Can We Talk Ourselves Into a Recession?

Robert Shiller has a new book coming out next month called Narrative Economics: How Stories Go Viral and Drive Major Economic EventsShiller laid out the idea behind the book in a recent piece for the New York Times:

Forecasting such a shift is extremely difficult. But if we are to have a chance at success, it is critical to insert into the discussion another factor entirely: an examination of the popular narratives that may be infecting individual economic decision-making.

The probability that a recession will come soon — or be severe when it does — depends in part on the state of ever-changing popular narratives about the economy. These are stories that provide a framework for piecing together the seemingly random bits of information that one picks up from friends, the news or social media.

If enough people begin to act fearfully, their anxiety can become self-fulfilling, and a recession, sometimes a big one, may follow.

I agree with Shiller that narratives drive much of what goes on in the economy, especially at the extremes. And these stories can stay with us for long periods of time.

There was an entire generation of people scarred by the Great Depression which impacted how they thought about money, markets, and financial security. Others have been using the 1970s inflationary playbook ever since.

Jim Grant admitted as much this week in a profile at Institutional Investor:

Grant readily admits he got it wrong on inflation, even suggesting that his views may have been colored by getting his start in the 1970s decade of inflationary high interest rates. He launched Grant’s two years after rates hit their modern-day highs.

I’m sure many young people will spend the rest of their lives waiting for the next Great Recession of 2007-2009 to hit.

The entire system is built on faith and trust. Paper money is technically backed by the government’s ability to tax us but in many ways how we spend and move money around is based on trust in the financial system.

My only problem with the idea of using narratives to gauge the health of the economy is the world is awash in them. Here’s what I had to say about this on the podcast this week:
 


 
It’s harder than ever to track sentiment because we have a firehose of opinions coming at us on a regular basis through social media, 24-hour news networks, the financial media, blogs and the usual finance industry sales tactics.

How can we ever be sure what the prevailing narrative is when there are dozens of new ones being created each day?

Eventually the collective narrative is going to shift, consumers are going to retrench, businesses are going to cut back, and the economy is going to go into a recession. I’m just not sure anyone is going to be able to figure out when that narrative switch is going to flip in advance.

Everyone wants to find the signal within the noise these days but the noise has never been louder and the signal is getting harder to pinpoint.

*******

Here are the remaining highlights from this week’s Animal Spirits:
 


 
Subscribe to The Compound and click on the Animal Spirits playlist to watch these highlights every week.

Further Reading:
Prosperity is a State of Mind

Now here’s what else I’ve been reading lately:

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.