘win’ the argument. Lawyers too. The rhetorical flourishes in Courtroom dramas are designed to sway the emotions of a jury more than the logic of a judge.
A Logical Fallacy Bingo Card
For Christmas lockdown fun, you can click the link and play it as a drinking game perhaps?
Most are self explanatory but on closer inspection can be applied to almost all of what passes as ‘debate’ in the public square. Read or listen to the majority of the arguments out there and you will find little in the way of logic and much in the way of emotion and logical fallacy.
For illustration, consider the Global Warming ‘debate’ in the context of the Bingo Card as an example of how to dominate the discussion without resort to logic – or indeed facts. First up and at the heart of the ‘theory’ is the ad hoc ergo proctor hoc, which is a fancy way of because X happened before Y, therefore X (Co2) caused Y, (temperature rising.) Statistically this is known as confusing correlation with causation, but is a powerful image when presented as a graph (as it always is). Then comes the appeal to anonymous authority, as in 97% of scientists agree this is true, (so who are you to argue?) perhaps coupled with the burden of proof fallacy/argument from ignorance as in, unless you can prove conclusively that man made CO2 does not cause global warming then we must assume it does. This is usually the ‘killer’ point – they have shifted the ‘argument’ away from proving their point true to you having to prove it false, or indeed to you having to come up with an alternative argument. Next comes the appeal to emotion as in the Polar bears are all dying and the slippery slope fallacy that the observed increase in global temperatures will ‘inevitably’ mean that temperatures will rise to catastrophic levels. This in turn makes for great images and the use of ‘news’ (hotter weather) as proof of the theory. This is then supported by the Texas sharphooter fallacy which basically means that supportive evidence is cherry picked. In addition, the special pleading fallacy is reserved for ‘explaining’ why the models that constantly predict disaster are always going to be correct in the next two/three/five/ten years.
If the reader is starting to see similarities with other ‘arguments’ such as no deal Brexit and, most cogently, Covid, it is not a coincidence. This is the standard toolkit of the official ‘persuaders’.
The Ad Populum fallacy is then applied that since ‘everyone’ believes in the theory it ‘must be true’, usually mixed with the burden of truth and some ad Hominem personal attacks (Denier!) on the sceptical observer who dares ask for the data, question the science or challenge the proposed ‘solution’. This, as we observed recently, is a dangerous assumption of a democratic mandate on the basis of the previous appeal to emotion – usually fear. The proposed solution is then often defended with a false choice, or false dichotomy, often combined with a Straw Man argument that is easy to shoot down, as in, we need to have more sustainable/renewable energy rather than ‘your idea’ of dirty coal plants. The alternatives of Nuclear or the relative benfits of Natural Gas are not discussed. For Covid, we are presented with lockdown or ‘letting it rip’. For No deal Brexit we are presented with staying in the Customs Union or closing the borders.
The tu quoque fallacy is similarly failing to defend a policy but instead attacking the sceptic, as in “it doesn’t matter that windfarms kill lots of birds because so do oil spillages.” To some extent this is combined with an appeal to novelty – new technology will save us, even if, like windfarms it is really old technology. It doesn’t matter that thousands are dying from untreated conditions, because you would kill granny with Covid. Vaccines will save us!
Learn to Spot the PRopaganda.
For investors, the bingo card helps us spot the PR (propaganda) as well as respect its ability to shape the narrative, the ‘construct’ that we agree is the world around us. This sounds a bit more Matrix than it needs to be, for market prices reflect the accepted wisdom of a balance of investors, risk managers and traders and this can change. This was the case with Brexit, when the Bingo card enabled us to spot the establishment narrative of how terrible a so-called no deal Brexit would be, despite the usual model-based predictions of disaster, the deliberate positioning of worst case scenarios as somehow central cases, the appeal to authority, the ad homs, the false dichotomies etc. The circular argument also develops, the FX markets believe no deal Brexit is bad, so they sell sterling, ergo the fact that sterling is going down means that a no deal Brexit is bad.
Emotion works both ways of course, which means we should probably not become too depressed or too excited either. For example, while some are indeed very fearful of the so called Great Reset being proposed by the Globalists of Davos, it is unlikely to genuinely deliver the Socialism by the back door that many libertarians are worried about. Nor indeed is it likely that a Biden administration would deliver big tax rises and socialism either. From a risk point of view we observe that the Election is still not declared, but we will know that soon enough. Similarly, the economy will not collapse because of the Covid policies, but there will be a significant transfer of wealth. The hospitality industries and the gig economy will re-appear, but investors/owners need to focus on cash flows and balance sheets. Trade will continue regardless of ‘trade deals’.
Having discussed the logical fallacies of the Climate Change argument, we don’t expect the narrative to change. While we should be sceptical of predictions of disaster, we should acknowledge that the movement is now ‘too big to fail’. What we can observe however is the trend in things such as ESG, which despite the mass of mainly emotional rather than logical arguments supporting the Climate Change narrative discussed above, has a ruthless logic of its own. Every government related institution has signed up to it and thus every large investment institution is pursuing it as ‘the next big thing’. Which it is. For them.
