If Narrative Economics works, what’s the next narrative?

My friend Jim Rickards recently published an analysis of “narrative economics” and how to use it in your investment process. Narrative economics is a theory proposed by the economist Robert Shiller about how stories, true or not, can move markets. The belief in the idea, ideology or theory is enough to fulfill its promise because it affects our actions.

The UK’s fuel shortage is looking like a textbook case. Depending on which newspaper you read, tax changes, Brexit, the DVLA or just newspaper reports about a shortage caused a shortage. The fact that there are several convenient narratives – and the vehemency with which we do or don’t believe them – is the point. Not to mention that there was a shortage as a result of our beliefs.

Another less controversial example is this: we’re all told that lower interest rates stimulate economic activity. This is because they incentivise borrowing and disincentivise saving. And borrowing equates to spending, so it boosts GDP.

This is a narrative. And it creates an economic shift because people believe in it.

But is it actually true?

I recall evidence from Germany that experts believe that German people may actually save more as rates go lower. One theory for this is that people are forced to supplement their retirement funds with more money when interest income on their retirement accounts falls.

To central bankers peddling the opposite narrative, these savers are known as “Wutsparer” – anger-savers. They are, of course, irrational, because they do not behave as the economic models suggest.

You can imagine what university science faculties think about their economist colleagues: “When reality doesn’t confirm my theory, then people are irrational.”

I think of the idea of narrative economics in terms of the one-armed economist. In case you haven’t heard the story, it goes a little like this…

US President Harry Truman got so sick of his economic advisers saying “on the one hand… but on the other hand” that he yelled out, “Give me a one-armed economist!”

Today, almost all economists have one arm. That is because that’s where the money is. People are willing to pay you more for your analysis when they know that the analysis will conclude with something definite.

Narrative economics, then, is the idea that one arm is more influential than the other for some period of time. It seems which arm carries the upper hand seems to be decided by who is in government, which always makes me laugh. In my view, what people believe depends on whether their team is in power, not any science. The US debt ceiling is the best example of this.

Similarly, we all believe that interest rates stimulate economic activity and pretend savers don’t save more in response to lower rates. Only one narrative is getting a hearing in the story. The economist who says “on the other hand” is an unscientific conspiracy theorist who must be de-platformed. Just in case their narrative gets the upper hand.

It’s practically our business model at the publisher of Fortune & Freedom to give a voice to the side you can’t hear elsewhere. That’s the first step.

The second part is to try and find those voices who are forming the next narrative which will hold sway.

Dr Atkins’s diet advice has been our first big success in this line of thinking.

Thus, we’re always on the look-out for how the narrative which is driving our economics will change and who is the controversial de-platformed conspiracy theorist who will suddenly be considered mainstream next.

The way I see it, at the moment, there are two key narratives driving our economics. Monetary policy and the pandemic. The particular story which holds sway in those two arenas at any point in time drives financial markets. And it seems to me that the pandemic’s narrative is about to shift. Badly.

We’ve already been through a whole load of narratives when it comes to COVID. The shift from the wet-market theory to a lab leak is an example of how things can change from a conspiracy theory to being likely.

Australia is still at the stage where they believe the mathematical modelling and make policy decisions based on this modelling. In the UK, this is considered laughable.

Experts have lost their sway as politicians reassert themselves as the decision makers, all around the world. The narrative that we must listen to the experts has shifted.

Why? Well, there are only so many ways to be wrong about the pandemic. At least, that’s what I used to think. But then there’s Professor Ferguson.

On 18 July, the intrepid Imperial College London epidemiologist Neil Ferguson told the BBC it was “almost inevitable” that cases would hit a record 100,000 within a week after the lifting of restrictions.

Instead, cases peaked three days later and began an impressive plunge.

On the 27 July, inews reported a change of heart from the modeller: ”I’m positive that by late September, October time, we will be looking back at most of the pandemic.”

A week later, cases bottomed and began rising again…

At this point we could at least hope that the Professor would be half right. Either his prediction that the pandemic would be behind us by October would be right, or there would be another outbreak due to the lack of restrictions.

But if you still have any faith left in the modelling, you’re in for another surprise.

There is, after all, only one possible way for the professor to be wrong. A sliver of room where both his predictions can be wrong. If the number of cases sits below 100,000, but still high enough to say that the pandemic is not yet behind us.

Sure enough, that’s exactly what happened! The UK has seen cases oscillating between 20,000 and 50,000 and the number of deaths rose – the only possible outcome to make the modeller look wrong, again.

Meanwhile, in Japan, cases have plunged to extraordinary lows. Reuters reports that the experts are as able as ever to explain why: “Japan’s dip in COVID-19 cases baffles experts”.

The COVID narrative shift underway now is of course the latest in a sequence. First we focused on cases, then hospitalisations, then deaths. Now, it’s vaccinations. After all, parts of Australia and other nations are gradually opening up to travel despite record cases and deaths, because of the narrative about vaccination thresholds.

Meanwhile, places with extremely high vaccination rates continue to see huge COVID outbreaks.

Here’s Newsweek:

According to statistics from AP, although “full vaccination rates across the six New England states range from a high of 69.4 percent in Vermont to 61.5 percent in New Hampshire”—higher than the U.S. average, 55.5 percent—parts of New England “are seeing record case counts, hospitalizations and deaths that rival pre-vaccine peaks.”

“I think it’s clearly frustrating for all of us,” said Michael Pieciak, the Vermont Department of Financial Regulation’s commissioner monitoring their COVID-19 statistics.

Yes, frustrating.

The good news is that our vaccines are of course 100% effective against preventing deaths.

Yes, remember that one? We used to reassure each other by quoting the vaccine trial results which showed 100% efficacy when it came to deaths and in some cases hospitalisations. It seemed the pandemic would be over for those who got vaccinated.

USA Today summarised the studies for us: The vaccines were all 100% effective in the vaccine trials in stopping hospitalizations and death.

But that was just based on studies. Well, as Fox News pointed out, “Real-world vaccine study shows 99% effective rate”. And that referred to cases, not deaths and hospitalisations.

Since then, things have gone downhill.

In Vermont, reportedly the most vaccinated state in the US, “Vaccinated Vermonters have accounted for roughly 64% of the 42 deaths reported since July 29.” What percent were fully vaccinated as of July 29? 67%…

Is this cherry picking the evidence? Well, cases can fall and rise for any number of reasons. But when it comes to measuring the efficacy of a vaccine, it only takes one case to disprove that they’re going to make a big difference.

The big test will of course be Australia, which is opening up despite record cases. So far, some states are willing and some are not. Some are finally allowing Australians to come back to their own country! I can fly from Japan to Sydney, but not from Sydney to Brisbane…

The Australian federal government is taking a “wait and see” approach on tourism though. That is because tourists’ vaccines have different efficacy to Australians’, of course…

So, it seems the world has moved on from the pandemic to focus on the new disease – that of being unvaccinated. And this narrative is driving plenty of economics already.

In my former home state inside Germany, the unvaccinated can be prevented from buying food in supermarkets.

In Italy any workers, public and private sector, must get a government issued health pass.

All around the world, huge amounts of employees face a choice between getting fired and getting vaccinated. And CNBC reports that in the US, “Fired for refusing a Covid vaccine? You likely can’t get unemployment benefits”.

This new narrative will have consequences, whatever the truths might be. And so all investors need to pay attention to them.

If governments were willing to do damage with lockdowns, they are with vaccines too.

Nick Hubble
Editor, Fortune & Freedom