Markets,mythsandYuvalHariri

The stock markets are trading in green, Dow Jones traded around its all-time highs yesterday. In the morning trade Hang Seng, Nikkei, Indian Nifty are all trading in positive with the South Korean Kospi being an exception. The Dollar Index is trading around 92.35, these levels not seen since the end of November 2020. The 10-year US treasury yields are trading at 1.57 having touched the 1.60 level in the trade yesterday. Indian 10 bond yields are at 6.21 below the level seen during the auction cut off last Friday. Gold is finally below 1700 $/oz, a level last seen in June 2020. Brent Oil is trading at 68.80$/bbl down from 70 yesterday.  

Now the standard narrative which we have been offering for the past few weeks, goes like this. Re-opening of the economy along with ample money supply is inflationary, this inflation will force the central banks to raise rates, that expectation is fuelling the rise in yields across the curve, this heat would ultimately be felt by the stock markets and other risky assets which will eventually reverse the flow of money towards US dollars and it will rise. The story neatly encapsulates the current situation however some chinks remain. Inflationary concern should increase the allure of gold, which is not the case, the stocks markets across the world are still in a euphoric mood and have been largely unconcerned with rising yields. We wrote yesterday that the forecasting ability of all these narratives is limited but they serve a larger purpose, let’s try to see what that is.

In his book Sapiens which was a tour de force of imaginative writing, author Yuval Hariri writes that the ability to weave narratives and the ensuing myths have been the single most reason for the rise of homo sapiens in the animal kingdom food chain. Some hundred thousand years ago humans started having the faculty to communicate and consequently collaborate with each other. Slowly they created stories which alerted their kin to navigate treacherous terrains, guarding themselves against Lions and other animals. These stories allowed them to survive a hugely uncertain period. We started using more of our brain which slowly enlarged at the expense of muscles which ultimately atrophied. Hariri quotes, the human brain, though 3% of body mass, requires 25% of energy from the body which is a fact unique to humans in the animal world.

Hariri writes that this ability to create myths have continued to the current times. He writes that the modern nation state, limited liability companies and the money itself are myths to a large extent. But these myths allow people who don’t know each other to communicate and collaborate together creating wonders. These wonders are the ones which increase the productivity of the society and continue us on path of progress (or survival).

However, myths and narratives are limited in their ability to forecast the immediate future. Surprises can and do occur with regularity. When inflation will turn into hyper-inflation is hardly known, when a benign unemployment situation will lead to a combustible unrest scenario resulting in overturning of regimes is also unknown. When a stray rocket on an oil facility will jeopardise a peace process and what chain of events it will lead to is also unpredictable. But the narratives and myths allow us to see a longer-term trend, money, nation state, LLPs all are here to stay and thrive. Only if such longer term bets can be taken!