The Trader, The Narrative And The Loss
I thought I'll start this note away from SARS Cov-2 but very much on the same thread. Yes guys, I am talking about narratives.
Narratives have been dominating trading for a while, like the Vanguard fund that makes you a steady return every year...Yeah, right! Look at your Vanguard fund now.
That's the power of narratives; if you plant it, it will grow. We see this in the Covid-19 "it's just the flu" narrative to the "herd immunity narrative" onto the "it only affects the old narrative". What all these narrative threads have in common is, they are designed to tell you how to think and how to act. If you plant it, it will grow.
Cobb - "An idea is like a virus, resilient, highly contagious". (Inception,2010)
Whether you like it or not narratives affect our trading decisions and like Cobb points out they are contagious and like SARS Cov-2 will spread through your mental population and eventually it will get you to act against your own best interest....And yeah, for a trader that shit is fatal.
So let me take you through a time portal to the Bond markets.
No you are not blind... Same chart, wildly different thread of thought. The thing you should see here is, we have a "low inflation" narrative and a "credit risk" narrative. So what they want us to think is that low inflation = trade worthy information and credit risk = trade worthy information but what's worse is, they want us to trade this. Here is my question to you, What will you do with this information? I bet you are opening a chart right now.... That's the power of narratives and that's how you start losing money.
Let's say we have low inflation, that's cheaper goods for everyone and likely low interest rates and that's better for mortgages and this means, even if we have slightly lower wages then goods will be cheaper and overall cost of living will reduce...Wait! That's a Keynesian view and a very 'liberal' one, while the stronger society narrative is a more 'conservative' one. Plant it and it will grow.
As traders we need to look beyond the narrative and ask a simple question, what do they want me to think versus what I can see in front of me? Back to bonds...
Now take a look at this https://www.tradingview.com/x/aN5SzWZd/
Okay, so do you really want to buy "credit risk" and "low inflation"? That's the power of narrative. Bonds have risen by 39% since September 2018 and that's after 3 rate hikes and rising inflation. There's is your proof, it doesn't really matter. Just like "herd immunity" doesn't matter and "it's just the flu" doesn't matter. What really matters is you think it all matters and worse you think it is trade worthy and yes, you act on it.
So to end this note...Remember Cobb. An idea is like a virus and we are in a pandemic.