Yields,flippersandRobertShiller

Stock markets which got rattled big time last week have stabilised a bit this week. Both Dow jones and Nasdaq made impressive gains on Monday following a small retreat yesterday. The market consensus around the continuous rise in yields impacting all the risk on assets (whether equities or EM currencies) also seems to be slowing down. The US 10-year yield is trading around the 1.41%-mark, a significant climb down from 1.6% as seen last week. The yields in the Eurozone have also come down with German and Italian 10-year yields coming down to -0.34% and 0.65% respectively. Indian 10-year is trading at 6.22%.

Now one would wonder what exactly has changed on the ground to change this mood. Apparently, nothing much! The discussions on the proposed 1.9 Trillion USD stimulus package are still on in the US Senate and no final word has come out. The debate on the minimum wage amount and the quantum of direct payments to individuals as unemployment benefits is still getting hotly debated. The Reserve Bank of Australia in its rate decision yesterday decided to keep the policy rates unchanged at 0.1% and promised to maintain the highly supportive monetary conditions till the employment and inflation objectives are met. The RBA is one of the central banks with a stated YCC (yield curve control) policy for a particular tenor.

It turns out that the fundamental situation on the ground has hardly altered either to justify the bond tempest last week or the relative return to calmer waters for last two days. Nobel laureate Robert Shiller in his 2019 book Narrative Economics writes that many a times in the world of finance (or general world), phenomena happen not because something has changed materially but because a particular narrative has taken hold. He gives numerous examples in his book about how such narratives can either be manufactured (by marketing) or can exhibit a more viral character (gain momentum on their own). One example he writes at length is about the real estate markets in the US preceding the GFC in 2008. He writes that years leading up to the crash a narrative that owning a home is a speculative investment gained currency. A house was not something which you buy to secure your retirement years, but it was something to make a quick buck. Shiller writes that a term called “flipper” i.e. someone who buys and sells home within a year for neat profit was suddenly being talked about in a very positive tone akin to a “master achiever”. The press was replete with glory stories about these flippers and how you can become one. This added fuel to the narrative which ultimately ended up sourly in 2008. Post the crash, the same “flippers” were chastised for being foolish. The narrative “flipped”!

Also, in the current context we can see that till some months ago a pandemic focused micro narrative was in place. Which was like “growth will remain low in future, economy has fundamentally changed, more support is needed”. As the data on a vaccination rollout and green shoots in the economy started coming in, the earlier narrative paved way for a different one, “all this money is inflationary, economy is going to be overheated”. Any particular narrative necessarily need not be seeped in facts, but it still gains currency because it distils a complex reality into a simple explanation which people find easy to follow. We on our side will keep checking for the facts (PMI data, NFP, unemployment number etc) to see what narrative looks more plausible.